Enforcing Non-Compete and Non-Solicitation Provisions in Virginia: Three Recent Takeaways From a Virginia Trial Court

The Court deemed the covenants facially invalid, and further determined that they violated public policy by attempting to “hoard” employees and use the covenants for “monopolistic” purposes. In reaching these decisions, the Court shed a good deal of light on (1) the evolving procedural and evidentiary requirements for an early determination of enforceability in Virginia; (2) the current permissible scope of restrictive covenants in Virginia; and (3) a potentially expanded view of the public policy considerations regarding enforceability.

This ruling provides important direction for employers, whether they are seeking to implement, enforce or invalidate non-compete agreements in the Commonwealth.

Background of the Recent Circuit Court Case

The Metis Group (Metis) sued two former independent contractors and the company with whom they were newly affiliated, Preting LLC (Preting).[1]  The former contractors were doctors who had performed psychological services for the United States Army on a task order for Metis under a Blanket Purchase Agreement issued by the United States Government (BPA). The contractors each signed Independent Contractor Agreements with Metis that contained restrictive covenants (the Agreements). The covenants prohibited them from engaging in any professional services with the United States Army anywhere in the world and for any purpose, as well as from soliciting Metis employees or contractors.

Specifically, as to the non-compete, the doctors agreed not to “directly or indirectly, solicit, attempt to solicit, engage, contact, provide any professional psychological services for Client [defined as the United States Army].” [2]

Specifically, as to the employee non-solicit provision, the doctors agreed not to:

(i) induce … any employee or contractor to terminate any employment or any contractual relationship with Metis and/or any Client; (ii) interfere with … Metis’ and/or any Client’s relationship with any other Metis and /or client employee or contractor; (iii) solicit, … employ or engage any employee or contractor employed or engaged by Metis and/or any Client with whom Metis and/or Client has a contractual relationship: or (iv) advise or recommend to a third party that it employ, … engage, or solicit for employment or independent contractor relationship, any person employed or engaged as an independent contractor by Metis and/or its Clients.[3]

The restrictive period for the employee non-solicitation provision is 24 months following the termination of the Agreement; the restrictive period for the non-compete is the term of the Agreements. The applicable task order ran for one year and was not renewed; the Agreements were never terminated.

After the conclusion of the Metis task order, the contractors provided services to the US Army under the same BPA – only this time for Preting.

The lawsuit filed by Metis asserts breach of contract claims against the contractors for violating the restrictive covenants; and tortious interference of contract claims against Preting for interfering with the restrictive covenants. In response, defendants filed a plea in bar attacking the enforceability of the restrictive covenants. Metis did not seek a TRO or Preliminary Injunction. The Court granted the plea in bar and dismissed all claims, due to its determination that the covenants were unenforceable as a matter of law.

Takeaway 1 – Litigating the Enforceability of Restrictive Covenants at the Early Stage

Two mechanisms exist in Virginia state courts for the dismissal of claims at the outset of a case[4] – demurrer, and plea in bar.  A demurrer is the functional equivalent of a motion to dismiss in federal court and other state court jurisdictions. It permits the dismissal of a claim as a matter of law where even if the facts plead are presumed to be true they are insufficient to support a claim.  For breach of contract cases, a demurrer is appropriate for instance where the party bringing the action fails to allege a valid, or enforceable, contract. A plea in bar permits dismissal of a claim if the party defending against the action asserts that a single issue if proven, bars recovery. Pleas in bar, for instance, are often used to prove that a claim is outside the statute of limitations. Demurrers are decided on the face of the complaint, and there can be no consideration of facts that were not asserted in the complaint; in contrast, pleas in bar permit evidentiary hearings on the facts underlying the single issue and may even permit contested facts to be heard by a jury.

In Virginia demurrers had been routinely used to determine the enforceability of restrictive covenants – this changed with the Virginia Supreme Court’s decision in Assurance Data, Inc. v. Malyevac.[5] In Assurance Data, the Virginia Supreme Court reversed the trial court’s dismissal of a non-compete claim on demurrer. There, the Virginia Supreme Court reiterated the principal that a demurrer does not allow the court to decide the merits of a claim, but rather only if a claim has been stated. Drawing on prior opinions, the Court further stated that each non-compete case “must be determined on its own facts,” that enforceability cannot be determined “in a factual vacuum,” and that the employer ought to have had the opportunity to present evidence as to enforceability. Assurance Data left open the question of whether non-compete claims could, going forward, be dismissed at the earliest stage of litigation.

Enter the plea in bar, which emerged as the post Assurance Data means of dismissing non-compete claims on early motion.[6] Recognizing that some “confusion” exists regarding who bears the burden of proof when the enforceability of a restrictive covenant is challenged on plea in bar, the trial court in Metis expanded on the framework from Assurance Data and held that both parties have a burden of proof – and which party has the burden of proof depends on which is in the better position to produce evidence on each of the enforceability factors.[7] 

Toward that end, the Court held that the employer is in a better position to produce evidence of factor one – that the restraint is no greater than necessary to protect its legitimate business interests and therefore has the burden of proof in that regard. As to the second factor, whether the restraint was unduly harsh or oppressive in obstructing an employee’s efforts to earn a livelihood, the Court held that the employee has the burden of proof. The last factor, whether the restraint violated public policy, is to be proven by both parties.

In the Metis case, as to the first factor, the Court found the scope of the non-compete to be too broad and therefore unenforceable because it prevents the contractors from “engaging in any professional services with the United State[s] Army anywhere in the world and for any purpose, whether or not such purposes compete with The Metis Group’s business model.”[8] Additionally, the Court found the non-solicitation of employee provision to be overbroad in that it restricted employees and independent contractors from pursuing opportunities unrelated to Metis’ business needs, and that coupled with the non-compete the contract sought to “hoard the services of the defendants.”[9] In finding the restrictive covenants unenforceable, Metis confirmed that Virginia courts will not rewrite contracts, as there is “no authority for courts to ‘blue pencil or otherwise rewrite the contract’ to eliminate any illegal overbreadth.”[10]

Takeaway 2 – Limiting the Scope of Enforceable Employee Non-Solicitation Provisions

Historically, the focus on whether a non-solicitation of employees provision is enforceable rests on whether the employee has a nexus to or material knowledge of the skills of the employees he or she is prohibited from recruiting. However, in Metis, the Court goes beyond this and focused on whether or not the employee non-solicitation provision was related to Metis’ business needs and limited to those who would be solicited to engage in competing services. Because the provision was not confined to providing competitive services, the Court regarded it as a mechanism to “hoard” the doctors’ services without regard to whether that disruption came from a competitor; and the fact that the disruption did, in fact, come from a competitor does not render the restriction enforceable. This is, arguably, a new limitation in Virginia with respect to non-solicitation of employee provisions.

Takeaway 3 – Expanding the Scope of the Public Policy Factor

Notably, the Court placed great emphasis on the third enforceability factor – public policy – which is often discussed as a secondary consideration if at all and generally limited to balancing the employer’s need to protect their legitimate business interests against the employee’s interest in maintaining a livelihood. In doing so, the Court held that the Metis restrictive covenants violated public policy because “they are designed to perpetuate a monopoly.”[11] Declaring restrictive covenants unenforceable in Virginia on the basis of monopolistic behavior is unprecedented.

In reaching this conclusion, the Court stated that it is “almost unconscionable” to prohibit a person from seeking employment where the employer did not have work for the contractor and did not offer to subsidize the contractor’s livelihood. In addition, the Court noted that “[t]he purpose of the restrictive covenants was to ensure that for so long as the Army thought the services were valuable that The Metis Group [would be] the only contractor able to provide such services.”[12]  In conclusion, the Court stated that while every company would “happily enjoy the economic benefit of being a sole source contractor… An interest in having monopolistic control over possible profits is not a factor that supports a restrictive covenant.”[13]

Bottom Line

The Metis decision is instructive in three key ways.

1. Employers enforcing restrictive covenants have an opportunity (and obligation) to factually establish that the contested restrictions are no broader than necessary to protect their legitimate business interests; and that defendants seeking to invalidate the covenants and dismiss the claims early in the litigation are advised to do so through plea in bar. In addition, the allocation of the burden of proof at the plea in bar stage makes it more likely that restrictive covenants will be robustly litigated in an evidentiary hearing prior to trial.

2. Employers drafting and seeking to enforce non-solicitation of employee covenants in Virginia should consider limiting the restriction on recruitment to performance of competitive services, in addition to limiting the restricted employees to those with whom the person works or about whom they have material knowledge.

3. Employers should be aware that, post- Metis, courts may now focus more significantly and more broadly on the public policy prong of enforceability. For instance, in addition to monopolistic behavior being the subject of public policy analysis, defendants might assert other public policy bases to claim unenforceability – such as pay equity or #MeToo.

As a result, employers should review the scope of their restrictive covenants agreements to ensure they are narrowly tailored to protect an articulable business interest and reflect the employer’s actual and legitimate competitive concerns. 

In short, the Metis decision is consistent with the national trend toward more limited enforcement of restrictive covenants. View the FTC Alert here. Restrictive covenants will be enforced, however, with careful and considered drafting; and proper evidentiary support for their scope.

[1] See The Metis Group, Inc. v. Allison, et al., No. CL 2019-10757, 2020 WL 201152, at *1 (Va. Cir. Ct. Jan. 08, 2020).

[2] Id. at *1.

[3] Id. at *2.

[4] Many non-compete cases are litigated in state court, rather than federal, because there often is no jurisdictional diversity between or among the parties and there is no federal claim at issue.  The relatively recent enactment of the federal Defend Trade Secrets Act (DTSA) statute, however, generally permits federal filing of these claims where there is related misappropriation of trade secrets.

[5] 286 Va. 137 (2013).

[6] It is worth noting that evidence beyond the facts in the complaint may be presented at preliminary injunction hearings, as the employer has the burden of proving they are likely to prevail on the issue of enforceability in order to obtain that emergency relief. It is also worth noting that the trial judge in Metis recognized that there remain instances in which the court could determine, on demurrer and on the face of the contract, whether the covenants are enforceable. See The Metis Group, Inc., 2020 WL 201152, at *8 n.3; see also Reading & Language Learning Ctr. v. Sturgill, 94 Va. Cir. 94, at *9 (2016).

[7] The Court confirmed the three factors for enforceability stating that the restriction must (1) be narrowly drawn to protect the employer’s legitimate business interest; (2) not unduly burden the employee’s ability to earn a livelihood, and (3) not violate public policy. In considering factor one, the Court also considers the following elements: function, geographic scope, and duration of the restrictive covenants.

[8] The Metis Group, Inc., 2020 WL 201152, at *4.

[9] Id. at *5.

[10] Lanmark Tech., Inc. v. Canales, 454 F. Supp.2d 524, 529 (E.D. Va. 2006).

[11] The Metis Group, Inc., 2020 WL 201152, at *5.

[12] Id. at *6.

[13] Id.