Are Non-Compete Agreements Lawful in Virginia?
Article originally published by Valley Business Front in Issue 193, October 2024: Valley Business FRONT, Issue 193, October 2024.
In the 35 years that I have represented Virginia businesses and executives in workplace matters and litigation, I have lost count as to the number of times I have heard someone say words to the effect that non-compete agreements are “unlawful” in Virginia. (Spoiler alert: they can be lawful.) This article provides answers, and an update.
As a General Statement, Non-Compete Agreements may be Valid in Virginia if Narrowly Tailored to Prevent Direct Competition.
It is true that restraints against competition are not favored in Virginia. They may be enforceable, however, when the agreement 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.” Omniplex World Servs. Corp. v. US Investigations Servs., 270 Va. 246, 249 (2005). In evaluating these factors, courts consider the function, geographic scope, and duration of the restriction.
The function element is assessed “by determining whether the prohibited activity is of the same type as that actually engaged in by the former employer.” Home Paramount v. Schaffer, 282 Va. 412, 416 (2011). In other words, where the restriction only precludes the employee from doing competing work (as opposed to doing any work for a competitor), it is generally enforceable. Enforceable restrictions prohibit an employee from engaging in activities that actually or potentially compete with the employee’s former employer.
Courts evaluate these cases on their own merits, equities, and context. But the above concepts provide the framework for the types of non-compete agreements that may be enforceable in Virginia.
But Wait—There is a Virginia Law that Invalidates Non-Compete Agreements with So-Called “Low-Wage Employees.”
I blame Jimmy John’s. In October 2014, the national media reported that Jimmy John’s required all its employees to sign non-compete agreements. “It’s one thing for a high paid exec to be prohibited from working at a competitor. But Jimmy John’s actually imposes non-compete clauses on its low-wage workers.” Jimmy John’s Under Fire for Worker Contracts, CNN Money (October 22, 2014). As the public policy evolved, in October 2016, the Obama Administration issued a “call to action” urging state policy makers to enact reforms to reduce the prevalence of non-compete agreements, especially those imposed upon so called “low-wage workers.” In 2020, Virginia responded. Virginia enacted a law that prohibits employers from entering into, enforcing, or threatening to enforce, a covenant not to compete with a “low-wage employee.” (The law does not apply to agreements in effect prior to July 1, 2020.) A covenant not to compete is defined to include a restriction that would prohibit an employee from providing services or products to a customer post-employment, unless the employee initiates contact with or solicits the customer. There are some limited exceptions, most notably for employees who are “predominately” paid by commission.
“Low-wage employee” is a misnomer. The General Assembly adopted a moving target definition that ties the “low wage” threshold to the “average weekly wage of the Commonwealth.” The practical effect is that a new average weekly wage is calculated each year when, inevitably, the average weekly wage goes up. On January 16, 2024, the Virginia Department of Labor & Industry (“DOLI”) announced that the average weekly wage for the next 12 months had risen to $73,320 annually, or $1,410 per week. (I expect that many persons who earn a salary of $73,000 would be surprised to learn that they are considered “low wage” employees in the Commonwealth.)
The Federal Government is Attempting to Invalidate Non-Compete Agreements.
As you probably heard, on April 23, 2024, the Federal Trade Commission (“FTC”) issued a Final Rule (the “Rule”) that was set to take effect on September 4, 2024. The Rule would have included a “comprehensive ban on non-competes with all workers.” The Rule aimed to prohibit employers from using or enforcing non-compete agreements with employees or independent contractors when their employment ends, in order to address what the FTC deemed “unfair methods of restricting competition.” The Rule was met with substantial criticism from business advocates as being a drastic, and unwarranted, expansion of power by a Federal agency.
On August 20, 2024, a U.S. District Court Judge held that the Rule was “promulgated . . . in excess of [the FTC’s] statutory authority.” Ryan LLC v. Federal Trade Commission, 3:24-cv-00986-E (N.D. Tex. 2024). As a result, the Court held that, the Rule would be “set aside.” Although the decision will likely be appealed, it seems unlikely the Rule will ever take effect. [Full disclosure—when the FTC first announced the proposed Rule in 2023, I was confident that the Rule would never take effect because I was certain the FTC had exceeded its authority. I was surprised that we had to wait until the 11th hour to receive the good news!]
Be aware that in 2023, the General Counsel (“GC”) to the National Labor Relations Board (“NLRB”) opined that an employer who proposes, maintains, or seeks to enforce a post-employment non-compete agreement, even in a separation agreement, has violated Section 8(a)(1) of the National Labor Relations Act (“Act”), except in very limited circumstances. In the GC’s view, most non-compete provisions are overbroad and chill non-supervisory employees in the exercise of their Section 7 rights. This position, if applied and upheld, will be available to any non-supervisory employee, even those without a union, because Section 7 rights apply to non-supervisory employees. Similar to the FTC, it is my judgment that the NLRB lacks the authority to impose this rule upon employers. To my knowledge, however, the courts have yet to rule on the NLRB’s efforts to regulate non-compete agreements.
Employers Seeking to Protect Their Interests Against Unfair Competition Have Other Options.
This article primarily addresses non-compete agreements. It is important to add that employers have other options to protect themselves against unfair competition. As one example, companies are increasingly including separate “non-solicitation” covenants in their agreements with key employees that apply in the post-employment context. Such covenants are well suited to executives, sales personnel, and key employees who are customer-facing. The concept is that departing employees can compete as long as they stay away from certain customers for a period of time. Here’s an example of the concept:
During your employment, you gained access to our trade secrets and other confidential information. If your employment ends, you agree not to solicit, directly or indirectly, or perform work, for any known customer or known active prospect for a period of 18 months.
These “non-solicitation” covenants must also be narrowly tailored. For example, assume a company has thousands of customers, and dozens of distinct product lines in various locations throughout the world. Assume also that a particular sales employee focuses upon a single product line in a limited region with a handful of customers. It would likely be invalid if the non-solicitation covenant could be interpreted to include thousands of customers unknown to this sales employee in other product lines or locations. As another tool, it is well-settled that a company can require that its employees not use, disclose, or otherwise misappropriate the company’s trade secrets, or other information that is confidential or proprietary. Here too, however, companies should not overreach. Not all internal information can be kept confidential. For example, it is a violation of Federal and Virginia law to prevent an employee from discussing or disclosing his or her own compensation.
Final Thoughts and Recommendations
There is much more to say about an employer’s efforts to minimize its risks if a key employee were to leave and seek to compete against their former employer. There is no one-size-fits all solution. I highly recommend that an employer be proactive and strategic well before an employee departs. Business owners should invest the time to evaluate the steps they can and should take. (In 2006, my law partner Greg Haley wrote an article in which he urged employers to cast their nets with a focus upon catching the “whales, not the minnows.” This remains excellent advice.)
