Non-Compete Agreements

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by | August 29, 2013

Litigation over non-compete agreements is rising, according to a recent Wall Street Journal report.  And the fight is not limited to high-end executives at large corporations; rather, small businesses and start-ups must decide how to handle non-compete agreements both for their current employees and for prospective applicants.  

On the one hand, non-compete agreements are rationally derived from a business’s desire to retain talented employees, protect trade secrets, and maintain existing client relationships.  Employers do not want to invest time and capital in an employee who is going to take this newly-gained knowledge and skill to a competitor.

On the other hand, non-compete agreements tend to restrict small businesses and startups from hiring highly-qualified individuals who possess needed skills.  Non-compete agreements can stifle innovation and stagnate the labor pool, which benefits neither an existing employer nor a prospective employer.  

With these competing interests in mind, an employer is left to weigh the likelihood and the risk of litigation in deciding whether to hire an applicant who is currently working under a non-compete agreement.  Similarly, an employer must decide whether to ask a new hire to enter into a non-compete agreement as a term of employment.

Additionally, different jurisdictions treat non-compete agreements differently.  While Washington, D.C., will uphold a well drafted agreement, California will rarely enforce a non-compete agreement.  Virginia traditionally disfavors non-compete agreements as an unnecessary restraint on competition and the fundamental right of individuals to seek success in our free-enterprise society.  See, e.g., Home Paramount Pest Control Companies, Inc. v. Shaffer, 282 Va. 412, 718 S.E.2d 762 (2011) (holding that the function element of the non-compete agreement was overbroad and unenforceable). 

Nonetheless, Virginia courts will uphold an agreement that (1) is narrowly drawn to protect the employer’s legitimate business interest, (2) is not unduly burdensome on the employee’s ability to earn a living, and (3) is not against public policy.  The employer must prove each of these points, and the Virginia court will consider the “function, geographic scope, and duration” of the restriction.  This means that there are a lot of factors and a lot of different opinions. 

To avoid litigation and encourage a robust market, small business employers should carefully consider these issues, among others, when deciding how to handle non-compete agreements.  A small business owner or employee with questions should contact the office here to discuss these considerations.