What is a non-compete clause?
A Virginia non-compete clause is often included in an employee’s or contractor’s contract to clarify the types of activities of which the employer considers unfair competition, the geographic area where these activities are prohibited, and the time-frame or duration in which the activities are barred. Simply put, the non-compete clause protects a business from unfair competition or from lost investment in an employee.
While the concept of a non-compete clause in a Virginia contract is straight-forward, the application and enforceability of a specific clause is more complicated.
The complexity of the non-compete clause is evident in its storied past. For centuries in England, they were considered impermissible barriers to trade, and as such were invariably held invalid. But over the years, as business needs evolved, common law developed guidelines to establish acceptable parameters for the use of these “trade barriers.” Some jurisdictions have even now codified the non-compete clause, however, Virginia is not one of them.
What are the Virginia rules regarding non-compete clauses?
Since the Virginia legislature has neither proscribed nor prescribed the use of non-compete clauses in employment contracts, the courts are left to make rules regarding the validity of a non-compete clause. The body of case law regarding the framework of a non-compete clause spans decades. The result, sadly, is not too clear.
There are some bright-lines to aid in the creation of reasonable and valid non-compete clauses. Regarding employee contracts, the Virginia Supreme Court in 2005 held that a non-compete clause will be enforced where the contract:
- is narrowly drawn to protect the employer’s legitimate business interest;
- does not place an undue burden upon the employee’s ability to earn a living; and
- is not counter to public interest.
Additionally, the reasonableness of a non-compete clause in Virginia turns upon the duration, geographic area, and extent of activities covered. As for legitimate business interests, courts commonly consider, among other things, customer relationships, particularly where the employee had personal contact with the customer; trade secrets; or confidential information pertaining to the conduct of business.
Is there a difference between an employer/employee non-compete and for one covering the sale of a business?
The framework a court uses when determining validity of a non-compete clause does differ depending upon whether the non-compete clause covers an employee or a business. But this tends to serve as a limiting function upon the scope of permissibility where a dispute arises out of an employer/employee non-compete clause. The courts will typically construe a covenant in a light more favorable to the employee.
If you are a party to a Virginia contract containing a non-compete clause or are considering writing one into your business contracts, contact the office today for a consultation.
