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While there is “continued silence” on blue penciling, Virginia high court clarifies other noncompete questions

January 18th, 2012  |  Sheryl Allenson

The withdrawal of a long-anticipated Virginia Supreme Court opinion will lead to “continued silence” by the state’s high court with respect to blue-penciling, explained Linda M. Jackson, a partner in the Virginia law firm of Venable, LLP. The court was expected to issue an opinion in the case of BB&T Insurance Services v. Thomas Rutherford, Inc, to address head on the applicability of blue-penciling in Virginia. While practitioners are left wondering how to treat blue-penciling, another state supreme court decision clarified questions about the enforceability of a noncompete provision, ruling that a blanket prohibition against working for a competitor was overbroad and unenforceable, thereby highlighting the evolution of noncompete jurisprudence.

In Home Paramount Pest Control Cos, Inc v Shaffer, (November 4, 2011, Mims, W). the state supreme court analyzed a provision identical to one found enforceable in litigation that included an entity related to Home Paramount. Although the provision was found enforceable by the state high court in 1989, in this instance, the court reasoned that the provision that restricts competition is enforceable if it “is narrowly drawn to protect the employer’s legitimate business interests, is not unduly burdensome on the employee’s ability to earn a living, and is not against public policy.”  To evaluate that burden, the court considers “function, geographic scope and duration” of the agreement. Although the elements are to be considered together, when one factor is overbroad, the agreement must be found unenforceable. “Although we weigh the function element of a provision that restricts competition together with its geographic scope and duration elements, the clear overbreadth of the function here cannot be saved by narrow tailoring of geographic scope and duration,” the supreme court stated. The court did not, however, address blue-penciling.  “If the court was looking for a chance to apply blue pencil it could have done it here. It would have been a stretch, but they could have done it,” said Jackson.

In Home Paramount, the employee was prohibited from engaging “directly or indirectly or concern[ing] himself/herself in any manner whatsoever in the carrying on or conducting” of a competing business. In this instance, the geographic scope and duration were not at issue, however, the function element was considered overbroad.  The employer pointed out that the geographic scope was relatively narrow and the duration, two years, was commonly accepted for such provisions, so that those elements compensated for the breadth of the function element. However, the state high court disagreed that the provision, as a whole, was not broader than necessary to protect its legitimate business interests.

Citing precedent in which provisions with broad functional limitations were deemed unenforceable, the supreme court reasoned that “[b]ecause Home Paramount did not confine the function element of the Provision to those activities it actually engaged in, it ore the burden or proving a legitimate business interest in prohibiting [the employee] from engaging in all reasonably conceivable activities while employed by a competitor.

Furthermore, the supreme court was not compelled by the employer’s suggestion that stare decisis barred the court from finding against enforceability. Instead, while acknowledging that the provision at issue was identical that the one upheld previously, the supreme court reasoned that it had “incrementally clarified the law” since that case was decided. Consequently, to the extent that Paramount Termite conflicts with the current holding, the supreme court expressly overruled it.

In what Jackson labeled “a very spirited and very direct dissent” Justice McClannahan reasoned that stare decisis required an opposite conclusion. “With today’s decision, the majority fails to give due respect and deference to a basic tenet of stare decisis, which is that ‘in a well ordered society it is important for peopled to know what their  legal rights are, not only under constitutions and legislative enactments but also as defined by judicial precedent, and when they have conducted their affairs in reliance therein, they ought not to have their rights swept away by judicial decree,’” stated the dissent, citing a Virginia Supreme Court decision.

Regardless of the court’s express rejection Paramount Termite, Jackson noted that Home Paramount didn’t change the state of the law, but instead reinforced it. She explained that on the function component, the law came to be known as the ‘janitor defense.” In other words, “[the provision] really had to prevent [the employee] from doing something they had done for the [the employer],” she explained. Noting the court’s heed about evolution in the law, Jackson suggested that employers review noncompete provisions with a fresh eye. “The law keeps changing. We have to look at in through that lens,” Jackson explained.