Justin Shaffer (“Shaffer”), a former employee of Home Paramount Pest Control Companies, Inc., signed an agreement containing a provision that prohibited him from engaging in any manner in any business involved in “exterminating, pest control, termite control and/or fumigation services as an owner, agent, servant, representative, or employee.”  The agreement also prohibited him from being a member of a partnership, an officer, director or stockholder of any corporation in any city, county, or state in which he was assigned to work.  The agreement contained a two year duration period.  After resigning from Home Paramount, Shaffer began working for Connor’s Termite and Pest Control, Inc. 

Home Paramount filed a complaint alleging breach of contract by Shaffer and tortious interference with contract by Connor’s.  The Circuit Court found the noncompete provision of the agreement overly broad and unenforceable.  On appeal, the Supreme Court upheld the Circuit Court’s decision and found that the provision was overly broad because it barred Shaffer from engaging indirectly or concerning himself in any manner with the pest control business, “even as a passive stockholder of a publicly traded international conglomerate with a pest control subsidiary.” 

Home Paramount argued that by focusing on the function element of the covenant, the court had overlooked the geographic scope and duration elements of the agreement – that the geographic scope in Shaffer’s agreement was relatively narrow and the duration was one commonly accepted in such provisions.  The court disagreed and stated that Virginia courts have usually examined the function element of the provision, and “overbreadth of the function here cannot be saved by narrow tailoring of geographic scope and duration.” 

Home Paramount also argued that the Court’s ruling invited circuit courts to contemplate hypothetical job duties in analyzing covenants not to compete (i.e. to apply the “janitor rule” — if the noncompete would prohibit the employee from working as a janitor for a competitor, it would be overbroad).  The Court noted that a provision that prohibits employees from working in “any capacity” for competitors invites such hypotheticals, and the employer has the burden of proving its legitimate interest in upholding the agreement. 

Home Paramount also argued that the circuit court should have considered Shaffer’s individual experience and training in evaluating what type of job he would have taken in a competitor company.  The Supreme Court disagreed because Home Paramount had not argued that the language in the agreement was ambiguous – the Court could not rely on evidence outside of the language to adduce meaning and to establish that the provision furthered Home Paramount’s legitimate business interests. 

To read the full opinion, click here.

The Virginia Supreme Court is currently considering another case involving covenants not to compete and employee confidentiality agreements.  We will post an update on the case once it is decided.

Employee was employed by Medtronic, Inc., a medical technology company.  During Employee’s employment, Employee signed a revised version of Medtronic’s standard employment agreement which contained a noncompete covenant that prohibited Employee from working on competitive products for a period of two years following the conclusion of his employment.  Employee received a restricted stock award of over $50,000 in exchange for signing the updated employment agreement.  Employee then accepted a position with St. Jude Medical S.C., a competitor of Medtronic.   St. Jude contacted Medtronic and stated that Employee’s employment would not result in any breach of Employee’s contract with Medtronic to the extent that it was enforceable.

Medtronic filed a lawsuit against Employee for anticipatory breach of contract.  Employee counterclaimed for declaratory and injunctive relief on the ground that the noncompete covenant was unenforceable and overbroad.  Employee requested that the district court limit the noncompete covenant to a reasonable geographic boundary and a time limit of no longer than one year.  St. Jude intervened and counterclaimed for declaratory and injunctive relief on the same grounds as Employee.  

The district court denied temporary injunctive relief and ten months after the lawsuit began, St. Jude instructed Employee to begin working in violation of the Medtronic noncompete covenant.  Medtronic then added a claim against St. Jude for tortious inference with a contract. 

After trial, the district court held that Medtronic’s noncompete covenant was enforceable because it “reasonably serves to protect a legitimate business interest.”  The district court concluded that the two-year duration was overly broad and reduced the length of the covenant to one year.  The district court found, however, that the geographic scope of the covenant was reasonable because it was limited to certain products.  The district court further concluded that Medtronic was entitled to judgment on its claim for tortious interference with contract against St. Jude and was awarded Medtronic over $615,000 in attorneys’ fees and other expenses in enforcing the covenant against Employee.     

The Court of Appeals affirmed, holding that the geographic scope of Medtronic’s noncompete covenant was reasonable under the circumstances because (a) the confidential information that Employee had access to was not specifically limited to the geographic area where he worked, and (b) the scope of the covenant was restricted to the specific product produced by Medtronic.  The Court of Appeals further held that Employee anticipatorily breached the noncompete covenant by accepting a position at St. Jude and St. Jude intentionally procured Employee’s breach by inducing him to accept its offer of employment.  The Court of Appeals rejected St. Jude’s argument that its interference was justified because it had a good-faith belief that Employee’s noncompete covenant was unenforceable because St. Jude produced no evidence to support its argument as it refused to disclose the basis for its assertion on the ground of attorney-client privilege . 

This Minnesota case highlights the risks for employers who hire applicants subject to a valid noncompete agreement.  For an interesting article about the benefits and risks of recruiting employees that already have a job, click here.

The noncompete provision prohibited the nurse from performing the types of services that she performed for her former company, directly or indirectly, as an “agent, officer, director, member, partner, shareholder, independent contractor, owner or employee.”  The court held that the shareholder prohibition was “inherently overbroad.”  The court reasoned that under the language as written, the defendant would be barred from owning stock in a publicly traded company if some part of that company provided the same medical services as her former company, which could include companies that were not competitors.  The agreement also failed to define “medical services” or what constitutes “indirect” performance of services so as to put the defendant on notice as to what services she could perform within the parameters of the agreement. 

Similarly, the court found that the nonsolicitation provision of the agreement was overbroad.  That provision stated that the defendant could not solicit any employee of the company “for any reason whatsoever, or to hire any such individual” during the 12 months prior to the defendant’s separation of employment.  The court held that the language was “unlimited as to location or function” and that the company “lacked a legitimate interest for preventing a prior employee from soliciting or hiring employees internationally and for any occupation whatsoever.”

The Virginia Lawyers Weekly article on this opinion can be found here.

Gray was employed by Fidelity as a Vice President/Senior Account Executive.  In this position, Fidelity alleged that Gray had access to customer account information.  When Gray left his employment at Fidelity for Morgan Stanley, he signed an Employee Agreement in which he promised to maintain the confidentiality of Fidelity’s customer information, not to use trade secret information, and not to solicit Fidelity’s customers for three years after the termination of his employment. 

Within seven months of leaving Fidelity, Gray allegedly used proprietary information to cause 12 Fidelity customers and over $9 million in assets to be transferred from Fidelity to Morgan Stanley.  Several Fidelity customers also complained to Fidelity that Gray was using their personal information to solicit them for Morgan Stanley.  As required by the Financial Industry Regulatory Authority (“FIRNA”), Fidelity was pursuing its claims against Gray in binding arbitration.  However, Fidelity requested that pursuant to the Employee Agreement signed by Gray, the court enjoin Gray from using its customer information to solicit its customers while the arbitration was pending.

In granting Fidelity’s request for a TRO, the court held that Fidelity would likely succeed on the merits of the arbitration.  First, the court concluded that Fidelity’s customer lists and customer information was entitled to the protection of trade secret information under the Trade Secret Act.  Additionally, the Employee Agreement signed by Gray, which was governed by Massachusetts law, was likely enforceable to protect the legitimate business interest of Fidelity, including Fidelity’s goodwill and trade secrets.  Gray argued that the three-year nonsolicitation period in the Employee Agreement was unreasonably long and therefore unenforceable.  The court rejected Gray’s argument and held that the restrictive covenant would likely be upheld to protect Fidelity’s legitimate interests.    

 Despite the fact that Fidelity manages over $1.5 trillion in assets, the court also found that there was a likelihood of irreparable harm without immediate relief as customers cannot be “unsolicited” and it is impossible to measure the loss of clients’ goodwill, trust, and future business.    

For a copy of the court’s opinion, click here.

The Court declined to enforce the covenant not to compete, but did find a nonsolicitation clause enforceable.  The case illustrates the heightened scrutiny that covenants not to compete now face in Virginia.  Boilerplate noncompete agreements are unlikely to survive this scrutiny, so employers that care about the enforceability of a covenant not to compete are well-advised to invest in review of the agreement (and revision if necessary) by competent labor counsel.  Unfortunately, without clear guidance from the Virginia Supreme Court or the General Assembly, drafting an enforceable covenant not to compete remains an exercise in uncertainty.

In this case, the employee, Lawrence, entered into a noncompete agreement with Specialty Marketing upon becoming a shareholder of the company.  The agreement prohibited Lawrence from owning, managing, or being an employee of “any business competitive with Specialty in areas where Specialty has a market for its business.”  About nine months after he was no longer employed by Specialty, Lawrence was hired by another company in a similar position and geographic area as he had with Specialty.  Specialty sued Lawrence for breach of the noncompete agreement, but ultimately lost when the court found the noncompete unenforceable based on two grounds:  first, the agreement’s prohibition against being employed by any business in competition with Specialty was overbroad, and second, the agreement lacked a limitation on geographic scope.

The Virginia Lawyer’s Weekly Blog has a post on the case here.  

FBR is an investment bank that provides its clients with training and brokerage services, including market research and analysis designed to assist client in making investment decision.  Defendant Karen Short was an equity research analyst who was employed by FBR from May 2006 to July 20, 2009.  Early in Short’s employment with FBR, she signed a covenant not to compete and non-solicitation agreement.  The Agreement required Short to provide 90 days written notice of her intended resignation.  The Agreement also including a covenant not to compete which stated that during the ninety day notice period or for ninety days from Short’s termination, she was not to be employed by or engage in “any business that competes with FBR in the capital markets, financial advisory and/or institutional sales and trading business [ ] in the same or similar capacity” as her employment with FBR. 

On or about July 20, 2009, Short informed her supervisor that she was leaving FBR to begin work at Bank of Montreal (“BMO”) – undisputedly an FBR competitor.  Short began employment with BMO as an Equity Research Analyst on July 21, 2009.  On September 9, 2009, FBR filed a complaint against Short alleging breach of contract and violation of the Virginia Uniform Trade Secrets Act, claiming that Short breached her covenant not to compete, non-solicitation agreement, and FBR’s confidential and proprietary information policy by going to work with BMO.  FBR also filed a motion for a temporary restraining order requesting that the Court bar Ms. Short from working for BMO or any other FBR competitor for a period of ninety days from entry of the order, which the Court addresses in this decision.

The granting of a preliminary injunction is an “extraordinary remedy … which is to be applied only in [the] limited circumstances which clearly demand it.”  Direx Israel, Ltd. v. Breakthrough Med. Corp. 952 F.2d 802, 811 (4^th Cir. 1991).  In order for a preliminary injunction to be awarded by the court, the plaintiff must show that it is likely to suffer irreparable harm in the absence of preliminary relief, and has the burden of proving a clear showing of irreparable harm.  Id.  Additionally, the “clear showing of irreparable harm to be suffered by the plaintiff from a denial of relief must be actual and immediate.”  Id at 812.  The Court relied on this “actual and immediate” standard in finding that FBR did not meet its burden of proof.

The Court was not satisfied with FBR’s proffered evidence of immediate irreparable injury and denied its request for injunctive relief.  The Court pointed to three reasons why FBR failed to make a clear showing of actual and immediate irreparable harm.  First, FBR failed to demonstrate that it suffered any harm as a result of Short’s departure.  The pleading, affidavits and hearing testimony provided by FBR alleged only that there was a risk that they might lose customers and income.  FBR provided no actual showing that it did suffer losses or that there was even a significant chance that it would lose customers or income.  For instance, FBR’s CEO implied that clients would leave the company to follow Short, however, he did not provide evidence that customers had or were going to leave.

Secondly, the Court found that even if FBR had suffered harm from Short’s departure, it could be adequately compensated through damages.  The Court was not persuaded by FBR’s assertion that its business model made it very difficult to quantify the effect of one analyst, such as Short, and thus damages would be too difficult to ascertain.  The Court dismissed this argument citing a similar case from the District Court of Vermont that found a reasonable estimate of damage can be made based on records of the assets and commission related to the accounts and similar records created by Defendant’s new employer for transferred accounts.  See Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Callahan, 265 F. Supp.2d 440 (D. Vt. 2003).  Therefore, if Short is found to have breached the contract and FBR suffered damages, the appropriate remedy is to seek damages through the breach of contract claim – not through the extraordinary remedy of a grant of preliminary injunction. 

Lastly, the Court found that FBR’s “lack of urgency” in replacing Short weighed against a finding of irreparable harm.  FBR claimed that it needed ninety days to hire someone to replace Short and give that person time to “ramp-up” before beginning to cover the specific stocks.  Yet, at the time of the decision it had been two months and FBR still had not replaced her.  Further, in the hearing, FBR stated that it was not sure it was even going to hire anyone to cover Short’s stocks.  The Court found that FBR cannot state it will be irreparably harmed if she is not enjoined from working for ninety days when the company will be in the same position after the ninety days whether the injunction is granted or not.

The Court denied Plaintiff’s Motion for a Temporary Restraining Order.

In 2001, Hal Moore sold his company, Western Insulation, Inc. (“Insulation”), to Western.  Hal and his wife Melanie, who was Chief Financial Officer of Insulation, signed identical noncompete agreements with Western.  While still under the timeframe of the noncompete, Melanie obtained financing and served as guarantor for the loans for two competing insulation companies founded by former Insulation employees.  Hal entered into a lease agreement with one of the competing companies, and sold some equipment to the other.  He also hired two former Insulation employees.  Western brought suit in Virginia state court, alleging violations of the noncompete agreements and seeking compensatory damages and an injunction. 

Following removal to federal district court, the court held that the Moores had breached their agreements and awarded $943,659 to Western as compensatory damages and denied injunctive relief.  The Moores appealed, and the Fourth Circuit affirmed the district court’s decision with regard to Melanie’s breach.  The court found that Hal had breached his agreement by hiring former Insulation employees, but that Western had failed to prove any compensatory damages with regard to that breach.  The Fourth Circuit disagreed with the district court’s denial of injunctive relief, and remanded for further consideration.  On remand, the district court granted an injunction against Melanie to prevent her from assisting any of Western’s competitors or obtaining any ownership interest pursuant to a loan guarantee, and extended her noncompete agreement for the length of time it determined she had breached the agreement.  The court entered judgment for breach of contract against both Hal and Melaine and awarded Western nominal damages in the amount of $100.

On appeal to the Fourth Circuit, the Moores argued that the injunction against Melanie was too broad in that it restricted her ability to provide personal financial assistance to the founders of the competing companies, there was no evidence that she would violate the agreement in the future, and the extension of the agreement’s timeframe was error.  The Fourth Circuit rejected these arguments in turn. 

First, with regard to the overbroad argument, the court stated that the restriction on personal financial assistance was necessary in light of the fact that Melanie had provided assistance to Western’s competitors in violation of the agreement, and so allowing her to provide financial assistance to the companies’ founders would simply be “moving funds from one pocket to another.”  As to the second argument, the court found that the financial assistance Melanie provided to Western’s competitors resulted in an ongoing breach because by enabling the companies to stay in business, she had exposed Western to continuing damage.  Finally, the court rejected the argument concerning the extension of the agreement because it found that Melanie had received the benefit of the breach during that entire length of time.

With regard to the court’s award of nominal damages, the Moores argued that because the court had previously found that Western had failed to prove compensatory damages, Western could not satisfy the elements for a breach of contract claim.  They also argued that the doctrine of judicial estoppel barred Western’s request for nominal damages.   The Fourth Circuit stated that under Virginia law, parties to a contract have the right to modify elements of a breach of contract claim, including eliminating the requirement of proving damages.  The court pointed to language in the agreement specifying that a breach “shall result in substantial injuries” and entitling Western to seek injunctive relief and monetary damages as a result.  Because Western’s compensatory damages were limited to those it could prove with “reasonable certainty,” and Western had not done so, the question then became whether Western could recover nominal damages.  The court concluded that Virginia law recognizes nominal damages in cases where a breach of contract occurred but where compensatory damages were not proven, and affirmed the district court’s award.  As to whether judicial estoppel barred Western’s claim for nominal damages, the court stated that Western did not act in bad faith in seeking the award, and so judicial estoppel did not apply.

The employee in this case had entered into a three year employment contract with a company that provided obstetric and gynecological services in southeast Virginia.  The employment agreement included a termination provision with the following language:  “This agreement may be terminated by either employee or employer without cause and without any further obligations upon sixty (60) days advance written notice.”  The agreement also contained a non-compete covenant.  That provision barred the employee for a two year period from maintaining any interest or participating in any medical practice involving obstetrics or gynecological services within a twenty miles radius of the employer.  The agreement also contained a severability clause. 

The employee terminated the employment agreement by providing sixty (60) days’ advance written notice as provided in the agreement.  The employee then filed a complaint seeking a declaratory judgment that the covenant not to compete was void.  The circuit court found for the employee, concluding that the employee’s termination of the agreement also terminated the covenant not to compete.  On appeal, the employer argued that the severability provision in the covenant not to compete rendered it enforceable despite the termination of the agreement. 

The court agreed with the employee.  The court found that there was an unresolvable conflict between the severability provision and the termination provision, which allowed a termination “without any further obligation.”  In this case, the employer was the drafter of the agreement and the court therefore construed it against the employer.  The court therefore held that the advance notice terminated the entire agreement including the non-compete provision. 

Although this case may have hinged on the exact wording of the termination provision, non-compete decisions in other states have fallen on the same issue.  Careful attention must be taken when drafting non-compete agreements in Virginia.  Even with careful drafting, employers should be aware that the trend in cases such as this one (and others that we have previously posted on — for example, here) is to strictly construe non-compete provisions against the employer.

The Plaintiff, KBH Corporation, a retailer and wholesaler of only used automobiles, filed a Complaint to enjoin a former employee from working for a competitor.  The competitor, David McGeorge Car Company, Inc., was a dealer of both new and used cars.  The trial court held that the non-compete provision in question was overbroad and unenforceable because the language of the provision barred the employee from working for McGeorge in any of its activities, not merely in those that directly competed with KBH.  The Supreme Court affirmed the decision. 

Significantly, KBH was engaged in a particular subset of business:  the wholesaling of used automobiles.  The non-compete provision at issue in the case sought to preclude the employee from affiliating with “any business which purchases, sells, or distributes automobiles.”  The Supreme Court found that such a wide ranging prohibition was manifestly unnecessary to protect the employer’s competitive advantage. 

Although this was not a published decision of the Virginia Supreme Court, the decision once again highlights the need for employers with non-compete provisions in Virginia to be vigilant in updating those contracts as time goes by.  In order to be enforceable in Virginia, non-compete agreements must be specifically and narrowly tailored to protect the employer’s legitimate interest.

Plaintiff, Combined Insurance Company of America (“Combined”), filed suit against a former employee alleging breach of contract, tortious interference with contractual and/or prospective business relations, breach of fiduciary duties, misappropriation of trade secrets, and conversion.  Defendant’s employment with Combined began in 1986 and in 2005 he was promoted to regional manager.  Defendant’s employment was subject to an employment contract which prohibits the defendant, for a period of two years following the termination of his employment, from soliciting plaintiff’s clients and employees.  Combined alleged that before defendant terminated his employment with plaintiff, defendant started working for a competitor, Family Heritage.  Additionally, Combined alleged that defendant used the company’s confidential and proprietary information to solicit plaintiff’s clients, current employees, and former employees.  The court discussed defendant’s motion to dismiss and ultimately denied said motion. 

Defendant’s first contention was that the non-competition clause and the prohibition on solicitation were unenforceable because they were vague and geographically overbroad.  Specifically, defendant argued that these covenants were overbroad and vague because they were limited to “any geographic areas for which the Executive has been responsible during the two year period before the date the Executive’s employment terminates.”  The court found this language to be permissible as the Supreme Court of Virginia upheld covenants that were “virtually indistinguishable from the ones at issue here, where the geographical limitation is defined with reference to the territories in which an employee worked prior to termination.”  Additionally the court noted that Virginia courts have upheld non-competition clauses that are limited to a former employer’s actual customers.  The court stated that Combined had clearly presented evidence that would rise to a claim for breach of contract. Accordingly, the court denied defendant’s motion with respect to count I.

Defendant’s second contention was that Counts Two, Three, and Five were precluded under Virginia law, because the only duties allegedly breached exist solely by virtue of the Contract.  The court stated that the Supreme Court of Virginia has “long recognized that under the common law an employee, including an employee-at-will, owes a fiduciary duty of loyalty to his employer during his employment,” and that this duty encompassed “the more specific duty that the employee not compete with his employer during his employment.”  The court found that the Contract was not the sole source of any fiduciary duties allegedly owed to Combined by the defendant.  Additionally the court stated that “a tort action exists against one who intentionally interferes with another’s contractual rights.”  Thus, the court held that Combined was not limited to pursuing contractual theories of relief and denied the defendant’s motion to dismiss with respect to that issue.

Defendant also argued that Combined’s claims for tortious interference, breach of fiduciary duties, and conversion are preempted by the Virginia Uniform Trade Secrets Act.  The court cited the United States District Court for the Eastern District of Virginia and concluded that the preemption provision is intended to preclude only those common law claims that are premised entirely on a claim for the misappropriation of a trade secret.  The court stated that to survive summary judgment a plaintiff must be able to show that the distinct theories of relief sought are supported by facts unrelated to the misappropriation of the trade secret. The court concluded that Combined’s claims for tortious interference and breach of fiduciary duties were not preemped because the claims were not entirely dependent upon the defendant’s alleged misappropriation of trade secrets. 

Finally defendant challenged the merits of Combined’s conversion claim. Combined alleged that the defendant forwarded a confidential and proprietary list of persons targeted for recruitment by Combined to his personal email account, and that he then used this information to solicit people on behalf of Family Heritage.  Defendant argued that the claim was without merit because the property allegedly converted, a list to the defendant’s email account, is intangible.  The court held that the claim does not fail merely because the property at issue was an electronic version of the list rather than a hard copy.  Accordingly, the court denied defendant’s motion to dismiss with regards to the conversion claim.

Contributed by Alexis J. Alber

It is important to remember when you file a lawsuit that the other side has the ability to file a counterclaim against you.  If you are living in a glass house, it may not make sense to throw the first stone.

The employer in this case was involved in information technology consulting.  The employee had signed a standard noncompetition and nonsolicitation agreement, which provided he could not perform services for clients of the company or work for a competing business, among other things.  After leaving the company and alleging performing services for a customer, the employer brought suit.

On the employee’s motion to dismiss, the court looked at the scope of the noncompetition and nonsolicitation clauses.  The court noted that such clauses are upheld “only to the extent that the proscribed functions are the same functions as were performed for the former employer.”  The court found the agreement wanting for a number of reasons:

“There is no regard for whether his employment with a current Nortec client in any way relates to his prior employment with Nortec and involves the use of any skills or knowledge acquired by Mr. Lee-Llacer in his former position.  Nowhere in the agreement does Nortec define what constitutes a ‘product or service offered.’  Additionally, it does not require that the employment be related to a product or service offered by Nortec to that client.”

The bill was intended to clarify that an entity that employs or contracts with an individual licensed by a health regulatory board may (i) practice or engage in the practice of a profession or occupation for which the individual is licensed, (ii) provide or render professional services related to the profession or occupation for which the person is licensed through the licensed individual, and (iii) enforce the terms of employment or of a contract with the licensed individual.   

The bill was a response to the decision by the Supreme Court of Virginia in Parikh v. Family Care Center, Inc., No. 060934 (2007), which held that a professional corporation did not have a legitimate business interest in preventing a doctor from competing with it because it was not allowed to “practice medicine” under Virginia law.

The text of the relevant provision, which will be included in Section 54.1-111 of the Code of Virginia, reads as follows:

Nothing in this section, nor §§ 13.1-543, 13.1-1102, 54.1-2902, and 54.1-2929, shall be construed to prohibit or prevent any entity of a type listed in § 13.1-542.1 or 13.1-1101.1, which employs or contracts with an individual licensed by a health regulatory board, from (i) practicing or engaging in the practice of a profession or occupation for which such individual is licensed, (ii) providing or rendering professional services related thereto through the licensed individual, or (iii) having a legitimate interest in enforcing the terms of employment or its contract with the licensed individual.