I Signed a Covenant Not-to-Compete – Now What?
by Brian Loffredo, Esq. The first day on a new job is typically an exciting time for most people. It represents a chance to start fresh, meet new people, make a good impression, and move into a new office. In many cases, starting a new job also means a lot of paperwork. New employees often spend their first days receiving, reading and signing tax forms, employee handbooks, office procedures, benefits forms and all sorts of other documents. Most of these papers will be filed away and never heard from again. But one document – commonly known as an employment agreement – has a habit of reappearing down the road. And there is one particular provision in many employment agreements that can cause a great deal of trouble. That provision is commonly known as a “covenant not-to-compete” or “non-compete.”
What is a non-compete?
As its name suggests, a non-compete attempts to prohibit employees from using their experience, and their employer’s proprietary information, to compete with their employer. The typical non-compete contains a geographical restriction (i.e. 20 miles from the employer’s office) as well as temporal restriction (i.e. 2 years). Non-competes that prohibit conduct while an employee is still employed are known as “in-term” covenants. But the more frequently litigated and problematic non-competes are those which purport to limit employee conduct after the employee stops working. These provisions, known as “post-term” non-competes, can lead to preliminary injunctions and other court ordered restrictions on employees who either quit or are terminated from their jobs.
Are all non-competes created equal?
For those seeking alternative employment, non-competes can certainly be an obstacle. However, job-hoppers can take solace in the fact that not all non-competes are created equal, and in many instances non-competes can be invalidated. A lot depends on how the non-compete is drafted and the scope and nature of the conduct it attempts to proscribe. While Virginia Courts hold sacred the rights of parties to enter into and enforce contracts, they generally do not favor non-competes, which prohibit people from earning a living. When determining whether or not to enforce a non-compete, Virginia Courts ask several questions, including: (1) Is the restraint, from the standpoint of the employer, narrowly drawn, and reasonable in the sense that it is no greater than is necessary to protect the employer in some legitimate business interest?; (2) From the standpoint of the employee, is the restraint reasonable in the sense that it is not unduly harsh and oppressive in curtailing his legitimate efforts to earn a livelihood?; and (3) Is the restraint reasonable from the standpoint of a sound public policy? The employer has the burden to prove each of the above factors, and Virginia Courts have made clear that they will consider the function, geographic scope and duration of a non-compete in determining whether that burden has been met. There are many instances where a non-compete might be invalidated. One fertile ground for attacking a non-competes is where the restriction is overbroad. For example, if the geographical restriction is obnoxiously large (i.e. 5,000 miles), a court is more likely the strike the non-compete. A less obvious example is where a non-compete restricts functions that were not performed by the employee in his prior job. For instance, assume an employee is employed as a mechanic for Flyways Airlines. Assume further that the employee signed a non-compete prohibiting him from “working for a competing airline” within two years after leaving Flyways Airlines. The non-compete is likely invalid because it prohibits the mechanic from performing a broad range of functions for a competitor, not just the job of mechanic. The non-compete would preclude the mechanic from working as a janitor at another airline, even though the mechanic did not perform janitorial services for Flyways Airlines. Had the non-compete restricted the mechanic from performing the “same or similar job,” for a competitor, the ex-employer would likely prevail. Non-competes will also be struck where they are vague. Virginia Courts construe vague non-competes in favor of the employee, not the employer, who is usually the drafting party. And while courts in some states will “blue pencil” (i.e. modify) non-competes to bring them into compliance with the law, Virginia courts have not expressed a willingness to do this. As a result, vague or overbroad non-competes will simply not be enforceable.
Am I in trouble or not?
The factors cited above do not make non-competes easy to evaluate. Indeed, courts have reached varying and sometimes inconsistent results when reviewing non-competes. One of the most important lessons to be learned from these cases is that the enforceability of a non-compete depends heavily on the situation at hand, and that each case is dependent on its facts. Employees faced with non-competes should not simply assume that they are bound, but should consult with an attorney. Poorly drafted non-competes can leave open the door for an employee’s departure or provide leverage to negotiate a peaceful exit strategy.
Brian Loffredo is a principal in Offit Kurman’s Baltimore/Washington office. If you have any questions about the content of this article or other construction matters, please contact Mr. Loffredo at 301.575.0345 or firstname.lastname@example.org.