The Fourth Circuit Court of Appeals has reversed the 2010 ruling of an Eastern District of Virginia District Court Judge in a non-competition case. In July 2010, Judge Leonie Brinkema granted summary judgment to a defendant who contended that the non-competition agreement contained in a restrictive covenant he had signed was unenforceable. Judge Brinkema’s decision in BP Products v. Stanley was reviewed in the September 2010 edition of this newsletter.
In 2005, BP Products North America, Incorporated (“BP”) decided to sell its Virginia, Maryland and District of Columbia station properties to Eastern Petroleum, one of its major fuel suppliers. The agreement was subject to an opportunity given to each retailer to match Eastern’s offer for the retailer’s station property. Charles V. Stanley Jr. matched the bid for his station and acquired the Alexandria, Virginia property where for years he’d operated an automotive repair shop and sold BP fuel under BP’s Amoco banner. The purchase and sale agreement by which he acquired the property included a special warranty deed containing restrictions on the property’s use, among them that Stanley would not sell non-BP fuel products and that he would enter into a supply agreement with Eastern.
The relationship did not go smoothly. By July 2008, Stanley had become so dissatisfied with Eastern’s prices that he stopped selling gas and in April 2009 accused Eastern of materially breaching their agreement by failing to offer fuel at commercially reasonable prices. When he received no response from BP, Stanley began selling AmeriGO fuel, a non-BP product. BP demanded that Stanley stop selling the non-conforming fuel and when he refused, BP sued him.
In granting Stanley’s 2010 motion for summary judgment, Judge Brinkema found that the restrictive covenant was unenforceable because it barred Stanley from offering for sale non-BP brand petroleum products that did not compete with BP. Because the restriction was beyond what was reasonably necessary to protect BP’s legitimate interests, she found it to be overbroad under the test enunciated by the Virginia Supreme Court in Omniplex World Services Corp. v. U.S. Investigations Services, Inc. in 2005.
On February 14, 2012, a panel of three judges of the Fourth Circuit held by a two to one vote that Brinkema had applied an incorrect test of enforceability and reversed and remanded the case for further proceedings.
The noncompetition provision at issue in Stanley was contained in a land use restriction in the Purchase and Sale Agreement by which Stanley acquired the station property. Nonetheless, Judge Brinkema had measured the enforceability of the covenant against the test used for noncompetition agreements contained in employment contracts. This, said the Fourth Circuit, was an error. Instead, the trial judge should have applied the more liberal test employed in an analysis of an arm’s length sales of assets transaction. The Fourth Circuit held that under that test, the provision was enforceable because it was “perhaps slightly broader than necessary to achieve its purpose [but] on the whole affords a fair protection to BP’s interests.”
The Virginia law on non-competition agreements contained in employment contracts continues to evolve through periodic opinions refining the law in this area. In support of their position, Stanley relied principally on Omniplex, a 2005 Supreme Court of Virginia decision. In support of their position, BP Products cited Merriman v. Cover, Drayton & Leonard, a case decided in 1905. The Fourth Circuit may or may not have properly interpreted Virginia law, but considering the volume of non-competition litigation in the Old Dominion, it may be time for the Virginia Supreme Court to take a new look at this old issue.