The Virginia Supreme Court recently issued a decision in Home Paramount Pest Control Companies, Inc. v. Justin Shaffer,
et al., Record No. 101837, --- S.E.2d ----, 2011 WL 5248212 (Nov. 4, 2011), that has changed Virginia law on the permissible scope of employee non-compete provisions, or at least formally recognized changes in Virginia law in this area over the past several years. Virginia employers, in particular, should take notice of this decision.
Home Paramount's Teachings
Under Virginia law, non-competes are considered covenants in restraint of trade, and they "are not favored, will be strictly construed, and, in the event of an ambiguity, will be construed in favor of the employee." E.g., Modern Environments, Inc. v. Stinnett, 561 S.E.2d 694, 695 (Va. 2002). Generally, Virginia law provides that "a non-compete provision is enforceable if it ‘is narrowly drawn to protect the employer's legitimate business interest, is not unduly burdensome on the employee's ability to earn a living, and is not against public policy.' The employer bears the burden of proving each of these factors. When considering whether the employer has met the burden, [a court] consider[s] the ‘function, geographic scope, and duration' elements of the restriction. These elements are ‘considered together' rather than ‘as three separate and distinct issues.'" Home Paramount at 2-3 (citations omitted).
Home Paramount principally focuses on the function element in the foregoing test. Regarding that element, Home Paramount notably teaches that a non-compete, to be enforceable, must not prohibit the employee from engaging in activities with a new employer beyond the kinds of business activities undertaken by the former employer (the beneficiary of the non-compete). If the non-compete prohibits the employee from engaging in additional activities, the former employer must prove the broader scope is necessary to further a legitimate business interest, else the non-compete will (likely) be overbroad and thus unenforceable. See id. at 4-7. Home Paramount also teaches that narrowness of a non-compete's geographic and temporal restraints are not sufficient to save the non-compete from being unenforceable, if it is clearly overbroad from a functional standpoint. See id. at 8.
The non-compete provision at issue in Home Paramount provided that:
The Employee will 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, in any city, cities, county or counties in the state(s) in which the Employee works and or in which the Employee was assigned during the two (2) years next preceding the termination of the Employment Agreement and for a period of two (2) years from and after the date upon which he/she shall cease for any reason whatsoever to be an employee of [Home Paramount].
at 1. In Home Paramount
, the Virginia Supreme Court affirmed the circuit court's order sustaining the employee's plea in bar, which asserted that this non-compete was functionally overbroad. See id
. 7, 9. Central to the Supreme Court's reasoning was that this non-compete, "[o]n its face, [ ] prohibits [the employee] from working for Connor's [an alleged competitor of the former employer] or any other business in the home pest control industry [the industry of the former employer] in any capacity
at 7 (emphasis added).
Home Paramount Establishes A Change In Virginia Law On Non-competes
Home Paramount addresses a non-compete provision identical to the one the Virginia Supreme Court addressed in its 1989 decision in Paramount Termite Control Co. v. Rector, 380 S.E.2d 922. However, the Virginia Supreme Court held in Paramount Termite that the non-compete was enforceable. That holding is premised on the conclusions that: (i) the employee's contacts with the former employer's customers and knowledge of the former employer's methods of operation "sufficiently demonstrate[d] the need for [the non-compete;]" (ii) the non-compete "did not prohibit [the employee [ ] from [ ] work[ing] in a number of areas within commuting distance [;]" (iii) the employee "may engage in any other work but that of pest control in the counties in which [he] formerly worked for Paramount[;]" and (iv) the industry in question "is highly competitive, with a limited supply of customers, and an ample supply of businesses and personnel willing to supply such services." Id. at 925.
Home Paramount establishes a change in Virginia law regarding non-competes by formally recognizing "incremental clarifi[cations]" to Virginia law on non-competes that have occurred over the years since Paramount Termite was issued and by expressly overruling Paramount Termite, to the extent that it "conflicts with any portion of [the] holding in [Home Paramount]." See Home Paramount at 10. The near future promises still more developments in Virginia law on non-competes because the Virginia Supreme Court heard oral argument on November 20th in BB&T Insurance Services, Inc. v. Thomas Rutherfoord, Inc., et. al., No. 101843, which also involves a dispute over the enforceability of a non-compete.
The Importance of Home Paramount
Virginia employers, in particular, should pay heed to Home Paramount. It could affect their non-competes with their own employees and non-competes between persons they wish to hire and those persons' employers. Among the lessons to take from the decision are that it:
- Makes the enforceability of a non-compete that prohibits an employee from working in any capacity for a new employer, even one that is a competitor, a doubtful proposition, at best. Such non-competes have been commonly used;
- Raises questions on whether and under what circumstances, if at all, a non-compete prohibiting an employee from engaging in activity with a new employer, beyond activity engaged in by the former employer, will be enforced; and
- Calls into question whether and to what extent, if at all, an employer can still justify a non-compete on any of the grounds upon which the Virginia Supreme Court relied in upholding the non-compete at issue in Paramount Termite.
About Kelley Drye
Kelley Drye is a full-service law firm with active business, litigation, and employment law practices, among others. Included within the firm are attorneys who regularly address matters concerning Virginia law and who appear in Virginia courts. Kelley Drye stands ready and willing to assist you better understand the impact and effect of Home Paramount, as well to assist you in addressing your other legal needs, including those related to employment matters.
For more information, please contact Joe Wilson, 202-342-8504, firstname.lastname@example.org.