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This might be a good time to look at your non-compete agreement.

Home Paramount Pest Control Companies, Inc. v. Shaffer, __ Va. __ Record No. 101837, Virginia Supreme Court, November 4, 2011. Justin Shaffer was an employee of Home Paramount Pest Control. In January, 2009, Shaffer signed an employment agreement that contained the following non-compete language:

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, in any city, cities, county or counties in the state(s) in which the Employee works and/or in which the Employee was assigned during the two (2) years next preceding the termination of the Employment Agreement and for a period of two (2) years from and after the date upon which he/she shall cease for any reason whatsoever to be an employee of [Home Paramount].

Home Paramount no doubt felt confident that its non-compete language was enforceable. After all, the Virginia Supreme Court had held in 1989 that the identical contractual provision created a valid and binding non-compete.  Paramount Termite Control Co. v. Rector, 238 Va. 171, 380 S.E.2d 922 (1989).

When Shaffer resigned from Home Paramount in July 2009 and quickly took a job with Connor’s Termite and Pest Control, Inc., Home Paramount sued Shaffer for beaching the non-compete and sued Connor’s for interfering with the contract. The trial court, however, reviewed the agreement and found that the part of the non-compete that prohibited the employee from engaging indirectly or concerning himself “in any manner whatsoever” in pest control was too broad. The trial court accordingly held that the non-compete was unenforceable and dismissed the parts of the complaint that dealt with that provision. Home Paramount appealed the decision.

The Virginia Supreme Court granted the appeal and examined the non-compete using some now-familiar rules:

  1. A provision that restricts competition 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.
  2. The employer – not the employee – bears the burden of proving each of these factors.
  3. When evaluating whether the employer has met that burden, the court looks at the “function, geographic scope, and duration” elements of the restriction and considers them together, rather than as three separate and distinct issues.

In the agreement at issue, the “function” part of the restriction is the part that reads, “[t]he 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….” The “scope” element is the “cities and counties” part and the duration element is the two year period following the end of employment.

Home Paramount argued that the trial court had erred because it had looked at this function element without considering the narrowing effect of the scope or the duration elements. This would appear to be a sound argument, particularly since the Virginia Supreme Court, in the 1989 decision, had held that these scope and duration elements were both reasonable and enforceable and, considering all three elements together, had found that the function element was not too broad.

This time, however, the Court rejected the argument. In the intervening years, the Court reasoned, it had repeatedly held that a “function” element could only prohibit an employee from work activity that was of the same type as that actually engaged in by the former employer. In that regard, the Court noted that a prohibition which prevents an employee from working for “any business similar to the type of business conducted by” the former employer is too broad, although one which prohibits an employee from working for “any competitor of the employer which renders the same of similar services” is not. In addition to the types of new employers that the “function” element can and cannot restrict, the Court also noted that the employee’s restricted activities must be narrowly drawn: When a former employer seeks to prohibit its former employees from working for its competitors in any capacity, it must prove a legitimate business interest for doing so.

Based on these refinements in the law, the Court held that the “function” element of this non-compete was so overly broad that no narrowing by the other two elements could save it. The Court pointed out that the agreement prohibited Shaffer from working for Connor’s or any other business in the pest control industry in any capacity, and it barred him from engaging even indirectly, or concerning himself in any manner whatsoever, in the pest control business, even as a passive stockholder of a publicly traded international conglomerate with a pest control subsidiary. The Court held that the agreement was not enforceable and affirmed the decision of the trial court.

With respect to the employer’s understandable protest that the 1989 decision compelled the Court to uphold this non-compete agreement again, the Court disagreed. Part of the Court’s duty is to carefully shepherd the evolution of the law. The Court identified five decisions that it had issued in the years between the 1989 Paramount decision and this one that had refined the law of Virginia regarding non-compete agreements. The Court then ruled that, to the extent the old decision was in conflict with the new Paramount decision, the old decision was overruled.

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