Can Your Employer Really Stop You From Taking a New Job?

When an employee leaves one job for another, they often are surprised to find out that their previous employer might be able to prevent them from working in the same industry.  Many employers write provisions into their employment contracts that seek to prevent employees from working for competitors.  However, these provisions do not always comply with Virginia law.

Employers may use only “reasonable” non-compete agreements.

In Virginia, courts will enforce non-compete agreements to protect an employer’s legitimate business interests, but only if they meet certain requirements.  In particular, non-compete agreements may not be unduly burdensome on the employee’s ability to earn a living.  This means that the provision must, at least, be limited in its (1) geographic scope and (2) duration.  Although, when deciding if it is valid, courts consider the overall restriction as a whole.

In general, Virginia courts have upheld contracts not to compete only if they are sufficiently “narrowly drawn” to prevent direct competition with the employer by the former employee.  See e.g., Home Paramount Pest Control Companies, Inc. v. Shaffer, et al., 282 Va. 412 (2011).  For example, the Virginia Supreme Court upheld a non-compete clause that proscribed work on one specific project, for only two specific companies, and which was limited to only 12 months.  Preferred Systems Solutions, Inc. v. GP Consulting, LLC, 284 Va. 382 (2012).  Similarly, Virginia circuit courts have upheld an agreement not to compete that was limited to fundraising for local charities within 60 miles of four cities, all located within the same region and a contract that was limited to preventing a former employee from contracting with or divulging information about the employers’ customers after the employee was fired.  Mut. Funding, Inc. v. Collins, 62 Va. 34 (Spotsylvania 2003); Zuccari, Inc. v. Adams, 42 Va. Cir. 132 (Fairfax 1997).

However, non-compete agreements may not prevent a former employee from engaging in activities that do not compete with the former employer’s business.  For instance, the Supreme Court of Virginia struck down one such provision because it sought to prevent the employee from engaging “directly or indirectly” with competing businesses in any area in which the employee had worked in the previous two years.  Home Paramount Pest Control Co., Inc. v. Shaffer, et al., 282 Va. 412 (2011).  Even with the time and geographic limits, the Supreme Court found that the contract provision in that case was overly broad.  The Virginia Supreme Court, and other courts applying Virginia law, have consistently held that similar restraints on trade are overbroad and unenforceable.  See e.g., Modern Env’ts, Inc. v. Stinnett, 263 Va. 491, 495 (2002) (holding a restrictive covenant invalid because it prohibited the former employee from working, directly or indirectly and within a 50 mile radius of any of the employer’s offices, in any capacity with a competing company for one year after the former employee’s departure from the employer); Motion Control Systems, Inc. v. East, 262 Va. 33, 37-38 (2001) (holding a restrictive covenant invalid because it sought to prevent the former employee from engaging, directly or indirectly, with businesses similar to the employer within 100 miles of the employer’s office); Business Interiors v. Sawyer, 6 Va. Cir. 337, 338-39 (Norfolk 1986) (holding a restrictive covenant invalid because it prevented the former employee from working, directly or indirectly, for any company that might solicit business from the employer’s customers for one year after the former employee’s termination); Grant v. Carotek, Inc., 737 F.2d 410 (4th Cir. 1984) (holding a restrictive covenant invalid because it prohibited the former employee from contracting with any of the employer’s clients).

Recently, a circuit court judge in Fairfax, VA issued an opinion letter stating that a non-compete agreement was not enforceable because, even though the time limit was valid, the geographic scope was too broad.  Therefore, the covenant was not narrowly tailored to protect only the employer’s legitimate business interest.  In Wings LLC v. Capitol Leather, a leather repair company, Wings LLC, entered into an agreement with two employees, which stated that the employees could not, within 2 years of leaving the Wings LLC, directly solicit any customer who had received services from Wings LLC within the year prior to the employees’ departure.  The contract also stated that the employees could not work for another company “in a position that is the same, or substantially the same” as their jobs with Wings LLC if that business had provided any service that competed with Wings LLC within the previous year.  Moreover, the contract stated that this restriction on future employment applied in any U.S. state or foreign country in which Wings LLC had done business in the year before the employee’s departure.

When the two employees quit their jobs at Wings LLC intending to work for a competitor business, Capitol Leather LLC, Wings LLC sought to enforce the non-compete agreement in the employees’ contracts.  Wings LLC claimed that the employees had received extensive training, learned confidential methods and techniques used by Wings LLC, learned Wings LLC’s marketing and business development methods, had Wings LLC’s pricing and financial information, and had access to confidential customer lists.  Wings LLC argued that the employees should not be able to use that information to help Capitol Leather LLC compete with Wings LLC.

The Fairfax circuit court judge considered the non-compete agreement and decided that even though the two year time restriction was reasonable, the geographic restriction on the employees was not.  In this case, Wings LLC operated primarily in northern Virginia, Maryland, and Washington, DC.  However, the contract sought to prevent the employees from working anywhere in any of those jurisdictions.  The Judge pointed out that preventing the employees from working, for example, in southwest Virginia was not narrowly tailored to meet Wings LLC’s legitimate business interests in northern Virginia.  The Judge stated that such a restriction “puts a significant burden” on the employee’s ability to earn a living.

In sum, an employer may impose a limited restriction on an employee’s future employment, but it may not create overly broad constraints that are not connected to protecting legitimate business interests.

Independent Contractors may not be restrained by non-compete agreements.

An independent contractor is not an “employee” and, therefore, cannot be subject to a non-compete agreement.  Nonetheless, employers occasionally try to apply non-compete agreements to independent contractors to reduce competition for their business.

Sometimes it is difficult to know whether a person is considered an “employee” or an “independent contractor.”  In general, independent contractors have more control over their schedule and what tasks they perform.  Often they work on a contract-basis for one task at a time.  Independent contractors may also purchase their own equipment, supplies, insurance, and provide for their own office space and other business-related expenses.

If you are an independent contractor, under Virginia law, no company may prevent you from taking other jobs, even with their competitors.

Claims Against Stockbrokers

Disputes frequently arise between investors and their securities brokers.  It is best to be proactive if you believe your broker has mismanaged your investments.  As an investor, you may report any issues or disputes to your broker’s manager or the brokerage firm’s compliance department.  You should keep notes of all telephone calls with your broker or brokerage firm, including names, dates, and times of the calls.  You should also retain copies of all written correspondence.

If communication with your broker’s manager or brokerage firm’s compliance department does not resolve the dispute to your satisfaction, and especially if you believe you are entitled to monetary damages, you should consider initiating a FINRA arbitration.  Although investors are not required to be represented by an attorney in an arbitration, brokerage firms are typically represented by counsel.  For that reason, consulting with and retaining an attorney to represent you in a FINRA arbitration is advised.

An investor may commence an arbitration against their broker, their brokerage firm, or both.  Nearly all contracts between investors and broker-dealers contain an arbitration clause that requires an investor to arbitrate disputes.  If your contract contains this type of arbitration provision, also called the “arbitration agreement,” you may only seek to resolve your dispute in arbitration; you may not bring your claim in court.

An investor begins the arbitration process by filing a Statement of Claim with FINRA.  Once this is filed, the investor is called the “claimant.”  The parties against whom the claimant files the Statement of Claim – i.e., the broker and/or the brokerage firm – are called the “respondents.”

The Statement of Claim is a written document that outlines the details of the dispute, such as the facts, the relevant dates, the names of the people and companies involved, what the claimant is seeking in the arbitration (in other words the “relief” or “damages” sought, such as money, interest, or specific performance of contract terms), and the respondents from whom the claimant seeks relief or damages.  Any documents referred to in the Statement of Claim, in particular the contract containing the arbitration agreement, should be attached as Exhibits and filed with the Statement of Claim.

To initiate an arbitration, the investor must also pay the FINRA filing fees which are based on the amount of the total claim, including any punitive and treble damages, but not including interest and expenses.  It is possible for an investor to obtain a waiver for the filing fees if they can demonstrate financial hardship.

In addition to the Statement of Claim and filing fees, a claimant must file a Submission Agreement, providing FINRA with all of the parties’ contact information.  By signing the Submission Agreement, the investor agrees to submit their claim to FINRA and to abide by the arbitrators’ decision on that claim.

Finally, the investor – or his/her attorney – must send to FINRA an original copy of the Statement of Claim and the Submission Agreement along with one copy for each respondent and each arbitrator. After the Statement of Claim and Submission Agreement have been filed and the filing fees have been paid, FINRA sends the Statement of Claim to the respondents and the arbitration process begins.