Non-Compete Agreements: Sword and Shield

Barrett E. Pope
January 1, 2001

In an era of intense business competition and unprecedented employee turnover, your company may become involved with non-compete agreements (“non-competes”). These agreements place certain restrictions on a former employee’s ability to work for a different company in the same business. Any employer who does not understand the role of non-competes risks injury to his company when a key employee leaves, or faces potential liability to a competitor when hiring a new employee.

Historically, there were no constraints on an employee’s ability to work for a rival company after leaving his employer. Then employers began using non-competes to limit their employees’ future mobility in the marketplace.

The response of the judicial system was to regard non-competes as unenforceable restraints on trade. Gradually, however, courts became more willing to enforce these restrictions as long as the non-competes passed a three-pronged test.

The first prong addresses a non-compete’s reasonableness as to the employer. Is enforcement of the restriction necessary to protect the employer’s legitimate business interests, and does it go no further than protecting those interests? An affirmative answer supports enforcing the restriction and leads to the second prong.

Is the restraint reasonable as to the former employee? Three factors are key in resolving this issue. Is the non-compete agreement reasonable as to duration? Courts have held that non-competes extending for as much as five years are enforceable. There are numerous decisions granting employers protection for two or three years.

Next, is it reasonable as to the prohibited territory? Sometimes a non-compete will restrict the former employee within a certain radius from the location of the employer’s business. Non-competes with as much as a 50-mile radius have been enforced. Another approach prohibits contact with the customers with whom the employee dealt without regard to the employer’s location. Most of the time courts respond favorably to this approach.

The final factor is reasonableness as to prohibited activity. Courts will entertain non-competes if they prohibit only those activities in which the employee engaged in his previous employment. An employer must be careful not to impose constraints on activities in which the employee did not participate even if the employer’s business encompasses such activities. For example, an automobile dealership should avoid attempting to prevent one of its mechanics from accepting a sales position at another dealership, because the mechanic did not sell cars in his former position.

If the non-compete is reasonable as to duration, territory and activity, courts consider the final prong: reasonableness as a matter of public policy. Although the public interest is generally served when contracts are enforced, there may be a concern over limiting the availability of certain services in a particular community. For example, if there is a shortage of emergency medical personnel in a rural locality, public policy may be violated by restricting someone from participating in that field. As a general rule, however, public policy considerations do not invalidate an otherwise reasonable non-compete.

An employee (and his would-be employer) can test the enforceability of a non-compete by filing what is known as a declaratory judgment lawsuit. In that proceedings, a judge will declare the rights and obligations of the parties before the employee begins working for a new company.

If the employee has already begun working for a competitor, the former employer can request a court to enjoin the breach of a non-compete. Although injunctive relief is an extraordinary remedy, it may be granted where the former employer’s damages are ongoing and difficult to calculate. The former employer may also pursue seizing the new employer’s profits already derived from a violation of the non-compete.

A word of caution: do not expect the courts to alter a non-compete to hold it to be enforceable. Overwhelmingly, Virginia judges decline to impose on the parties a contract different from the original one by re-writing the non-compete to eliminate or modify objectionable language. Be conservative in imposing restrictions on the employee. A narrowly-drawn but enforceable non-compete is far better than one giving you greater protection but which may be viewed as over-reaching and, thus, unenforceable.

At DurretteBradshaw PLC we deal with drafting, enforcing and blocking non-compete agreements as part of our Business and Commercial Litigation practice groups. If you need counseling in this area, let us hear from you.