3.5 PRACTICAL CONSIDERATIONS IN LITIGATING NONCOMPETE AGREEMENTS
3.501 Injunctions and Temporary Restraining Orders. Often employers seek to enforce noncompetition covenants through the use of injunctive relief.
A. Cases Granting Injunctive Relief.
1. East Coast Fire Protection, Inc. v. Muhammad. 408 In this case, the court denied the former employee's request to stay a previously granted injunction and his request for expedited discovery. Based on the limited record, the court concluded that (i) the plaintiff had a "probable right" to injunctive relief under the terms of the parties agreement, (ii) the defendant had not made a showing of irreparable harm if the stay was denied, (iii) preservation of the status quo was necessary to prevent substantial harm to the plaintiff's
[Page 254]
business, and (iv) the defendant had not carried his burden to show that the public interest would be served by the stay.
2. STaSIS, Inc. v. Schurtz. 409 The court issued a temporary restraining order enjoining the defendants from using any of STaSIS's confidential information and from "advertising, marketing, selling, or offering for sale any product designed, engineered, or manufactured by means of information taken by defendants from STaSIS." 410 STaSIS's evidence in support of the temporary restraining order included (i) a former STaSIS employee had removed confidential STaSIS information from a laptop; (ii) the former employee and another STaSIS employee had become employed by a company that had not previously been in the same business as STaSIS; (iii) the new company announced its entry into the same business market as STaSIS within a short time after the hiring of the former STaSIS employees; and (iv) and the new company posted a webpage announcing a product almost identical to the STaSIS product.
B. Cases Denying Injunctive Relief.
1. Preferred Systems Solutions, Inc. v. GP Consulting, LLC. 411 The Virginia Supreme Court affirmed the trial court's decision to deny the plaintiff's request for an injunction on the ground that the plaintiff failed to demonstrate it lacked an adequate remedy at law.
2. Deltek, Inc. v. Iuvo Systems, Inc. 412 In this case, the court declined to grant Deltek's motion for an injunction barring the defendants from using its confidential information and trade secrets because Deltek had failed to show actual and imminent harm, given that it had not presented evidence that the defendants had acquired or were using its confidential information or trade secrets. The court further reasoned that such an injunction was unnecessary because certain allegedly confidential information (i) was publicly available on Deltek's website; (ii) could be obtained by attending a Deltek conference; (iii) was published in Deltek manuals, which were available to Deltek business partners and conference attendees; and (iv) could be obtain by asking Deltek customers for the information. The court also refused to grant Deltek's motion for an injunction that would prohibit the defendants from soliciting Deltek's customers.
[Page 255]
3. Bank of America Investment Services, Inc. v. Byrd. 413 The court declined to grant Bank of America's motion for injunction because it had failed to show that it would be irreparably harmed if the motion for preliminary injunction was denied or that the balance of the hardships tipped in its favor. In so holding, the court reasoned that (i) Bank of America had relied primarily on affidavits, which were rebutted by the defendants' affidavits; (ii) the Bank of America customer affidavit was questionable given her relationship to a Bank of America branch manager and Bank of America's failure to call her as a witness; (iii) Bank of America had not shown loss of goodwill or damage to its reputation; (iv) Bank of America had failed to prove it lost any customers or that the defendants had taken any proprietary information; and (v) that money damages would be an adequate remedy.
4. FBR Capital Markets & Co. v. Short. 414 The court denied FBR's motion for a temporary restraining order for three reasons: (i) FBR failed to demonstrate that it had suffered any harm as a result of the defendant's departure from FBR; (ii) FBR failed to show that it could not be made whole through monetary damages; and (iii) FBR's failure to replace the defendant with another employee as of the date of the hearing.
5. ForceX, Inc. v. Technology Fusion, LLC. 415 The court denied the plaintiff's motion for expedited discovery, reasoning that the plaintiff was not likely to succeed on its breach of restrictive covenant claim because the geographic scope of the restrictive covenant at issue was too broad under either New York or Virginia law. The territory covered by the restrictive covenant included: "(i) all counties in the State of New York, (ii) all other states of the United States of America and (iii) all other countries of the world; provided that, with respect to clauses (ii) and (iii), the Company derives at least five percent (5%) of its gross revenues from such geographic area prior to the date of termination of my relationship with the Company." 416
3.502 Availability of Declaratory Relief. Virginia's Declaratory Judgment Act 417 permits circuit courts to make binding adjudications of right in a case or controversy, even if additional relief is not available and the judgment thus serves only as a declaration of right of the prevailing party. The statute specifically permits adjudication of controversies involving the interpretation of
[Page 256]
"instruments of writing," which has been interpreted to include covenants not to compete. 418
Despite the broad language of the statute, for the Declaratory Judgment Act to apply, a dispute must involve a justiciable case or controversy. In Graves v. Ciraden, Inc., 419 the court found that a justiciable case existed where a dentist signed a noncompete agreement with a dental management company that prohibited him from working within six miles of its dental offices for 20 years after signing the agreement. The agreement further contained a liquidated damages clause requiring the dentist to pay $200,000 to the dental management company within 12 months of any breach of the agreement. The court held that an actual controversy existed because the dentist intended to compete within the restricted area and claimed that the noncompete provision was overbroad, and the dental management service represented that it intended to enforce the agreement if breached. The court held that the dentist should not be required to breach the agreement and face potential liability for $200,000 in damages to obtain the requested declaratory relief.
In Meissel v. Finley, 420 a partner in an insurance agency filed for declaratory relief to obtain an adjudication as to whether a restrictive covenant in a limited partnership agreement, which prohibited the limited partner from working within fifty miles of agency for five years after leaving the agency, was enforceable. The circuit court rejected the plaintiff's bill of complaint and, on cross motion, entered an injunction for the insurance agency, which the Supreme Court upheld.
3.503 Responding to a Noncompetition Claim with a Demurrer. Since the covenant was invalidated in Motion Control Systems, Inc. v. East, 421 counsel for former employees have sought to defeat noncompetes at the onset of the case by filing a demurrer to the complaint. 422 However, in 2013, the Virginia Supreme Court weighed in heavily against the use of demurrers to weigh the sufficiency and enforceability of restrictive covenants.
[Page 257]
In Assurance Data, Inc. v. Malyevac, 423 Malyevac entered into an agreement with Assurance Data, Inc. ("ADI") to sell ADI's products and services. The agreement provided, among other things, the following restrictive covenants:
| 1. | [Malyevac] shall not, during the term of this Agreement and for 6 months after the termination hereof (within a fifty (50) mile radius of [ADI's] Virginia office(s)), solicit, provide, promote or sell, directly or indirectly, except through and for the direct benefit of [ADI]: (a) computer, software or hardware products in competition with the products which are available through [ADI]; (b) services for customers or prospective customers that are competitive with services provided by or available through [ADI]; or (c) training, managed services, installation, implementation or related professional services for software and/or hardware which are provided by [ADI], except as pre-approved in writing by [ADI]. 424 | |
| 2. | [Malyevac shall not] [e]xcept for the sole benefit of [ADI] and consistent with the terms hereof, during the term hereof, and for a period of twelve (12) after the date of termination hereof, [he] will not, directly or indirectly, seek, engage in or solicit, from any "Company Customer" (as hereafter defined) any business which is competitive with [ADI's] offering of services or products or in any way discourage client or customer usage of [ADI's] services or products. A "Company Customer" shall mean any past, present or prospective customers of [ADI] or its subsidiaries, with whom [Malyevac] has been in contact or obtained contact/user information in connection with his/her consulting activities for [ADI] or its vendors. 425 |
In addition to the above covenants, the agreement precluded the misuse of confidential information and required that Malyevac turn over all confidential information of his employer. After Malyevac's resignation, ADI filed suit alleging violation of the aforementioned restrictive covenants and seeking injunctive relief.
[Page 258]
Malyevac demurred, arguing that the restrictive covenants were overbroad and unenforceable. For...
