Sales Manager Non-Compete Struck Down by Chesapeake Court
In 2004, 1800SKILLED hired Seth Nogiec to work as a manager in the marine division of its Virginia Beach office. Essentially, Nogiec sold staffing services to businesses in the Hampton Roads area.
When Nogiec was hired, he signed a contract, the “Employee Restrict Covenant,” which stated:
Employee…agrees that for a period of two years after termination of his/her employment with TradeStaff…the employee will not, within the State of Virginia, or any other state where TradeStaff provides labor, directly or indirectly engage in the business of providing labor personnel, including but not limited to, carpenters, electricians, plumbers, general laborers, masons, etc., to companies performing work in the construction industry…Direct or indirectly engaging in the business of “labor provider” or in any competitive business shall include engaging in such business as an owner, partner, or agent, or as an employee of any person, firm, or corporation engaged in such business…
In 2006, Nogiec resigned from the company. He returned eight months later and orally agreed to resume employment under the same contractual terms as before.
In 2008, Nogiec quit 1800SKILLED and joined Chipton Ross, a competitor.
After Nogiec began working for Chipton Ross, 1800SKILLED filed a lawsuit, alleging (a) breach of the non-compete contract by Nogiec, (b) tortious interference with contract by Chipton Ross, (c) conspiracy to divert business in violation of the non-compete by Nogiec and Chipton Ross, and (d) breach of fiduciary duties by Nogiec.
Nogiec and Chipton Ross moved to dismiss the lawsuit. They argued that the non-compete was invalid under the Virginia State of Frauds, and even if it were a valid contract, it was overly broad and unenforceable.
The Chesapeake Circuit Court held a hearing on both issues.
Virginia Statute of Frauds Does Not Apply to Non-Compete
Nogiec moved to dismiss the case because his oral contract was invalid under Virginia law. He did sign a written contract when he first started with the company. But he left and returned, and when he started working a second time, he contract was merely an “oral promise” to keep working at the company under the same terms as before.
Under the Virginia Statute of Frauds, an oral promise is not enforceable if the parties cannot complete performance under the contract within one year. Va. Code § 11-2(8).
In this case, Nogiec argued that the his work as an employee at 1800SKILLED and the non-compete would take at least two years to perform; after all, even if Nogiec quit within one day of working for the company, his non-compete would be in effect for up to two years.
However, the Chesapeake Circuit Court disagreed. Under the Supreme Court of Virginia’s interpretation of the statute of frauds, both parties must be obligated to do something for more than one year. See Greenbrier Farms v. Clarke, 193 Va. 891, 895 (1952) (holding that the Virginia Statute of Frauds does not apply unless the agreement “contemplate[s] non-performance by both parties within the year.”).
It is not enough that an employee might be bound by a non-compete after a year’s time for the Virginia Statute of Frauds to apply. The employer must also be obligated to perform some act beyond a year.
In the context of at-will employment, the mere obligation to comply with a non-compete is not enough to trigger the Virginia Statute of Frauds. See, e.g., Farm Veterinary Services, Inc. v. Novak, 61 Va. Cir. 584 (Franklin County 2001) (holding that the Virginia Statute of Frauds did not apply to a non-compete that lasted three years because the employee was at-will).
Chesapeake Court Holds Non-Compete Overbroad
Even though the Chesapeake Circuit Court upheld the validity of an oral non-compete contract, the Court nonetheless held that the contract itself was overbroad and unenforceable.
Under Virginia law, a non-compete contract must be reasonably limited in duration, geographic scope, and functional limitation. Blue Ridge Anesthesia & Critical Care, Inc. v. Gildick, 239 Va. 369 (1990). The employee gets the benefit of the doubt; if the contract is susceptible to two or more interpretations, one of which is overbroad, then the non-compete will be held unenforceable. Lanmark Tech, Inc. v. Canales, 454 F. Supp. 2d 524 (E.D. Va. 2006).
Here, the Chesapeake Circuit Court held that the duration of two years was likely reasonable. See, e.g. Roanoke Engineering Sales Co. v. Rosenbaum, 223 Va. 548, 553 (1982) (holding that a period of three years was reasonable where the non-compete was limited to the “territory covered by [employer]”).
However, the functional restriction against working for a competitor in any capacity was overbroad and render Nogiec’s non-compete unenforceable as a matter of Virginia law. Also, the geographic scope was too broad.(a) Overbroad Functional Restriction – “In Any Capacity”
Numerous Virginia courts have struck down non-compete where the functional restriction prohibited working for a competitor in any capacity and doing unrelated work. See, e.g., Modern Envt’s, Inc. v. Stinnett, 263 Va. 491 (2002) (invalidating a non-compete that prohibited working in any capacity for a competitor); Motion Control Sys., Inc. v. East, 262 Va. 33, 37-38 (2001) (invalidating a non-compete that prohibited working in any capacity for any company that made a motor that was “similar” to the former employer’s specialized, brushless motors) Lanmark Tech, 454 F. Supp. 2d 524 at 528 (invalidating a non-compete that prohibited “former employee from any form of employment with a competitor, including work unrelated to the employee’s [former] work”).
Therefore, the 1800SKILLED non-compete, which prohibited working in any capacity, was unenforceable.
(b) Overbroad Geographic Restriction – “Anywhere” 1800SKILLED Does Business
The Chesapeake Circuit Court also criticized the over breadth of the non-compete’s geographic restriction.
1800SKILLED prohibited Nogiec from working throughout the State of Virginia and anywhere the company might do business in the future.
The Chesapeake court noted that a non-compete will generally be enforceable if it were limited to the area formally serviced by the salesperson, i.e. their sales territory. See, e.g. New River Media Group, Inc. v. Knighton, 245 Va. 367, 368 (1993) (upholding a 60-mile restriction equivalent to former radio broadcaster’s territory); Blue Ridge Anesthesia, 239 Va. at 372 (upholding a non-compete limited to territories serviced by the employee).
However, here, the non-compete extends far beyond the few counties where Nogiec worked as a sales manager.
Moreover, the fact that the non-compete could “grow and expand” to wherever the company did business was hopelessly vague and unenforceable as a matter of law. The Chesapeake Circuit Court compared such an open-ended geographic restriction to an “amoeba” which might have “a life wholly unto itself” and grow more oppressive by the day.
Employees, said the Chesapeake court, should not have to guess as to the boundaries of their non-compete contracts. Therefore, the Court held that the geographic restriction was overbroad.
Key Takeaway for Employers and Employees: A non-compete does not have to be in writing for at-will employees, but it’s helpful to get a signed agreement. The non-compete terms should be limited to the sales territory serviced by the employee. Otherwise, a court may invalidate the contract.