Virginia Supreme Court Last Week: Courts Should Not Rule on Non-Compete's Enforceability in a Factual Vacuum

| Marcus, Ellen

"Red Vacuum"

Last week, the Virginia Supreme Court reversed a trial court’s ruling that a non-compete agreement was unenforceable on its face as a matter of law.  The VSC held that the trial court should not have decided the enforceability of the agreement on a demurrer (more about what that means below) because, in Virginia, whether a non-compete is enforceable (or valid) turns on whether it is “reasonable under the particular circumstances of the case” – that is, whether 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.”  According to the VSC, this means that the particular circumstances of the case matter, and that the enforceability of a non-compete should not be decided “in a factual vacuum.”

Why did the VSC think that the trial court ruled in a factual vacuum?  Because the trial court made its decision early in the case, on a demurrer, when a defendant asks a court to dismiss the plaintiff’s complaint based solely on the plaintiff’s allegations in the complaint – not on the actual facts.  Actual facts are for later in the case, after the parties develop evidence in discovery.  “Demurrer” is an old-fashioned term.  The federal courts and most states’ courts refer to the same type of request as a “motion to dismiss.”  (Insert Virginia joke here, although you risk hurting the feelings of your Suits by Suits bloggers, three of whom call the Old Dominion home.)   

The VSC stressed that it will be the employer’s burden in the case to eventually prove that the non-compete is reasonable and therefore enforceable under the particular circumstances of the case – taking into account three elements:  how the non-compete would restrict the former employee’s job functions, the geographic scope of the restriction and the duration of the restriction.  Given that these are the elements, it seems possible to imagine a non-compete that is unenforceable regardless of the circumstances of a particular case – in other words, a non-compete that is clearly unenforceable, even when considered in a factual vacuum.  To take an extreme example, what if a non-compete would by its terms restrict a former employee from performing any job function in any place for all time?  The VSC apparently would say that the particular facts of the case still matter and that this non-compete cannot be ruled unenforceable on a demurrer before the facts are before the trial court.  In our extreme example, a possible fact going in the other direction could be that the employer paid the former employee $100 million in exchange for signing the non-compete agreement.     

We do not expect for such an extreme scenario to be presented to Virginia courts but will keep our eyes out for how they interpret this recent decision by the VSC in cases where the non-competes may seem overly restrictive on their face.