Could the Court Really Extend a Non-Compete? Yes!

Three individuals entered into a covenant not to compete with a tax preparation franchisor, and promised not to compete within 25 miles of the franchisor’s business, for a period of two-years after termination.  Despite the fact that the contract was terminated in  August 2010, a recent case extended the covenant not to compete (commonly referred to as a “non-compete”) until November 2, 2013, which is over three years after the contract’s termination.  How can this happen?  The Federal Court in Virginia explained in JTH Tax, Inc. v. Noor, et. al, Civil Action No. 2:11cv22 (Sep. 26, 2012) that a court has authority to extend a non-compete in the interest of equity.

Generally, a court is granted this equitable authority in two circumstances.  The first is if the period covered under the non-compete expires before the court enters judgment in the case.  The second is the situation where an employee ignores a court’s previous order and continues to compete with the company.  Interestingly, this case involves both of these situations.

When this lawsuit was filed in the Eastern District of Virginia, the individuals accused of breaching their contracts by competing with the franchisor continued to ignore the allegations made against them.  They flat out failed to appear, answer, or file any type of response to the complaint brought by the franchisor.  Not surprisingly, the franchisor easily obtained a default judgment against the individuals.  (A “default” means judgment is entered against the parties that failed to defend the claims brought against them).  The franchisor requested that a two-year injunction prohibiting the individuals from engaging in restricted competitive activity begin on the date of judgment, or on May 11, 2011.  However, the Court accounted for the period in which the individuals were not violating the non-compete provisions.  While the parties’ business relationship ended in August 2010, the individuals did not begin competing until January 2011.  Accordingly, the Court counted these five months of compliance in favor of the individuals, and ordered that the individuals could not compete against the franchisor within 25 miles of the franchisor’s business for a period of one year and seven months, beginning on    May 11, 2011.

After the Court’s May 11, 2011 Order, the individuals again competed.  As expected, the franchisor again requested relief from the Court, and presented credible evidence that the individuals engaged in the prohibited competitive activity in March and April of 2012.  Thus, the Court counted the period from May 11, 2011 until April 2012 against the individuals.  The individuals were not only violating the non-compete provisions in their contracts, but were now also violating the Court’s May 11, 2011 Order.  Finding that an extension of the non-compete was necessary to prevent the individuals from actually benefiting from their breach of the Court’s Order, the Court further extended the provisions of the individuals’ non-compete restrictions for an additional one year and seven months from April 2, 2012 (the last known date of the violation).  In other words, a non-compete which was originally set to expire in        August 2012, was now extended by the Court through November 2, 2013.  The Court also ordered the individuals to pay the reasonable attorney’s fees incurred by the franchisor since the individuals were willfully violating the Court’s May 11, 2011 Order.

The law in Virginia surrounding covenants not to compete has rapidly evolved in recent years.  While non-compete provisions are common in the workplace, they are not always enforceable.  Employers and employees alike should seek legal advice concerning a non-compete’s restrictions before signing such a covenant and before terminating a business relationship where a non-compete is involved.  Obtaining legal counsel in such circumstances could save long-term resources for both individuals and businesses.