Are Non-Compete Agreements Dead?

From Brian S. Wheeler, attorney with LeClairRyan:

When hiring employees, especially critical employees who have access to customers, confidential information and trade secrets, companies often try to protect themselves from unwanted competition by requiring the new employee to enter into an employment agreement containing a covenant not to compete or non-competition agreement. Because covenants not to compete may have a real world impact upon an individual’s ability to earn a livelihood, Virginia courts have become less and less inclined to enforce them. 

Brian S. WheelerAre covenants not to compete dead in Virginia?  The short answer is no, BUT such covenants will be narrowly construed to ensure that they are protecting an employer’s legitimate business interests. 

The question asked will be this:  Is the covenant not to compete reasonable in its scope? 

When determining whether a covenant not to compete is reasonable in scope, courts generally consider: 1) the function and scope of the restriction in light of the employer’s legitimate business interests, 2) geographic scope, and 3) duration.     

A covenant not to compete is much more likely to be enforced if it only prohibits an employee from working in the same or similar capacity in which she worked for her previous employer.  This is especially true if the covenant not to compete is necessary to prevent an employee from taking a position where she can use the customer, pricing, trade secrets or other confidential or proprietary information of her former employer to the benefit of her current employer.

Likewise, when looking at the geographic and durational scope of the covenant not to compete, these must be no greater than necessary to protect the legitimate business interests of the employer.  
 
Finally, provisions in employment agreements which restrict a former employee’s ability to solicit the customers and prospective customers or the employees of the employer are more likely to be enforced.  While the law regarding covenants not to compete is changing to favor the employee, such covenants may still be enforced if it protects the legitimate business interests of the employer.  The key is not to be greedy.           

Given recent court rulings, emloyers are encouraged to contact their attorney to update any  existing  covenants not to compete currently in place  and to ensure that any additional covenants will be enforceable under current law.

For more information, contact Brian Wheeler at 540-443-3308.

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Mike Drzal, partner with law firm LeClairRyan, is a GAP 50 Regional Ambassador for the GAP 50 Entrepreneur Awards, a program designed to identify and celebrate Virginia's next generation of entrepreneurs in the areas of life sciences, technology and energy.  Nominate Virginia entrepreneurs here through September 20, 2012.

LeClairRyan specialized in high-tech corporate law.LeClairRyan is an entrepreneurial law firm with offices from Virginia to New York to California, providing business counsel and client representation in matters of corporate law and high-stakes litigation. The Blacksburg, Virginia-based office of LeClairRyan offers venture capital, angel investor funding, and intellectual property law services for startups, entrepreneurs, and technology-based companies.  It also offers Outside General Counsel services covering the full gamut of clients' corporate, employment and business litigation needs. For more information, please contact Jim Cowan or Mike Drzal at 540-961-2600.

LeClairRyan is a client of Handshake Media, Incorporated, the parent company of Handshake 2.0.

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Comments

  1. In his note to me about this post, Brian Wheeler cited this example with his question, “Are covenants not to compete dead in Virginia?”

    A recent example of a court striking down a covenant not to compete came in the matter of Home Paramount Pest Control Cos. Inc., v. Shaffer et al., 282, Va. 412 (2011). In Paramount, the Supreme Court of Virginia held that a non-competition provision barring a former employee form working for any other business in the pest control industry in any capacity was unreasonably overbroad and therefore unenforceable.

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