If an employee misappropriates their current or former employer’s proprietary information, and discloses such information to its new employer and/or any other unauthorized person(s), that is enough to establish a violation under the Virginia Uniform Trade Secrets Act (“VUTSA”) so says the Virginia Supreme Court. There is no requirement under the Act that the employee or new employer actually use the misappropriated information to compete with the former employer.
In the case of Geographic Services, Inc. v. Collelo, et al. (2012), the Virginia Supreme Court held that once an employer establishes the existence of a trade secret, all that they are then required to show is that the trade secret was misappropriated as that term is defined under the Trade Secrets Act. The entity from which the trade secret was misappropriated does not have to show that defendants used the trade secret in order to establish a claim under the VUTSA and recover damages. Disclosure of the trade secret is sufficient where it can be shown that the new employer and/or person to whom the trade secret was disclosed knew, or had reason to know, that the trade secret was acquired by improper means. In such cases, where the plaintiff cannot readily prove measurable damages, then the VUTSA provides that the court can impose a reasonable royalty upon the wrongdoers for the unauthorized disclosure of the trade secret.
This decision by Virginia’s highest court provides a cautionary note for Virginia employers: if you know, or should have known, that an employee has obtained proprietary information from its prior employer without its knowledge, you could be on the hook for damages if the employee discloses the information to your company – even if your company never uses the information. The disclosure, in and of itself, will be enough to expose companies to monetary damages. Conversely, companies in which an employee has taken proprietary information can seek legal redress and possibly obtain damages even if the employee and its new company did not use the information.
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For several years now, many practitioners that advise and/or draft non-competes for their business clients have stopped including language in non-compete provisions which prohibit a former employee from being an “owner” or “shareholder” in a competing business. Virginia Courts have routinely held that including language which prohibits a former employee from essentially owning stock in a competing business was overbroad and not necessary to protect an employer’s legitimate business interest. Therefore, such non-competes have regularly been invalidated.
Consistent with prior court opinions, a Virginia Beach Circuit Court recently invalidated a non-compete provision which prohibited a former employee from, inter alia, being an owner or shareholder in a competing business. The case, Patient First Richmond Medical Group, LLC v. Ameanthea Rica Blanco (Virginia Beach Circuit Court, Feb. 15, 2011), involved Defendant Blanco, a family nurse practitioner who was employed by Plaintiff Patient First. According to the allegations in the case, Blanco, while still working at Patient First, began formation of a competing healthcare practice which was to provide primary and urgent care treatment at reasonable or fixed fees during extended weekday and weekend hours without the need for an appointment.
Blanco also solicited two doctors from Patient First to come work with her at the new medical practice. After she resigned her position with Patient First, Blanco opened up the competing business within seven miles of her former place of employment. Patient First brought suit alleging that Blanco violated her employment agreement which contained non-competition and non-solicitation provisions.
The covenant not to compete prohibited Blanco from performing medical services of the type performed for Patient First (though the term “medical services” was not defined) for two years after her employment and within a seven-mile radius as an “agent, officer, director, member, partner, shareholder, independent contractor, owner, or employee” of the competing business. The Court found that the non-compete provision was overbroad because its provisions went beyond occupations and businesses that were in competition with Patient First. The Court reasoned that by barring Blanco from being a shareholder in a competing business, she would be barred from merely owning stock in a publically traded company, even if she were not providing medical services for the company and thus not competing with Patient First.
The Court also held that a number of the terms in the provision were not defined and left too much uncertainty as to which activities of the former employee would, or would not, be in violation of the covenant. Therefore, an employee would essentially have to guess at which conduct was prohibited. The Court held that in such cases, the non-compete was unenforceable as offending sound public policy, and sustained Blanco’s demurrer without leave for Patient First to amend.
Fairfax County Circuit Court Awards Damages To IT Government Contractor In Non-Compete Case Against Subcontractor
A Fairfax County Circuit Court judge awarded a Virginia information technology government contractor $172,395 in damages in a non-compete case against a former subcontractor. The court determined that the defendant subcontractor breached the covenant not-to-compete provision in its consulting agreement with the plaintiff government contractor.
A Virginia court will enforce a non-compete clause between an employer and an employee if it is: sufficiently narrowly drawn to protect the employer’s legitimate business interest; not unduly burdensome on the employee’s ability to earn a living; and, not against public policy. As restrictive covenants are generally disfavored in Virginia (as they restrain free trade), the employer bears the burden of proof and any ambiguities in the contract are construed in favor of the employee.
In this case, the court concluded that the covenant not-to-compete at issue was enforceable because it only prevented the subcontractor from working for two companies; it proscribed competition for only a year; and, it was specific as to the type of work that was prohibited under the agreement between the parties.
The damages awarded by the court to the plaintiff government contractor were based on the lost profits that the non-compete clause was supposed to prevent. As the court noted, “[a]warding damages on the breach of the agreement protects plaintiff’s legitimate business interest by compensating it for the breach.”
Preferred Systems Solutions, Inc. v. GP Consulting LLC, Circuit Court for Fairfax County, Virginia (July 28, 2011)
The Virginia Supreme Court recently granted a writ of appeal in a noncompete case from the Fairfax County Circuit Court. In Home Paramount Pest Control Companies, Inc. v. Justin Shaffer, the issues before the Court include whether the lower court erred in finding the noncompete overly broad. In finding the noncompetition agreement unenforceable, the Fairfax Circuit Court considered the scope of the restricted activities, but did not consider the portion of the agreement in light of the narrow geographic scope of the restriction which applied only to certain limited geographic boundaries within Fairfax County.
Noncompetition agreements in Virginia are strictly construed against the employer, but a court will enforce the parties’ agreement if it is reasonable and narrowly tailored to protect the legitimate business interests of the company. In assessing the enforceability these types of restrictive covenants, Virginia courts scrutinize three aspects for reasonableness: (1) duration of the restriction; (2) geographic scope of the restriction; and (3) breadth of the restricted activities.
In Virginia, the enforceability of noncompetes is governed by common law principles (i.e., case law and precedent). Thus, the body of law on this subject is constantly evolving with each new court decision. The Virginia Supreme Court’s decision in this matter will shed further light on employer's ability to restrict post-employment activities of its workers.
As we have discussed previously, simply having an agreement in place may not properly protect a Virginia business from competition by a former employee. To be upheld under Virginia law, the non-compete agreement must be drafted in accordance with Virginia court case precedent.
In a case that may further shape the landscape of non-compete cases in Virginia, the Virginia Supreme Court granted today a writ of appeal in a case involving a former employee of a pest control company that was subject to a non-competition agreement when he went to work for a competitor.
The case, Home Paramount Pest Control Companies v. Shaffer, et al., involves a former employee, Justin Schaffer, of Home Paramount Pest Control that was subject to a non-compete which restricted his future employment in terms of working for a competitor. The geographical restriction for the non-compete was limited to Fairfax County; however the work restriction limited the employee from working for a competing pest control company “in any manner whatsoever.” Despite claims from Home Paramount that Schaffer was attempting to get business from commercial customers he worked with while at Home Paramount, the Fairfax Circuit Court found the restriction to be overbroad and ruled in favor of the former employee. The Virginia Supreme Court has now granted a writ with respect to three assignments of error to review the decision of the lower court.
A Fairfax County Circuit Court has found in favor of an employee and his new employer who were sued for misappropriation of trade secrets, among other claims, when the employee went to work for a direct competitor and took a customer list and vendor contact sheet with him. In the case of Tryco Inc. v. U.S. Medical Source, et al., Brian Thomas (“Thomas”) worked for the Plaintiff (“Tryco”), which was in a niche government contracting industry selling dental and medical supplies to the U.S. government under a Decentralized Blanket Purchase Agreement (“DBPA”). Thomas’s sister-in-law decided to get a DBPA and she started a company which sold dental and medical supplies to the government. Thomas left Tryco and went directly to work for his sister-in-law’s new company, U.S. Medical Source (“USMS”).
Upon leaving to work for the new company, Thomas did not tell Tryco that he was going to work for a direct competitor, and when he downloaded a number of personal items from his work computer onto a flash drive, he copied a contact list and vendor list along with his personal files. Tryco sued everyone involved, including Thomas, USMS, Thomas’s sister-in-law and Thomas’s brother who helped out at USMS from time to time.
After a four day bench trial, the Court found in favor of all the Defendants. Specifically, the Court found that neither of the lists taken by Thomas had independent economic value because:
- The customer list was mostly outdated, and the information on the list (names and telephone numbers of government contracting officers) could be readily obtained through legitimate means – such as using the list of contacts provided to the Defendants by the government; and
- The names and contact information for the companies on the vendor list could be readily obtained simply by looking up the companies on the internet. Therefore, the Court found that Plaintiff could not meet its burden under the Virginia Uniform Trade Secrets Act (“VUTSA”).
In addition, the Court found Thomas’s testimony to be credible that he inadvertently took the two files at issue, rather than misappropriating them for some improper means. This finding was bolstered by the fact that Thomas returned the entire flash drive as soon as he was notified of the issue by Tryco’s counsel, and just days after leaving Tryco’s employ; that he did not disclose any of the information to his new employer; and that, as a factual matter, Thomas knew all of the information on the two documents given that he had interfaced with the government contracting officers and the various vendors routinely as part of his work for Tryco.
At this point (if it had not occurred to you sooner), you may be asking why the employer just did not sue Thomas for breach of his non-competition agreement since he went directly from his employment with Tryco to work for a competitor. The answer is that Thomas was never required to sign a non-compete agreement; so he was free to compete and did so accordingly.
A recent decision from a Virginia Circuit Court serves as a worthwhile reminder to Virginia employers that not all non-compete agreements are enforceable. Although there was a non-compete agreement in place between a wholesale business and a former employee (who served as an account representative), the court in Specialty Marketing, Inc. v. Lawrence dismissed the breach of contract action because the agreement was geographically and functionally overbroad.
As we recently detailed in our series on business litigation claims, restrictive covenants (e.g., non-compete agreements) are disfavored in Virginia as they are restraints on trade. As such, it is the employer’s burden to prove that the restrictions are: 1) no greater than necessary to protect the employer’s legitimate business interest; and 2) not unduly harsh or oppressive in curtailing an employee’s ability to earn a livelihood. To determine whether an employer has met its burden, a Virginia court will look at the function, geographic scope, and duration of the non-compete agreement.
In Specialty Marketing, Inc. v. Lawrence, the non-compete agreement at issue provided that the employee could not “be employed by . . . any business competitive with Specialty in areas where Specialty has a market for its business.” The court concluded that this language was overbroad and unenforceable because it was unlimited in functional scope and far exceeded whatever limitation was necessary to protect the employer’s business interests. Additionally, the non-compete agreement was geographically overbroad as it was not limited to the area formerly serviced by the employee; nor was the agreement limited to a specific mile radius from the employee’s former territory.
As this case illustrates, simply having an agreement in place may not properly protect a Virginia business from competition by a former employee. To be upheld under Virginia law, the non-compete agreement must be narrowly tailored in terms of function, geographic scope, and time.
As noted in previous posts on Virginia Business Law Update, this blog is running a six-part series on Virginia business litigation claims. This week, the featured Virginia business litigation claim is breach of non-compete agreements.
In this age of intense competition, businesses have a legitimate interest in preventing former employees from gaining a competitive advantage by using the relationships, information or skills acquired during their employment with the company. Non-compete and non-solicitation agreements are an effective means to protect the business’s confidential information and investment into its employees.
As an attorney practicing in this area, it is apparent that the use of such agreements has been on the rise over the past decade. Their use is practically in every industry – from technology, government contractors, service and retail companies, to entertainment. As most of you have heard, Conan O’Brien recently ended his non-compete “fracas” with NBC. It is apparent from news reports that O’Brien had restrictions in his contract regarding his on-the-air television appearances after leaving the network. Each state’s laws are somewhat different in this area, and we focus on Virginia courts’ analysis of these types of restrictive covenants in this post.
What is a non-compete agreement?
A non-compete agreement prevents a former employee from pursuing a similar position in competition with the company. Since the agreement is a contract, it is bound by all the traditional contract requirements including consideration. Typically, covenants not to compete are executed at the time of hire, and the offer of employment will be sufficient consideration to enforce the agreement. Non-solicitation agreements are sometimes generally described as a covenant not to compete as well, but the obligations for the employee are different for this type of covenant. Non-solicitations restrict former employees from soliciting employees or customers of a business, and by their nature are more precise regarding the terms of the prohibition.
How do Virginia courts analyze the enforceability of non-compete agreements?
In Virginia, courts have scrutinized non-compete agreements in three areas to determine their reasonableness: (1) duration of the restriction; (2) geographic scope of the restriction; and (3) the scope of the restricted activities. An overall consideration is that the restriction must be no greater than necessary to protect the company’s legitimate business interests, such as safeguarding its proprietary information or trade secrets.
In structuring a non-compete agreement, the restriction must not encompass any activity in which the employer is not engaged or which the employee did not perform while employed by employer. If the court determines that the non-compete agreement is too broad a restriction, then it will not be enforced. However, an agreement that is reasonable and consistent with public interest will likely be enforced. In this instance, not only may an employer obtain an immediate injunction preventing the former employee from violating the agreement, but the company may also obtain monetary damages for the employee’s breach.
Many factors must be considered in drafting a non-compete in order to withstand court scrutiny. Thus, companies should not rely on standard form non-compete clauses but should exercise great care and caution in determining the appropriate restrictions and terms for such an agreement.
As with misappropriation of trade secret cases, it is important to note that it is common for the former employee’s new employer to be brought into a non-compete dispute. The business alleging breach of the non-compete may bring a tortious interference with contractual relations claim against the new employer. In doing so, the former employer alleges that the competitor disrupted the ability of the employee from performing his/her obligations under the contract. To protect your business against such potential liability, it is imperative to require new employees disclose any restrictions related to their employment with the company.
Stay tuned for Part 3 of the Virginia business litigation claims series, which will focus on breach of fiduciary duty.
Most attorneys representing a corporate client have gotten the late afternoon call that a former employee is now working for a competitor in violation of the employee’s non-compete, and likely using confidential corporate information. A double-whammy which your client wants stopped immediately!
Well, for years us lawyers practicing in the Eastern District of Virginia would get out our tried and true Complaint asking for a PI, along with the papers requesting a Temporary Restraining Order (TRO) to immediately stop the wayward former employee from wrecking our client’s business one second longer (assuming diversity of citizenship for access to federal court).
We used what had become well-known as the Blackwelder standard, named after the case of Blackwelder Furniture Co. of Statesville v. Selig Manufacturing Co., 550 F.2d 189 (4th Cir. 1977), which was later reaffirmed in Rum Creek Coal Sales, Inc. v. Caperton. The injunction standard adopted by these cases used “the balance-of-hardship test”.
However, a few months ago, the Fourth Circuit changed the tried and true tune of the Blackwelder standard. Citing a Supreme Court case from 2008, the Fourth Circuit ruled in The Real Truth About Obama, Inc. v. FEC (PDF), that it had been misapplying the preliminary injunction standard. Last year, in Winter v. Natural Resources Defense Council, Inc. (PDF), the Supreme Court held that in order to obtain a preliminary injunction, a plaintiff has to establish that:
- he is likely to succeed on the merits
- he is likely to suffer irreparable harm in the absence of preliminary relief
- the balance of equities tips in his favor
- an injunction is in the public interest
For some reason, the prior cases form the Fourth Circuit heavily emphasized prongs two and three. The practical effect of the Real Truth decision (apart from a new catchy sounding injunction standard) is yet to be determined, because despite its proclamations in Real Truth, the Fourth Circuit and the district courts in this Circuit will likely find it difficult to move from a legal standard that had been adopted by jurists and practitioners alike for more than thirty years. However, it may be the case that employers and their counsel will have to really go the extra mile to get a TRO, and actually meet all four prongs of the injunction standard. We will have to wait and see.