Non-competition agreements, also known as covenants not to compete or restrictive covenants, are employment contracts used by employers to limit the ability of an employee to compete with the employer by stealing customers or trade secrets. Enforceable agreements must strike a balance between protecting the employer’s legitimate business interests from an unfair competitive advantage with the employee’s right to work in a field for which he or she is trained.  In general, courts decide what is considered reasonable or not reasonable by examining the type and size of the business, how long and over what geographic area the restrictions apply and whether adequate consideration, or benefit, was given the employee at the time the agreement was signed.

The Law In Virginia

Virginia courts have determined that restrictive covenants are enforceable if the terms are reasonable and necessary to protect certain business interests of the employer such as trade secrets, customer contacts and knowledge of methods of operation.

Consideration

With any contractual arrangement, both parties must be giving and receiving something of value, also known as consideration. Virginia courts have not explicitly determined that the offer of initial employment or a change in the terms and conditions of employment is sufficient consideration or benefit to the employee in exchange for agreeing to not compete with the employer should the employment relationship terminate.  But they have implicitly accepted the sufficiency of the consideration in finding such agreements valid.  However, continued employment alone is not sufficient consideration for an agreement entered into after employment starts.

Reasonableness in Time and Geographic Scope

Agreements may be deemed unenforceable if a court finds that they are unreasonable in terms of duration, geographic scope and the type of employment or line of business being restricted. If a court finds an agreement is unreasonable, it will declare the entire agreement invalid.  Virginia courts have consistently declined to modify offended portions of such agreements to make them reasonable.

Examples of non-compete agreements that Virginia courts have found to be reasonable include:

• A 3-year, 1-mile radius restriction against a former high-end men’s clothing salesperson from working for a particular competitor.
• A restriction with no geographic restriction because the functional and temporal restrictions were narrowly drawn to protect the former employer’s nationwide publication distribution network.
• A 5-year restriction against a former director of sales and marketing from soliciting the former employer’s officers, employees and wholesaler.

The courts have found restrictive covenants unreasonable or used the “blue pencil” rule to modify agreements in these situations:

• A restriction against the former sales representative of an office furniture business from being employed in any capacity by a competing company.
• A 2-year, 100-mile radius restriction against the former manager of a high-performance motor drive manufacturer from engaging in a “similar business” because that could include a wide range of businesses unrelated to that of the employer.
• A 2-year, worldwide restriction against the program director of an international engineering consulting service.  The court stated that in similar situations other companies had executed valid non-competition agreements by limiting them to a geographic area around any company office.

Employers need to keep these issues in mind when asking employees to sign restrictive covenants. It is also important to know if potential new hires have a non-compete agreement with a former employer. In some cases, the new employer can be liable to the former employer if hiring the employee would put him or her in violation of the agreement. Different rules may apply to situations in which all or part of a business is being sold and a restrictive covenant is agreed to by the buyer and the seller.