Virginia Supreme Court Reverses 22-Year-Old Precedent in Non-Compete Case

A recent decision by the Virginia Supreme Court makes clear that when it comes to the use and enforcement of noncompetition agreements under Virginia law, “one size” does not “fit all” and that employers must utilize narrowly tailored agreements that reflect a position-specific, functional analysis in order for such agreements to be deemed enforceable. In Home Paramount Pest Control Companies, Inc. v. Shaffer, No. 101837, 2011 Va. LEXIS 222 (2011), the Virginia Supreme Court upheld the trial court’s decision to strike down the noncompetition clause in an employment agreement that the company entered into with one of its employees, who in 2009, resigned his position and soon went to work for a competitor. Through this decision, the Supreme Court reversed its own, 22-year-old precedent, through which it had held that the precise language at issue within a noncompetition agreement was enforceable.

Factual Background

Home Paramount had entered into an employment agreement with Justin Shaffer who in 2009, resigned his position and soon went to work for a competitor. Through this agreement, Shaffer had promised that for a period of two years following the end of his employment with Home Paramount, within the cities or counties in which he worked or was assigned in the preceding two-year period, he would not:

engage directly or indirectly or concern himself/herself in any manner whatsoever in the carrying on or conducting the business of exterminating, pest control, termite control and/or fumigation services as an owner, agent, servant, representative, or employee, and/or as a member of a partnership and/or as an officer, director or stockholder of any corporation, or in any manner whatsoever . . . .

Legal Analysis

Shaffer’s promise notwithstanding, the Virginia Supreme Court held that this language, which effectively would have precluded Shaffer from working for a competitor of Home Paramount in any capacity within the specific geographic areas, was overly broad and hence, unenforceable. Notably, the Supreme Court reached this conclusion even though it appeared that Shaffer, on behalf of his new employer, began soliciting the customers with whom he had dealt while at Home Paramount.

In reaching this holding, the Supreme Court reversed its own, prior precedent, in which it had upheld the use in a noncompetition agreement by Home Paramount’s predecessor in interest of the identical language at issue in Shaffer’s agreement. See Paramount Termite Control Co. v. Rector, 238 Va. 171, 380 S.E.2d 922 (1989) (holding that a noncompetition agreement that prohibited an employee from competing “in any manner whatsoever” was enforceable). In so doing, the Supreme Court embraced what some would refer to as a “hypothetical job duties” form of analysis when assessing whether Shaffer’s noncompetition agreement was overly broad, rather than focusing on the specific evidence concerning Shaffer’s activities in actively competing against Home Paramount for the same customers on behalf of his new employer.

To that end, because the language of Shaffer’s agreement hypothetically would have served to prevent him from engaging even indirectly in the pest control business – “even as a passive stockholder of a publicly traded international conglomerate with a pest control subsidiary” – it was too broad and unenforceable under Virginia law because Home Paramount could not present evidence of its legitimate business interests in support of such restrictions.

The Supreme Court explained that in order for such agreements to be enforceable, they must be “narrowly drawn to protect the employer’s legitimate business interest,” cannot be “unduly burdensome” on the employee’s ability to earn a living, and must not violate public policy. When conducting this analysis, courts must analyze the “function, geographic scope, and duration” of the restriction, and must consider these factors “together” rather than as “three separate and distinct issues.”

Practical Impact

John Flood, a shareholder in Ogletree Deakins’ Washington, D.C. office and member of the firm’s unfair competition and trade secrets practice group, explained that “this case is remarkable because the Virginia Supreme Court directly reversed its own, prior precedent, which undoubtedly caused Home Paramount – and probably numerous other employers in Virginia since 1989 – to conclude that the same language would continue to be upheld despite the passage of time.”

Sharon Margello, a shareholder in Ogletree Deakins’ office in Morristown, NJ, and member of the firm’s unfair competition and trade secrets practice group, also explained that this case “demonstrates the need for employers, in Virginia and beyond, to engage in a carefully tailored, fact-specific analysis of the business interests underlying each form of restriction contained in noncompetition agreements and other forms of restrictive covenants, to narrowly tailor the restrictive language used to protect such interests, and to periodically review such agreements to make sure that the law has not changed over time.”