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Monday, November 21, 2011

Virginia Supreme Court on Non-Competes

TermitesThe issue in Home Paramount Pest Control Cos. v. Shaffer was whether a non-compete clause in an employment agreement was overbroad.  Mr. Shaffer was an employee of Home Paramount Pest Control (Paramount) for about six months before he resigned and went to work for a rival pest control company, Connor's.  

Mr. Shaffer had signed a non-compete clause when he went to work for Paramount which provided that he would not have any involvement in any pest control business in the cities and/or counties in which he worked for a two year period after the termination of his employment with Paramount.  Paramount brought suit against Shaffer, alleging breach of contract, and against Connor's, alleging tortious interference.  The trial court found the non-compete overbroad and dismissed the suit.  The Virginia Supreme Court heard Paramount's appeal. 

In Virginia, a non-compete is enforceable if it “is narrowly drawn to protect the employer’s legitimate business interest, is not unduly burdensome on the employee’s ability to earn a living, and is not against public policy.”  In determining whether or not the test is met, the court considers together three elements: function, geographic scope and duration.  On appeal, Paramount argued that the trial court focused on function, especially on the fact that the non-compete at issue prohibited Mr. Shaffer from having any role in a pest control enterprise:

The Employee will not engage directly or indirectly or concern himself/herself 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 of any corporation, or in any manner whatsoever. . . .

Paramount argued that the relatively narrow geographic and durational components of the non-compete compensated for the potential overbreadth of the fuctional element.  Virginia's Supreme Court disagreed: Virginia courts have repeatedly struck down non-competes that purport to prohibit a person from doing anything in an industry, while they uphold non-competes that prohibit a person from engaging in the same sort of activity as she was employed to engage in previously.  Since the non-compete at issue here would have prevented Mr. Shaffer from even participating in a pest control business as a passive investor, it clearly was overbroad.  

The Court acknowledged that the language of the challenged non-compete was identical to that of a non-compete that the Court declared enforceable in a 1989 case, Paramount Termite Control Co. v. Rector, 238 Va. 171, 380 S.E.2d 922 (1989).  The Court ruled that it was not bound by stare decisis in this case, as many subsequent decisions had whittled away at Rector, which the Court now expressly overruled.  The Court would not even consider Paramount's evidence that Mr. Shaffer had solicited its customers.  Given that the entire non-compete was found to be unenforceable, evidence of a breach of that provision is irrelevant.

Although the Court does not address the issue, it seems that Virginia courts apply a formal approach to non-competes.  There is no mention of the "blue pencil test," which would have permitted a court to render the non-compete enforceable by editing out the offensive language relating to function.  If, as seems likely, Mr. Shaffer has agreed to perform the same work for Connor's as he did for Paramount (while poaching customers in the process, perhaps in violation of a common-law fiduciary duty -- see Town & Country Serv. v. Newberry), the result here does not seem fair to Paramount.  True, it should not be permitted to limit Mr. Shaffer's opportunities to the extent that it sought to do, but it is hard to imagine that both parties did not understand that the non-compete was intended to prohibit precisely the conduct in which Mr. Shaffer engaged.  

[JT]

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