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Non-Competition Agreements and Independent Contractors

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James Irving
BKK Business Law Newsletter
September 2011

In Virginia, the extent to which a contracting party may bind an independent contractor to a post-contract non-competition arrangement remains uncertain. The presumption against the enforceability of non-competition agreements generally is a matter of public policy in Virginia. Since independent contractors ("ICs") offer their services broadly throughout a given industry, one might plausibly argue that a non-competition agreement can never be employed to restrict an IC's post-contract endeavors; however, Virginia courts have recognized a party's legitimate interest in protecting the direct business relationships to which a party introduces its independent contractors.

In 1992, the Circuit Court of the City of Fredericksburg issued an opinion enforcing a principal-independent contractor non-competition agreement, but did so by finessing the policy argument. In the case of Crawley v. Cox, Cox, the independent contractor, argued [according to Judge William Ledbetter] that "the covenant is not enforceable because it is not ancillary to an employment agreement." Judge Ledbetter reviewed this argument as if it addressed not a fatal insufficiency in the relationship between the parties, but a defect in the type of document in which the non-compete was delivered, ruling that "Non-competition covenants do not have to be incident to employment contracts. Such covenants are found in other lawful contracts such as partnership agreements, shareholders' agreements, buy-sell contracts and service contracts." In enforcing the clause, Judge Ledbetter neatly avoided the question of whether a non-competition restriction was appropriate to the principal-independent contractor relationship.

Judge Ledbetter was likely persuaded by the equities involved. Cox, a young dentist who got his professional start in Crawley's Fredericksburg practice, admitted signing an independent contractor agreement with Crawley that contained a two year, post-contract non-competition clause. Not long after completing his contractual term, Cox bought a competing practice in Fredericksburg and entered into direct competition for Crawley's patients.

Similarly, in June of 2011, a Fairfax Circuit Court judge agreed to enforce a non-compete against an independent contractor without addressing the merits of the fundamental defense.

In Preferred Systems Solutions, Inc. ("PSS") v. GP Consulting, LLC, Judge Terrence Ney enforced a non-competition agreement between a government contractor and its independent subcontractor ("GP") after GP terminated the agreement and almost immediately began providing the same services to Accenture, one of the two competitors of PSS that the non-compete specifically identified and barred from competition.

Judge Ney went to great pains to establish the equities of Plaintiffs' claim: (1) that the non-compete was narrowly drawn; (2) that it only prohibited competition with two named entities; (3) that the period of restriction was only one year; (4) that it was specific as to the type of work prohibited; and (5) that there was no undue burden or restraint placed of GP. But perhaps what really mattered was that, as in the Crawley case, GP's actions didn't pass the smell test.

This is not to say that jurists like Judge Ledbetter and Judge Ney ignore the law when their sense of fair play is offended; only that the unsettled state of the law on this issue allows room for a circuit judge to rule based on equity. Certainly it seems just and reasonable that contracting parties such as Crawley and PSS should be able to protect their direct, vertical professional relationships from poaching by former contractors. What's not clear is how broad such a restriction can be, or what the Supreme Court of Virginia might do if forced to decide the issue. However, no matter how flagrant the former IC's competition, it seems unlikely that a Virginia court would allow a restriction on competition with the principal's indirect connections. To do so would unreasonably burden the IC by depriving him of legitimate business opportunities.