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Virginia Does Not Disfavor Non...

Virginia Does Not Disfavor Non-Competes When Parties Are Sophisticated

While it is well-settled that the law in Virginia disfavors covenants not to compete (commonly referred to as “non-competes”), this policy does not apply to non-competes which were entered into and negotiated by sophisticated parties.  The United States District Court for the Eastern District of Virginia refused to void two employees’ non-compete agreements because in the law’s view, sophisticated parties are entitled to the benefit of their bargain.

In the case of Capital One Fin. Corp. v. Kanas, et al., the court addressed what it termed as a “unique scenario,” which differentiated this case from “typical Virginia precedent.”  The employees seeking to void their non-competes were not the typical employees, but were Business Executives who received a collective $42 million in restricted stock in exchange for promising not to compete with their former employer, Capital One.  In fact, each Executive admitted that neither had concerns regarding their post-covenant ability to earn a livelihood since they received nearly $200 million upon separating from Capital One.

Despite these unique circumstances, this case is sure to impact all Virginia businesses since the court analyzed the recent Virginia Supreme Court decision, Home Paramount Pest Control Cos. v. Shafferin reaching its conclusion that the non-competes at issue here were enforceable.  In Home Paramount, the Supreme Court indicated that a non-compete was overbroad and unenforceable if it did not restrict competition of the same type actually engaged in by the former employer.  This left many businesses unsure about how narrowly to draft their non-compete provisions in the employment context.

The contract at issue in this case limited its restrictions to “the consumer and commercial banking business” “engaged in” by Capital One “as of the Separation Date.”  Applying the employer/employee test to non-competes, the Court held that this was expressly permissible under the Home Paramountframework because it prohibits only the same type of activity actually engaged in by the employer.  While a restrictive covenant that is applied to business owners, rather than employees of the business, is generally more likely to be enforceable, the Court held that in this situation the more stringent employer/employee standard applies to the Executives’ non-compete.

In determining that that these Executives would be a formidable competitive threat to Capitol One, the Court also found it significant that the terms of the agreement expressly stated that the restrictions were reasonable, and that the Executives displayed sizeable past success, present goodwill, and recent access to confidential information.  Accordingly, the geographic scope, duration, and function of the restriction were reasonable to protect Capital One’s legitimate business interest in restricting the Executives’ ability to compete, and the Court ultimately held that the covenant was enforceable.  This case demonstrates the emphasis Virginia courts will place on the individual circumstances of each case in making non-compete determinations.