By David Barmak
In a unique decision, Home Paramount Pest Control Companies v Justin Shaffer, the Virginia Supreme court recently found a non-compete provision unenforceable despite the fact that it had found the identical provision enforceable 22 years ago in a decision that has formed the foundation for Virginia’s non-compete law jurisprudence over the course of the ensuing years. The decision turned on the Court’s analysis of the “functional element” of the non-compete provision at issue and provides an important lesson to employers using non-compete agreements with their employees, both within Virginia and elsewhere.
Traditionally, analysis of the reasonableness of a non-compete provision has focused on its duration, geographic scope and the industries or lines of business covered by the non-compete. This case shines a light on another aspect of that analysis: the functional scope of the provision, which is to say the kind of jobs and other work the employee is prohibited from doing.
The provision at issue provided that “the Employee will not engage directly or indirectly or concern himself/herself in any manner whatsoever in the carrying on or conducting the business of exterminating, pest control, termite control and/or fumigation services . . . “ (emphasis supplied). In 1989, in Paramount Termite Control v Rector, the court had held the identical provision (used by Home Paramount’s predecessor in interest) enforceable, ruling that “we also find that the restraint does not unreasonably curtail the employees' legitimate efforts to earn a livelihood . . . . [T]hey may engage in any other work but that of pest control in the counties in which they formerly worked for Paramount.” In Home Paramount, however, the court - - noting that the law had been “incrementally clarified” and “gradually refined” in the last 22 years - - found that provision unreasonably overbroad because it prohibited the employee from working in the pest control industry in any capacity, even indirectly or as a “passive stockholder of a publicly traded international conglomerate with a pest control subsidiary.” The principle articulated in Home Paramount is sometimes referred to as the “janitorial defense” to reflect the notion that a provision which prohibits, say, a former marketing employee from working for a competitor even if the employee was to work there as a janitor, is unreasonably restrictive and should not be enforced.
In Virginia, where the courts will not modify or “blue pencil” an overbroad non-compete provision, the over breadth of the functional element of the provision at issue in Home Paramount was its death knell. In another jurisdiction, the court might have “re-written” the functional component to make the provision enforceable. Nonetheless, Home Paramount provides several important reminders for employers who use non-compete provisions, regardless of which state’s law would apply in determining the enforceability of the provision.
First, very close attention needs to be paid to the language used in the provision to ensure that is not overbroad in any way, including not only the geography, duration, and competitive industries covered, but also the type of work the employee will be prohibited from performing for competitors. Second, the facts and the law often change over time. For example, the lines of business in which the employer is engaged or the employee’s role in the company may differ from those that existed when the non-compete was first entered into. Similarly, as the Home Paramount decision proves, the law evolves. Therefore, employers should periodically review and consider updating their non-compete agreements.