Does a non-compete restrict an employee from competing after his contract expires?

No, not unless it specifically says so, according to a recent decision by the U.S. Court of Appeals for the Fourth Circuit.  In that case, the Fourth Circuit ruled that Virginia non-compete law generally presumes that expiration differs from termination, and thus a post-termination restriction like a non-competition clause must specify if expiration is a triggering event.

In Hamden v. Total Car Franchising Corporation, No. 12-2085 (4th Cir. Nov. 22, 2013), the Fourth Circuit reviewed both non-competition and non-disclosure language in a franchise agreement that a body shop repair company, Total Car Franchising Corporation (TCF), sought to enforce against its former franchisee, Devin Hamden.  Hamden had signed a franchise agreement with TCF to run a TCF franchise for fifteen years. After fifteen years passed, he opened up his own dent-repair business.

TCF filed for an injunction to enforce the two-year non-compete as well as the non-disclosure clauses within the contract. The non-compete clause stated that Hamden would not conduct competitive business activity “for period of 2 years after termination, transfer or assignment” of the franchise contract.   The district court held in Hamden’s favor that the non-compete did not apply to the natural expiration of the 15 year contract.

On appeal, the Fourth Circuit affirmed the district court’s ruling, holding that “termination” in the contract did not include expiration.  In so holding, the Fourth Circuit relied upon a decision of the Virginia Supreme Court, Clinch Valley Physicians, Inc. v. Garcia, 414 S.E.2d 599 (1992), that a non-compete did not automatically apply upon non-renewal of a contract’s terms.  This indicated a presumption in Virginia non-compete law – separate and apart from other principles of contract interpretation – against treating expiration as a form of “termination” which causes a non-compete to become effective.

In contrast, the Fourth Circuit enforced a non-disclosure clause in the agreement which provided that “[d]uring the term of the Franchise Agreement and thereafter” Hamden would not divulge TCF proprietary information.  The non-disclosure clause broadly included all future events, including termination and expiration, because, as the Fourth Circuit explained, “‘Thereafter’ denotes indefinite continuance into the future.”  The distinction drawn by the Fourth Circuit highlights the greater enforceability of non-disclosure agreements, which need not be limited in geographic scope and duration like other restrictive covenants.

By ruling that non-competes must specify if they apply after expiration, the Fourth Circuit recognized the disfavored nature of these agreements and emphasized the heavy burden on companies and their counsel to identify with clarity and specificity when they go into effect.

The above is provided for informational purposes only and should not be construed as legal advice.