Virginia Federal Court Upholds Non-Compete Despite Breadth Of Terms, Based On Employee’s Competitive Conduct.

In Brainware, Inc. v. Mahan, 1:11cv470 (LMB/TCB) (E.D. Va., Aug. 24, 2011), the U.S. District Court for the Eastern District of Virginia denied an employee’s motion to dismiss claims brought against him by his former employer based upon his non-compete and post-employment conduct.  In that case, Brainware, the former employer, marketed and sold software applications in the Intelligent Data Capture and Recognition market, which involves IT products used in automating billing and product delivery. The defendant, Mahan, was a senior account executive in Brainware’s sales department from January 2009 until he resigned in November 2010. Mahan’s Employment Agreement with Brainware contained three provisions: a non-compete, a non-solicitation clause, and a non-disclosure clause, which provided, in pertinent part, that:

[F]or a period of one year after the termination or cessation of . . . employment for any reason, the Employee will not directly or indirectly:

(i) As an . . employee . . . or in any other capacity whatsoever. . . develop, design, produce, market, sell or render (or assist any other person in developing, designing, producing, marketing, selling or rendering) products or services competitive with those developed, designed, produced, marketed, sold or rendered by the Company while the Employee was employed by the Company; or

(ii) Solicit, divert or take away or attempt to divert or to take away, the business or patronage of any of the clients, customers or accounts, or prospective clients, customers or accounts, of the Company which were contacted, solicited or served by the Employee while employed by the Company.

The non-disclosure provision in the Agreement further required Mahan to “hold in strictest confidence and will not disclose, use, lecture upon or publish any of the Company’s Proprietary Information.”

After leaving Brainware, Mahan began working in sales for Kofax, Inc. (“Kofax”), a Brainware competitor. Brainware alleged that Mahan began assisting Kofax in marketing and selling directly competitive products, and was soliciting the business of prospective Brainware customers, including Allstate, on behalf of Kofax in violation of his Agreement. Among other things, Brainware alleged that a webinar created by Kofax stated that Kofax was aware of Brainware’s pricing and sales information and, as a result of its knowledge, was superior to Brainware.  Based on this, Brainware alleged that Mahan breached the Employment Agreement’s provisions, as well as his fiduciary duty to the company, and engaged in conversion, violation of the Virginia Uniform Trade Secrets Act, unjust enrichment, and intentional interference with business expectancies.

Mahan moved to dismiss the Complaint on the grounds that the non-compete, non-solicitation, and non-disclosure provisions were overbroad and thus unenforceable, and that the other claims did not comply with the federal pleading standard because they did not give fair notice of the nature of plaintiff’s claims.

In denying the motion to dismiss as to all claims accept the intentional interference count, the Court noted that, in evaluating a non-compete, it must consider all factors, including the legitimate, protectable interests of the employer, the nature of the employee’s former and subsequent employment, whether the employee’s actions actually violated the non-compete, and the nature of the restraint in light of all circumstances. While the employee argued that the non-compete was overbroad by prohibiting him from selling any products also sold by Brainware, regardless of whether he sold those exact products at Brainware, and by having no geographical limitation, the Court rejected these arguments.

First, the Court noted that, despite the potential existence of a “janitor defense” due to language in the non-compete prohibiting certain forms of employee competition “in any capacity,” the non-compete’s restrictions limited its scope to specified prohibited actions, and did not prohibit competitive employment in general.  Thus it was not functionally overbroad.  The Court further pointed to the extent of the confidential information Mahan allegedly obtained while working for Brainware, which supported Brainware’s legitimate business interest in enforcing the Agreement. Additionally, the Court relied upon the narrow scope of the Intelligent Data Capture/Intelligent Data Recognition (IDR) market, which further limited the restrictive effect of the non-compete and the burden it places on the employee, factors that weighed heavily in the company’s favor.

The Court then found that the lack of a geographical limitation was not fatal to the non-compete, reasoning that the limitations on function, geographical scope, and duration must be considered together in deciding whether the non-compete was overbroad.  The Court determined that both Brainware and Kofax enjoy a “global reach,” and thus it was appropriate despite the lack of a geographical limitation to protect Brainware in a niche market against a significant competitor.

The Court further upheld the non-solicitation and confidentiality agreements on the motion to dismiss, reasoning that the non-solicitation clause was narrowly tailored to restrict solicitation on clients actually contacted, served, or solicited by Mahan at Brainware, and that the confidentiality clause was limited to truly proprietary information and thus was enforceable despite having no time limitation.

The Court thus found that the non-compete, non-solicitation, and non-disclosure provisions at issue were appropriate based on the circumstances of the employee’s former and subsequent competitive employment.  Nevertheless, the Court dismissed Brainware’s tortious interference claim, reasoning that, although Brainware alleged that Mahan interfered with its relationship with Allstate, a prospective client, its Complaint alleged no facts establishing any reasonably certain business opportunities with Allstate nor how any such expectancies were lost due to Mahan.  Because the Complaint merely describe Allstate as a “prospective client,” it did not allege that Mahan interfered with a “reasonably certain” venture, and thus the Court dismissed this count.