A recent Supreme Court of Virginia decision will make it more difficult to challenge non-compete restrictions through early pleading challenges.
In Assurance Data, Inc. v. Malyevac, the Supreme Court of Virginia reversed the Circuit Court of Fairfax County, which sustained a demurrer, and, in doing so, determined the enforceability of certain restraints on competition contained in an employment agreement on the pleadings. In remanding the action back to the lower court, the Supreme Court of Virginia held that any finding regarding the enforceability of the agreement must be made on the facts, and certainly not at the demurrer stage.
Plaintiff Assurance Data, Inc. (“ADI”) is a company which provides information technology consulting and design services. It retained defendant John Malyevac to sell its computer products and services to its customers and required Malyevac to execute an employment agreement containing various restraints on competition. Pursuant to the employment agreement, upon termination of his employment with ADI, Malyevac was prohibited from selling products also sold by ADI for six months, disclosing confidential information, and soliciting ADI customers. In particular, the non-solicitation provision provided Maylevac would not solicit any ADI customers “[e]xcept for the sole benefit of [ADI] . . . for a period of twelve (12) after the date of termination.”
A few months after Malyevac entered into the agreement, he resigned. Shortly thereafter, ADI filed a complaint alleging that Malyevac had violated a number of the provisions contained in the employment agreement.
Demurrer and Appeal:
Malyevac filed a demurrer claiming that the agreement’s non-compete and non-solicitation clauses were overbroad and thus unenforceable. He pointed to the “twelve” contained in the non-solicitation clause, arguing that it was unenforceable because no increment of time, i.e. days, weeks, months, or years, was specificed. The Circuit Court of Fairfax County sustained the demurrer finding that, as a matter of law, the non-compete and non-solicitation provisions were unenforceable.
The Supreme Court of Virginia reversed, finding that the lower court erred in sustaining the demurrer. It explained that the only purpose of a demurrer is to determine whether a party has stated a cause of action upon which relief can be granted. A demurrer should never be used to determine whether the restraints on competition are actually enforceable. The Supreme Court observed that, in sustaining the demurrer, the lower court improperly deprived ADI of the opportunity to present evidence to meet its burden of showing that the contract’s restraints on competition were reasonable.
In reversing the lower court, the Virginia Supreme Court reaffirmed a long line of cases which requires that an agreement that restrains competition be evaluated on its own merits and determined on its own facts. This ruling is helpful for employers seeking to enforce non-compete provisions in that it preserves the opportunity for the employer to present evidence regarding the enforceability of its non-compete agreements. Nevertheless, an employer must be prepared to meet its burden of showing that a non-compete is enforceable because it (i) restrains a former employee no more than is necessary to protect a legitimate business interest; (ii) is not unduly harsh or oppressive in curtailing an employee’s ability to earn a livelihood; and (iii) is reasonable in light of sound public policy.