Part 1 of this post discussed a suit brought by Wings LLC to enforce a noncompete against two defector employees. The letter opinion said that the noncompete was  unenforceable. In this post, I examine the role of noncompetition agreements and when other  agreements may be better options in cases such as this one.

The Role of Noncompetes – Protecting the Investment

A closer look at this case also reveals a common misunderstanding about the purpose of noncompetes.  Put simply, a noncompete is designed to protect a business from losing its investment. This can be  seen most clearly in the context of a business sale. When one person buys a Pizza Hut franchise from its owner, the person also  “purchases” the customer market that comes with it. If the former owner then opens a Little  Caesar’s across the street, the purchaser’s investment is severely compromised in the form of lost  customers and lost profits. A noncompete prohibiting the former owner from engaging in the same or  similar business within the customer market for a suf icient period of time wil help protect the  purchaser from being undermined by immediate competition.  And it prevents the sel er from  double-crossing the purchaser by profiting twice—once from the sale of the Pizza Hut and again from  the profits made from Little Caesar’s.

Similarly, when an employer invests in an employee for purposes of maintaining its competitive  edge, it does not want to lose that edge to a competitor after the employee leaves. Here, the  noncompete is designed to prevent the former employee from using the employer’s investment for  personal profit, either individual y or on behalf of a competing business (for which the former  employee likely wil be handsomely rewarded). With a noncompete, the employer’s investment is  protected from being leveraged by a competitor. The employee is permitted to take another job, but  not for purposes of using the employer’s investment against it.

When Is a Non-Solicitation and Confidentiality Agreement a Better Option?

When the issue is mainly preserving an employer’s customer base, a noncompete is not always the  best vehicle. This is because of the legal restrictions placed on noncompetes such as the  requirement of a reasonable geographic range. Customers can be located al over the world but that  is not always equivalent to the principle of protecting a business’s legitimate interest in its  investment. For example, an employer with a customer base in Maryland and Virginia has no real  interest in Ohio. If its employees move to Ohio and perform similar jobs, there should be no legal  penalty against the employees. Thus, a noncompete prohibiting an employee from taking the same or  similar job in Ohio almost certainly wil be held unenforceable. Likewise, if an employer has customers in Ohio, but only occasional y conducts business with those customers, or the breadth of the customer base is very narrow, its interest in Ohio is too smal to  have a noncompete covering the entire state.

The better option in both cases is to execute a non-solicitation and confidentiality agreement. A  non- solicitation and confidentiality agreement bridges the “investment” gap by preserving the  employer’s customer market without succumbing to the legal limitations of a noncompete. Wings had a  non-solicitation agreement but also relied on its noncompete agreement. The noncompete was  overbroad, but stronger non-solicitation and confidentiality agreements would protect a company  from losing its customers to a competitor, which was the real loss Wings seemed to have suf ered.  It would also protect against the improper use of Wings’ confidential business information that  gave it a competitive edge in the market, preventing Capitol Leather  LLC from using Wings’ former  employees to undermine Wings’ business. A separate non-solicitation and confidentiality agreement  would ensure that, even if a noncompete fails, the restrictions on pilfering customers and using an  employer’s strategic information against it would remain intact. When drafted wel , these  agreements preserve fair competition even if former employees move to a competitor.

Using Restrictive Covenants Smartly

Although disfavored, noncompetes in Virginia are stil enforceable. The key is to use restrictive  covenants smartly. Employers should consider using noncompetes for protecting their business  investments against unlawful competition, but consider relying more on non-solicitation and  confidentiality agreements to protect their actual competitive position. Understanding when and how  to use both can mean the dif erence between a triumphant victory in court over a costly loss.