We’ve written a lot about legal issues relating to contract formation and some general contract terms (for instance, here, here, and here). A common kind of contract we have yet to discuss is the non-competition agreement. More generally belonging to a class of agreement known as “restrictive covenants,” which also include non-solicitation agreements, a non-compete agreement purports to restrict an employee of a business from competing against his employer during the employment or for some time once the employment ends. Every business should understand that these kinds of agreements must adhere to certain limitations for a judge to consider enforcing them. These limitations, which we review below, are required because the law permits a business only to restrict competition to the extent necessary to protect its legitimate business interests in a reasonable manner.
In general, a non-competition agreement must have a limited duration. This is because a court realizes that the person subject to the non-competition agreement has to earn a living, and it’s also due to the fact that the American system is generally antithetical to monopolistic or anti-free market agreements (think of antitrust law). As a result, the length of time a non-competition agreement lasts will be a significant factor that a court will consider. While there is no hard and fast rule, anything beyond even a year may raise suspicions from a court, depending upon the full circumstances surrounding the agreement.
Another issue arising in many non-compete agreements is when it has unlimited geographic scope. All else being equal, a Virginia court may view an employment agreement with this kind of language as unenforceable. To get around this problem, a lawyer will craft language that carefully considers what geographic areas a business legitimately competes in or provides goods or services.
This is the so-called “Janitor Rule” in Virginia. A non-compete clause should restrict the forbidden competition to job roles or job duties that the former employee had with the former employer attempting to enforce the agreement. Otherwise, the agreement would not be drawn to the company’s legitimate business interests, because it would not be preventing actual competition from this ex-employee. Thus, as the Virginia Supreme Court has noted, if a non-competition agreement would prohibit an engineer from working for a competitor as a janitor, then the agreement is probably unenforceable.
There is nothing unlawful about a business prohibiting competition during employment. Indeed, an employee usually has a legally recognized duty of loyalty to his or her employer during employment, apart from any contractual obligation. Therefore, the law generally prohibits an employee from compete with his employer during employment, no matter what the employee’s non-competition agreement says.
A non-competition agreement, non-solicitation agreement, and other restrictive covenants are usually vital parts of an employment package designed to protect a business. However, those documents always require special consideration and planning to ensure that they are enforceable in Virginia.
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