Protecting Your Legitimate Business Interests

I. Covenants Not To Compete

"Restrictive provisions of this character have been dealt with by courts in almost unnumbered cases. A great array of them are cited in a learned and elaborate opinion by Judge Hoover, of the Court of Common Pleas of Ohio, Cuyahoga County, in the case of Arthur Murray Dance Studios v. Witter, 105 N.E.2d 685, in which he referred to the authorities as constituting a vast sea out of which one could fish out 'any kind of strange support for anything, if he lives so long.' The result of his own expedition is stated to be: 'Each case must be determined on its own particular facts."' Meissel v. Finley, 198 Va. 577, 579, 95 S.E.2d 186, 188 (1956).

A. Purpose

Protect against disclosure and misappropriation of business interests (customers, sales, profits, goodwill and confidential information or trade secrets such as client lists, operational methodology, pricing, profit margins) by employees, independent contractors, licensees, lessees, partners, joint venturers, sellers of a business, or any other contracting party with knowledge of a company's confidential and proprietary information or a significant level of customer contact.

Allow more open discussion and sharing of confidential information among employees to enhance and improve operations without losing control over the company's secrets. If a firm cannot protect that information from dissemination to competitors, the incentive for developing such information may be eliminated. Eden Harmon & Co. v. Sumitomo Trust & Banking Co., 914 F.2d 556 (4th Cir. 1990).

Ensure recovery of training costs expended on employees.

Covenants not to compete are necessary because: (a) it is difficult to prove the misappropriation and use of a trade secret or violation of a nondisclosure provision, which can seldom be proven by direct evidence as opposed to inferences drawn from circumstantial evidence; (b) most courts require proof that the disclosure has already occurred before it will enjoin further disclosure; and (c) policing compliance with an injunction prohibiting disclosure of confidential information and trade secrets by a former employee is very difficult when the employee is still working for a competitor and needs to use the information to fully perform for the new employer. The covenant not to compete makes it more difficult for the former employee to pass on confidential information or trade secrets to the competitor. Eden Hannon & Co. v. Sumitomo Trust & Banking Co., supra.

B. Balancing Public Policies

Freedom of Contract (Employer Interest)- strongly supported by the law of Virginia. The Courts must give effect to the intention of the parties as expressed in their contract.

It is well-established in Virginia that the Court must give effect to the intention of the parties as expressed in the language of their agreements, including noncompetition and nonsolicitation agreements. Rash v. Hilb, Rogal & Hamilton Co. of Richmond, 251 Va. 281, 285, 467 S.E.2d 791, 794 (1996); Foti v. Cook, 220 Va. 800, 263 S.E.2d 430, 433 (1980). An individual's right of freedom to contract has been consistently and zealously guarded by this Commonwealth. "The parties' contract becomes the law of the case unless it is repugnant to some rule of law or public policy." Rash, 251 Va. at 285-86 (quoting Winn v. Aleda Constr. Co., 227 Va. 304, 307, 315 S.E.2d 193, 194 (1984); accord D.C. McClain, Inc. v. Arlington County, 249 Va. 131, 135, 452 S.E.2d 659, 662 (1995)). See also Meissel v. Finley, 198 Va. 577, 584, 95 S.E.2d 186, 191 (1956) ("While the law frowns upon unreasonable restrictions, it favors the enforcement of contracts intended to protect legitimate interests. It is as much a matter of public concern to see that valid engagements are observed as it is to frustrate oppressive ones."); Shuttleworth, Ruloff and Giordano, P.C. v. Nutter, 493 S.E.2d 364 (Va. 1997) ("[T]he law looks with favor upon the making of contracts between competent parties upon valid consideration and for lawful purposes, and 'courts are averse to holding contracts unenforceable on the ground of public policy unless their illegality is clear and certain."')

Right of Employees to Seek Gainful Employment (Employee Interest) and Abhorrence of Restrictions on Competition (Public Interest)

Stoneman v. Wilson, 169 Va. 239, 245, 192 S.E. 816 (1938)- noting that by early common law, any limitation upon the right of one to work was against public policy, and that while this rule has been relaxed, it is still subject to strict limitations. "One may not be restrained from following all vocations for which he is fitted. Such a restraint would be against public policy and might make him a public charge."

C. Strict Construction And Burden Of Proof

Strictly Construed - Covenants not to compete are disfavored by the law because of their anti-competitive effect and the fear of limiting one's ability to work; therefore, any broad or ambiguous language will be strictly construed against the employer. Richardson v. Paxton, 203 Va. 790, 127 S.E.2d 113 (1962); Linville v. Servisoft of Va., Inc., 211 Va. 53, 174 S.E.2d 785 (1970); Clinch Valley Physicians, Inc. v. Garcia, 243 Va. 286, 289, 414 S.E.2d 599, 601 (1992) (holding that if the language is ambiguous, "the court will adopt that construction most favorable to the employee."); Grant v. Carotek, Inc., 737 F.2d 410, 411 (4th Cir. 1984); Alston Studios, Inc. v. Gress & Assoc., 492 F.2d 279 (4th Cir. 1974); Roto-Die Co., Inc. v. Lesser, 899 F.Supp. 1515, 1519 (W.D.Va. 1995).

More Deference Given in the Context of the Sale of a Business - Covenants in agreements to sell businesses and in partnership agreements are given somewhat more deference. Richardson v. Paxton, supra, ("[T]he scope of permissible restraint is more limited between employer and employee than between seller and buyer ..."); Stoneman v. Wilson, supra; Linville v. Servisoft of Va., Inc., supra; Foti v. Cook, supra; Grant v. Carotek, Inc., supra; Alston Studios, Inc. v. Gress & Assoc., supra; Roto-Die Co., Inc. v. Lesser, supra; National Homes Corp. v. Lester Indus., Inc., 293 F.Supp. 1025 (W.D.Va.), aff'd in part, rev'd in part, 404 F.2d 225 (4th Cir. 1968).

Burden of Proof - Employer has burden of proving that covenant is reasonable. Richardson v. Paxton, supra; Linville v. Servisoft of Va., Inc., supra; Grant v. Carotek, Inc., supra ; Alston Studios, Inc. v. Gress & Assoc., supra; Roto-Die Co., Inc. v. Lesser, supra.

D. 3-Prong Test of Reasonableness (fashioned to reflect competing policies)

Is the restraint, from the standpoint of the employer, reasonable in the sense that it is no greater than necessary to protect the employer in some legitimate business interest?

From the standpoint of the employee, is the restraint reasonable in the sense that it is not unduly harsh and oppressive in curtailing legitimate efforts to earn a livelihood?

Is the restraint reasonable from the standpoint of sound public policy?

Blue Ridge Anesthesia & Critical Care, Inc. v. Gidick, 239 Va....