Non-Competition Agreements for Small Business: Not Too Broad or Too Narrow, But Just Right

The Supreme Court of Virginia Building, adjace...

Non-competition agreements, or non-solicitation agreements, are generally clauses within employment agreements which limit employees’ ability to enter into employment or to start a business which competes with a former employer.  Under Virginia law, non-competes (sometimes called or written plainly “noncompetes”), though viewed as a restraint of trade, are enforceable if the three prongs of the non-compete–time, geography and function–are properly limited.  The non-compete terms should be broad enough to protect the employer’s business interests, but not so broad as to prevent the employee from earning a living and should not violate public policy.

 

Many times the focus on non-compete agreement terms fall on the time and geography prong.  In November, the Virginia Supreme Court squarely refocused the discussion on the function prong of the non-compete.  In Home Paramount Pest Control v. Shaffer, the Court reviewed a non-compete agreement that it had approved 22 years ago in Paramount Termite Control v. Rector.  This time the Court declared that the function provision, which the company had not changed in the ensuing time, as overly broad and the entire agreement as unenforceable.

 

The Court held that the language which stated that the former employee could not engage “directly or indirectly. . . 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 or any corporation or in any manner whatsoever . . .” was not reasonable because the clause effectively prohibited the employee from holding any type of job in the industry.  The reasonableness of the time and geography prongs were insufficient to save the agreement.  Under the Home Paramount, if a business wants to preclude an employee from performing any work for a competitor, then it must be ready, willing and able to prove a “legitimate business interest” to do so. That’s not necessarily an easy task.

 

So, to ease the process for small businesses, now is the time to review any non-compete clauses used in your business.  Be wary of non-competition agreement forms or templates.  What terms are permissible in a non-compete clause in Virginia may not work at all in California – and vice versa. Terms permissible 20 years ago or even 6 months ago  in Virginia are no longer workable.  Court decisions over time can and do change the law.  The laws of individual states evolve over time and the laws of each state differ.

 

All three prongs of the non-compete must be appropriately limited, reasonable and related to the position in question.  The function prong cannot be so broad that it effectively precludes the employee from performing any job in the industry from CEO to janitor or even from owning stock passively in a multinational, publicly held corporation.

 

 

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