Virginia Non-competition Law

posted by Neil Klingshirn  |  Feb 17, 2010 10:08 AM [EST]  |  applies to Ohio

Restrictive covenants are disfavored in Virginia as restraints on trade. Virginia courts will enforce restraints in non-competes only if the restraint is:

• reasonable in that it is no greater than necessary to protect the employer's legitimate business interest;
• is not unduly harsh and oppressive in it's impact on an employee's legitimate efforts to earn a living; and
• reasonable from a public policy perspective.
  

Foti v. Cook, 220 Va. 800, 263 S.E.2d 430 (1980)

Virginia courts limit enforcement of non-competes to cases involving direct competition with a former employer or employment with a direct competitor. Omniplex World Servs. Corp. v. U.S. Investigations Servs., Inc., 270 Va. 246, 249, 618 S.E.2d 340 (2005).

Consideration

The Virginia Supreme Court held that employees who continue their at-will employment after signing non-competes provide sufficient consideration the non-compete by continuing their employment. Paramount Termite Control Co. v. Rector, 238 Va. 171, 176 (Va. 1989).  Since the company could have terminated the employees at its will after they signed the non-competition agreements, the company supplied the consideration for their promise not to compete by continuing to employ them and giving them access to valuable information.

More recently, a federal court predicted that the Virginia Supreme Court would no longer find sufficient consideration from mere continuation of at-will employment. Mona Elec. Group, Inc. v. Truland Serv. Corp., 193 F. Supp. 2d 874 (E.D. Va. 2002). In that case, the employer did not threaten the employee with termination for failing to sign the non-compete. Thus, absent evidence that at-will employment would end unless employees sign a non-compete, continued employment may not provide sufficient consideration.

Legitimate Employer Business Interests

An employer has a legitimate interest in limiting the potential harm they would suffer through the loss of business that could result from former employees taking trade secret information or exploiting contacts or relationships acquired through their employment.

Reasonable Restrictions

Restrictions in Virginia cannot be greater than that necessary to protect an employer's legitimate business interest. Richardson v. Paxton Co., 203 Va. 790, 794, 127 S.E.2d 113 (Va. 1962). To this end, the Virginia Supreme Court upholds covenants not to compete only to the extent that the proscribed functions are the same functions as were performed for the former employer. In Omniplex, for example, the Virginia Supreme Court invalidated a prohibition on performing any service “for any other employer in a position supporting” the former employer's customer, regardless of whether or not such service would be in competition with the former employer.  Similarly, Virginia invalidated a non-compete in Modern Environments, Inc. v. Stinnett, 263 Va. 491, 495, 561 S.E.2d 694 (2002) where the restraint was on employment “in any capacity” by a competing company.  See also Motion Control Sys., Inc. v. East, 262 Va. 33, 37-38, 546 S.E.2d 424 (2001) (invalidating a covenant providing that any business that made any kind of motor was "similar" to a business that made specialized, brushless motors).

When the employer properly constructs a non-compete, however, Virginia courts will uphold them.  Virginia cases upholding non-competes include:

• Blue Ridge Anesthesia & Critical Care, Inc. v. Gidick, 239 Va. 369, 372-74, 389 S.E.2d 467, 6 Va. Law Rep. 1581 (1990) (upholding a restriction limited to the territories serviced by the former employee);
• New River Media Group, Inc. v. Knighton, 245 Va. 367, 368, 429 S.E.2d 25, 9 Va. Law Rep. 1183 (1993) (upholding a sixty-mile limitation as to a radio host, when sixty miles approximated the radio station's broadcast range);
• Paramount Termite Control Co., Inc. v. Rector, 238 Va. 171, 175-76, 380 S.E.2d 922, 5 Va. Law Rep. 2888 (1989) (upholding a restriction limited to the county or counties [or city or cities] to which the former employee had been assigned in the past two years);
• Roanoke Eng'g Sales Co., Inc. v. Rosenbaum, 223 Va. 548, 553, 290 S.E.2d 882 (1982) (upholding a restriction as to all "territory covered by" the former employer, enforced against the employer's former treasurer, who had knowledge pertinent to all of the employer's branch offices);
• Meissel v. Finley, 198 Va. 577, 582-83, 95 S.E.2d 186 (1956) (upholding a restriction as to Norfolk, or within fifty miles thereof, as "practically coextensive with the business of the agency . . . .");
• Worrie v. Boze, 191 Va. 916, 927, 62 S.E.2d 876 (1951) (upholding a restriction as to within twenty-five miles of franchised studios as "a limited and designated area from which many of [the former employer's] pupils were obtained."); and
• Stoneman v. Wilson, 169 Va. 239, 246, 192 S.E. 816 (1937) (restriction as to within five miles of town upheld as reasonable in light of, inter alia, the extent of the former employee's personal contact with his former employer's customers).

Physician Non-competition Agreements

Non-competes among medical professionals do not violate Virginia’s public policy, at least where sufficient competition for medical services exist. Blue Ridge Anesthesia & Critical Care, Inc. v. Gidick, 239 Va. 369, 372-74, 389 S.E.2d 467, 6 Va. Law Rep. 1581 (1990). Virginia courts have held that they are not bound by the pronouncement of the American Medical Association that discourages physician covenants not to compete.

Judicial Modifications of Non-competition Agreements

Virginia does not permit “blue penciling” or judicial modification of overly broad non-competes. Rather, a Virginia court will not enforce a non-competition agreement that is too broad.

Assignment of Non-competition Agreements

The Virginia courts that considered whether Virginia non-competes are assignable have held that they are not. Virginia views restrictive covenants in a non-compete as a personal services contract.  Contracts for personal services in Virginia are not assignable unless both parties agree to the assignment. Therefore, Virginia law does not allow non-competes to be assigned to, nor enforced by, a third party without the employee’s consent. Reynolds and Reynolds Co. v. Hardee, 932 F. Supp. 149 (E.D. Va. 1996), aff'd 133 F.3d 916 (4th Cir. 1997); Christian Defense Fund v. Stephen Winchell & Assocs., 47 Va. Cir. 148, 150 (Va. Cir. Ct. 1998)

Involuntary termination of the Employee

In Virginia, the employer’s involuntary termination of an employee does not invalidate an otherwise valid non-compete. Similarly, an employee did not escape his non-compete as a result of a demotion.

Key Cases

• Blue Ridge Anesthesia & Critical Care, Inc. v. Gidick, 239 Va. 369, 372-74, 389 S.E.2d 467, 6 Va. Law Rep. 1581 (1990)
• Clinch Valley Physicians, Inc. v. Garcia, 243 Va. 286, 289, 414 S.E.2d 599, 8 Va. Law Rep. 2202 (1992)
• Foti v. Cook, 220 Va. 800, 263 S.E.2d 430 (1980)
• Meissel v. Finley, 198 Va. 577, 582-83, 95 S.E.2d 186 (1956)
• Modern Environments, Inc. v. Stinnett, 263 Va. 491, 495, 561 S.E.2d 694 (2002)
• Motion Control Sys., Inc. v. East, 262 Va. 33, 37-38, 546 S.E.2d 424 (2001)
• New River Media Group, Inc. v. Knighton, 245 Va. 367, 368, 429 S.E.2d 25, 9 Va. Law Rep. 1183 (1993)
• Paramount Termite Control Co. v. Rector, 238 Va. 171, 176 (Va. 1989)
• Omniplex World Servs. Corp. v. U.S. Investigations Servs., Inc., 270 Va. 246, 249, 618 S.E.2d 340 (2005).
• Richardson v. Paxton Co., 203 Va. 790, 794, 127 S.E.2d 113 (Va. 1962)
• Roanoke Eng'g Sales Co., Inc. v. Rosenbaum, 223 Va. 548, 553, 290 S.E.2d 882 (1982)
• Worrie v. Boze, 191 Va. 916, 927, 62 S.E.2d 876 (1951)

posted by Neil Klingshirn  |  Feb 17, 2010 10:08 AM [EST]  |  applies to Ohio