Virginia Supreme Court Further Narrows Non-Compete Covenant Enforceability

In Home Paramount Pest Control Cos. v. Shaffer, No. 101837, 2011 Va. LEXIS 222 (Nov. 4, 2011), the Virginia Supreme Court ruled that a covenant not to compete was overbroad and unenforceable, even though it was identical to a covenant the court had upheld 22 years earlier in Paramount Termite Control Co. v. Rector, 238 Va. 171 (1989). Acknowledging this, the court expressly overruled its holding in Paramount Termite.

Shaffer represents the culmination of 20 years of narrowing the enforceability of restrictive covenants in Virginia. In overruling Paramount Termite, the court's ruling both confirms and reflects this major shift in the law governing non-compete covenants in Virginia.

Facts

While employed by Home Paramount Pest Control, Mr. Shaffer signed an employment agreement prohibiting him from ". . . engag[ing] directly or indirectly or concern[ing] himself . . . in any manner whatsoever in the carrying on or conducting the business of exterminating, pest control, termite control and/or fumigation services" in any city or county in which he worked for two years after separating from employment. After resigning from the company, and within the two-year period, he became employed by another pest control company and engaged in competing activities. The company filed suit to enforce the covenant.

Ruling

The court recited the long-standing, general rule that non-competition agreements are enforceable in Virginia if they are narrowly drawn to protect the employer's legitimate business interests, not unduly burdensome on the employee's ability to earn a living, and not against public policy. After noting that the employer has the burden of proof on all of these elements, the court applied its recent, more restrictive interpretation of the general rule.

Emphasizing that the restrictive covenant was not limited to preventing the former employee from engaging in activity that competes with the company, the court found the blanket prohibition against working in any capacity for a competitor overbroad and unenforceable. The court observed that it "bars [the former employee] from engaging even indirectly . . . in the pest control business," even as a stockholder in a public company with a pest control subsidiary. The court rejected the company's argument that its ruling would invite the courts to contemplate "hypothetical job duties," noting that the company's failure to confine the "function element" of the non-compete provision – the prohibited...