Are Noncompetition Agreements Worth the Paper They Are Written On?
Yes, but one size does not fit all. Recent Virginia Supreme Court decisions demonstrate the importance of properly tailoring an agreement to address the specific interests of the company and the activities of the employee. While the duration and geographic scope of the noncompetition agreement remain critically important, companies must now pay particular attention to the type of activity that they seek to prohibit their employee from performing. The activities which the employee is prohibited from performing should be limited to: (1) the same or similar type of work performed by the employee for the company and (2) activities that are in actual competition with the company.
The first component is often referred to as the “janitor” rule. If the noncompete provision prevents the employee from working for a competing company in “any capacity” or in a non-competing role (i.e. as a janitor), the Court may likely conclude it is overbroad. For example, if Suzie the sales manager is prohibited from working as “an employee for a competing company,” the agreement may be overbroad because Suzie is arguably prohibited from working in a non-competing position such as a janitor. The language of the agreement should be limited to preventing Suzie from working in the same or similar position for a competing company. Simply put, if the noncompete agreement overreaches, it provides opposing counsel, and the court for that matter, the opportunity to conjure up hypothetical scenarios (no matter how absurd) that may render the agreement meaningless.
The second and equally important component is to make sure that the restriction is limited to working for competing companies. While such a statement may seem obvious, many agreements overreach. For example, if Suzie the sales manager is prohibited from working in sales for a company that is the same or similar to her former company, the court may still strike down the agreement because it did not limit the restriction to “competing” companies.
The lessons are clear. Noncompetition agreements need to be reasonable not only as to duration and geographic scope, but also as to the activities to be prohibited. Likewise, not every employee should be required to sign an agreement or the same agreement as it potentially dilutes the importance of those agreements that really matter. Given the recent case decisions, existing agreements should be reviewed to ensure that they are not overbroad and actually worth the paper they are written on.