By Thomas Flaherty, Linda Jackson, Paul Kennedy and Rebecca Roche © Littler Mendelson
A trial court was too quick to rule on the enforceability of a covenant not to compete, the Supreme Court of Virginia ruled, reversing the court’s dismissal of the employer’s complaint and sending the case back for further proceedings.
This ruling signals an important shift in the procedural and strategic landscape surrounding noncompete agreements in the commonwealth, as the court has effectively limited a frequently used device for challenging and disposing of noncompete claims early in litigation.
While employed by Assurance Data Inc., John Malyevac entered into an employment agreement prohibiting him from soliciting, providing, promoting or selling products or services that competed with the company within a 50 mile radius of its Virginia office for six months after termination. The agreement also prohibited Malyevac from soliciting customers of the company for any business which is competitive with the company “for a period of twelve (12) [sic] after the date of termination . . . .”
After resigning, Malyevac went to work for another company, where he engaged in competing activities. His former employer filed suit to enforce the agreement, to request the return of all confidential information, and to recover compensatory damages.
Malyevac filed a filed a demurrer to the complaint, claiming that the allegations failed to state a claim upon which relief could be granted. Specifically, he argued that the noncompete and non-solicitation provisions in the agreement were overbroad and unenforceable. By way of example, he pointed to the provision prohibiting him from soliciting customers for “twelve (12) [sic] after the date of termination” with no indication whether the duration was days, weeks, months or years. Assurance Data argued that the court could not decide the enforceability issue on demurrer, because doing so would deny it the opportunity to present evidence that the restraints are reasonable and no greater than necessary to protect its legitimate business interests. The Fairfax County Circuit Court disagreed, and sustained the demurrer without leave to amend, holding “as a matter of law the provision is unenforceable.”
Supreme Court Ruling
On appeal, the Supreme Court of Virginia restated that the purpose of a demurrer is to determine whether a complaint states a cause of action upon which relief may be granted and that, unlike its role in deciding a motion for summary judgment, the court does not evaluate the merits of a claim on demurrer.
Further, the court reiterated the rule that a noncompete agreement must be evaluated on its own merits, “balancing the provisions of the contract with the circumstances of the businesses and employees involved.” It also revived the principle that each case involving the enforceability of noncompetes “must be determined on its own facts.” The court then restated that the employer bears the burden of showing that the scope of the noncompete is no greater than necessary to protect a legitimate business interest. And it is during that analysis that the courts consider the function, geographic scope and duration elements of the noncompete restriction.
The court stated that “restraints on competition are neither enforceable nor unenforceable in a factual vacuum.” Importantly, where restrictions appear unenforceable on their face, the court noted that employers may be able to prove that the restraint is actually reasonable under the particular circumstances of the case. In this context, the court ruled that the trial court had inappropriately dismissed the case before the former employer had the opportunity to present evidence as to the reasonableness of the noncompete.
Significance for Employers
In Malyevac, the court moved away from a trend, evident in the last several years, where noncompete restrictions were summarily invalidated. Employers now have a greater opportunity to establish that the contested restrictions are necessary, truly embracing a “case-by-case” factual analysis, rather than a truncated focus primarily confined to the words used in the noncompete clause. To that point, it will be much more difficult for defendants to dispose of noncompete claims prior to discovery and an evidentiary hearing of some sort (such as a plea in bar). That said, Malyevac is not without limitations. The court was careful to state that its holding was based on the fact that the former employer opposed the demurrer specifically on the ground that it sought to present evidence to prove the reasonableness of the restraint. By way of comparison, in Modern Environments, the employer did not offer an argument or evidence proving its legitimate business interests were served by the restraint at issue.
The significance of this ruling for employers in the commonwealth cannot be overstated. Going forward, recognizing that disputes concerning noncompetes are likely to be more fully litigated, employers should carefully draft such agreements to ensure full compliance with Virginia law, and consult counsel as appropriate. Employers should take care to review the scope of their noncompete agreements to ensure they are narrowly tailored to protect a legitimate business interest and that they reflect the realities of the employer’s competitive environment, taking the employee’s position into consideration as well other factors such as (1) the nature of the information the employer seeks to protect, and (2) the efforts it has taken to safeguard its competitive position with respect to this information. As part of this process, employers should consider what facts they would assert either in a complaint or an evidentiary hearing to justify the scope of the noncompete elements and demonstrate their relationship to the business interest they are intended to protect.
Assurance Data Inc. v. Malyevac, Va., No. 121989 (Sept. 12, 2013).
Thomas Flaherty is the office managing shareholder of Littler Mendelson's Northern Virginia office, Linda Jackson and Paul Kennedy are shareholders in the Washington D.C. and Northern Virginia offices, and Rebecca Roche is an associate in the Northern Virginia office. Republished with permission. © 2013 Littler Mendelson. All rights reserved.