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Court: Engineers’ Non-Compete Valid Under Virginia Law

Court: Engineers’ Non-Compete Valid Under Virginia Law

Case: Virginia Transformer Corp. v. Labh, et al., Case No. CL12-475 (Roanoke February 19, 2014)

Virginia Transformer, a manufacturer of transformers in Roanoke, Virginia, sued two former engineers in Roanoke City Circuit Court who left to join a Missouri competitor. The engineers had been hired in India and brought to the United States for training. (For more information on the visa process as immigrants, click here). They left several years into the job.

When the engineers started with Virginia Transformer, they had signed non-compete contracts. Here is what the contracts said about competing:

[Employee is prohibited from] providing services to or on behalf of a Restricted Business enterprise for a period of one year after termination of their employment.

The term “services” was defined as work that was the “same as, substantially similar to, or directly related to” the job duties or functions that the engineers performed for Virginia Transformer during their employment. Furthermore, the term “services” included work that “related to products…competitive with the products…provided by [Virginia Transformer” during the engineers’ employment “and about which [the engineers were] in possession of confidential information.”

The term “Restricted Business” included any enterprise “which derives revenue…directly, indirectly, individually, or or through one or more affiliates” from the “design, development, engineering, manufacture, construction, or marketing of power transformers…” in the United States or Mexico.

To summarize, the engineers could not work as engineers for any company in United States or Mexico that developed or sold power transformers. Would the Roanoke City Circuit Court enforce the non-compete?

Here is what the court decided. Under Virginia law, a non-compete clause must be reasonably limited in function, geographic scope, and duration.

First, the duration of the engineers’ non-compete (one year) was reasonable. Courts in Virginia have upheld non-competes up to two years, and in some cases, up to five years, depending on the circumstances.

Second, the geographic scope (United States and Mexico) was reasonable. The engineers argued it was too broad because it encompassed areas where they had never worked. But the court held that Virginia Transformer produced sufficient evidence to show that it was competitive in each country, and indeed, had a worldwide marketing area.

Finally, the functional scope (same or similar services) was reasonable. Again, the engineers argued it was overbroad because the non-compete prohibited working for a competitor in product categories about which they had gained confidential information, which was much broader than the specific job roles they had performed. The court held that prohibiting an employing for a short period of time from engaging in similar work, whether that work was the same or similar to what the employee had performed, or that work was sufficiently related to work about which the employee had gained inside information, was reasonably related to competition and therefore valid.

Bottom Line: Engineer non-compete contracts may be enforceable under Virginia law. But every contract is different, the outcome depends on the circumstances of employment, the activities of the employer and employee, and most importantly, the actual words used in the contract.

Virginia Transformer Corporation v. Ashwini Labh, Case No. 12-475 (Roanoke Cir. Ct. 2014)

Virginia Transformer Corporation v. Rohit Kanti, Case No. 12-476 (Roanoke Cir. Ct. 2014)

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