Restrictive Covenants

Restrictive covenants in employment agreements, such as non-compete, or non-solicitation, or non-disclosure agreements, must be narrowly tailored to meet the needs of the employer and the employee. One size does not fit all. The basic rule is this: restrictive covenants are disfavored restraints on trade, but will be enforced if the contract–

  • 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.

Virginia courts, like those of other jurisdictions, look to the covenant’s duration, territorial scope, and the type and description of the prohibited employment function. To a lesser extent, courts will also look at the relative bargaining positions of the parties. Each non-compete agreement is evaluated on its own merits, balancing the provisions of the contract with the circumstances of the businesses and employees involved. Accordingly, there is no precise formulation of terms that will always pass muster with the courts.

Usually, the covenant’s geographic scope can be shown to be reasonable with proof that it encompasses an area equal to or smaller than the region in which the employee performed services for the company. By the same reasoning, a geographic scope that is much larger than the employer’s marketplace will likely be considered overbroad and will make the restrictive covenant unenforceable. Likewise, the duration of the covenant can be justified by tying it to some business cycle, such as the amount of time it takes for a salesman to capture and cultivate a new customer, or the employer’s business cycle, but courts often will simply hold, without analysis of the relationship between the time period and the business, that a period of a year or two is reasonable.

As a practical matter, however, it is the description of the prohibited employment that offers the most challenges to a covenant’s enforceability. Because restrictive covenants restrain free trade, any ambiguities in the contract are construed in favor of the employee. The description of prohibited employment must therefore do no more than prevent an employee from engaging in activities that actually compete with the employer. In discussing this sort of overbreadth, the Virginia Supreme Court has given examples such as blanket prohibitions against “working for a competitor,” or prohibitions against any form of employment in the field.

“Covenantees desiring the maximum of protection have no doubt a difficult task. When they fail, it is commonly because, like the dog in the fable, they grasp at too much, and so lose all.”

—Herreshoff v. Boutineau, 17 R.I. 3, 7 (1890)

The “reasonableness” requirements for non-competes only address the first two prongs of the test. The “public policy” part of the test – the third prong – usually comes into play in an agreement where any part of the restrictive covenant is ambiguous or vague. In this context, vagueness or ambiguity means that an employee must try to interpret a provision to decide whether it is prudent, from a standpoint of possible legal liability, to accept a particular job or whether it might be necessary to resist the employer’s efforts to assert that the provision covers a particular job. Virginia courts, state and federal, have held that subjecting the employee to such uncertainty offends public policy.