The Continuing Saga of Non-Compete Clauses In Virginia: Wings, LLC v. Capital Leather, LLC
By: David Ventker
In our first discussion of non-compete clauses in Virginia, we talked generally about the costs and implications of such clauses even when they are unenforceable. Now we have an example of a case where a court found a non-compete clause had been violated, but then found the clause to be unenforceable.
In 2011, the Virginia Supreme Court provided its latest guidance as to when non-compete clauses are enforceable. In Home Paramount Pest Control Cos., Inc. v. Shaffer, 282 VA 412, 415-416 (2011), the Court made these comments about non-compete clause when it struck down a clause in an employment contract used by a pesticide company (internal citations omitted):
The enforceability of a provision that restricts competition is a question of law that we review de novo. … It 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.” … The employer bears the burden of proving each of these factors…. When evaluating whether the employer has met that burden, we consider the “function, geographic scope, and duration” elements of the restriction. These elements are “considered together” rather than “as three separate and distinct issues.”
As an aside, lawyers for Home Paramount, who lost, can be forgiven if they were frustrated by the Court’s decision inasmuch as some twenty years earlier, the Virginia Supreme Court had approved the identical clause signed by Mr. Schaffer in another case won by Home Paramount. Home Paramount, to its subsequent consternation, had structured all of its employment agreements in the twenty years thereafter on the agreement that had been expressly approved by the Supreme Court.
Though Home Paramount is interesting in its own right, it is just background for the case we want to talk about, Wings, LLC v. Capital Leather, LLC, (Fairfax, March 6, 2014) 2014 WL 1058253. A father/son dispute, this is a decision handed down in a Trial Order by the Circuit Court for Fairfax County, Virginia on March 6, 2014. Wings, LLC, is a company located in Northern Virginia specializing in repairing automobile interiors that have been damaged in accidents. Owned by John Kia, the company invests considerable time and resources in training technicians how to do the work, and then sends them out into specific territories to solicit and service various customers, primarily car dealers and auto body repair shops. Its primary area of operations is Northern Virginia, Southern Maryland, West Virginia, and the District of Columbia. When they are hired, Wings technicians are required to sign an employment agreement that includes the following language:
Paragraph 4.5 Non-Solicitation. Employee agrees that Employee will not, during Employee’s employment with Employer, and for a twenty-four (24) month period immediately following the termination of Employee’s employment with Employer (for whatever reason), directly (a) solicit any Customer for purpose of providing services the same as or substantially similar to services provided by Employer to any such Customer during the twelve (12) month period preceding Employee’s termination date.
Paragraph 4.6 Non-Competition. Employee agrees that during Employee’s employment with Employer and for a twenty-four (24) month period immediate following termination of Employee’s employment with Employer (for whatever reason), Employee will not be directly employed in a position that is the same, or substantially the same, as an employment position held by Employee with Employer during the twelve (12) months preceding Employee’s termination date, with a business engaged in providing material, labor or services that compete (or, upon commercialization would compete) with the material, labor or services provided by Employer at the time of Employee’s termination (the provision of such material, labor or services is hereinafter called a “Competing Business”). Employee further agrees that during Employee’s employment with Employer and for a twenty-four (24) month period immediate following termination of Employee’s employment with Employer (for whatever reason), Employee will not maintain any controlling interest in a Competing Business. Notwithstanding anything herein to the contrary, this Section 4.4 [sic] is not intended to restrict Employee from performing work for a Competing Business in some role that does not actually compete with Employer’s business. This restriction shall only apply within any state of the United States or country outside the United States in which, during (he twelve (12) months preceding Employee’s termination, Employer has conducted or conducts business.
Capital Leather, LLC is also engage in the business of repairing the interiors of damaged automobiles within the geographic areas surrounding the District of Columbia. It happens to be owned by Jonathan Kia, who is John Kia’s son. In a sign that the Kia family ties are not as sound as they might be, Capital Leather hired away two technicians from Wings, LLC, and they were thereafter seen servicing former customers of Wings, LLC. Further, the court found that these activities were directly responsible for a considerable drop in revenue to Wings, LLC. As you might expect, Wings, LLC did what any aggrieved business would do – it sued Capital Leather and its formers employees and sought an injunction to stop the clear violation of the agreements previously signed by its employees.
The court found the Capital Leather, LLC employees, plainly violated their employment agreements with Wings, LLC in that they were soliciting Wings’ customers and working for a direct competitor of Wings. The court also found Wings, LLC was suffering a loss of business as a result of this activity. However, it then followed up by finding that both the Non-Solicitation Clause and the Non-Compete Clause were unenforceable under the Home Paramount standard.
Both Wings, LLC and Capital Leather, LLC do their work in the environs radiating about half a days’ drive out from Washington, D.C. As the court noted, Wings, LLC does not do business in areas such as Abingdon, Virginia (some 300 miles from Washington, D.C.). Despite this, in a clear effort at over-reaching, the very last sentence of the non-compete clause purports to restrict and control the activities of former employees anywhere in Virginia, Maryland, or West Virginia even though Wings’ LLC conducts its activity only in a small, compact portion of these states:
This restriction shall only apply within any state of the United States or country outside the United States in which, during the twelve (12) months preceding Employee’s termination, Employer has conducted or conducts business.
Even if Wings, LLC actually did business on a much broader scale, Virginia public policy frowns on agreements that restrict the ability of employees to earn a living. Here, the geographic over-breadth was aggravated by the length of the restraint (24 months). Wings, LLC, which had the burden of proving any limit on an employee’s ability to find work is important to its legitimate business interests, simply could not show why it needed such a broad restriction.
If you read the Home Paramount decision, you will not see any reference to a non-solicitation clause in the opinion – the case deals with non-compete clauses. The Fairfax court in Wings, LLC treated the non-solicitation clause and the non-compete clause together. We have lately seen a variety of employment contracts where, as was done by Wings, LLC, companies couch their provisions as non-solicitation clauses and make no reference to non-compete clauses. This will not change the analysis. Virginia courts have concluded that non-solicitation agreements are a species of non-compete agreements and are subject to the same requirements and restrictions. Brainware, Inc. v. Mahan, (E.D. Va 2011).
It is difficult to fashion a hard and fast rule for non-compete clauses. Business owners want to protect their businesses and revenue from employees who left, frequently on less than stellar terms. Employees will sign anything to get a job, only to find out that their new workplace environment may not be the nirvana they hoped. A simple observation might be this: business owners have the right to protect their interests, but they don’t have the right to punish departing employees. Employees have the right to work, but they don’t have the right to steal the keys to the kingdom provided by their former employer when times were better.