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Fairfax Circuit Court Strikes Down Noncompete as Overbroad - Part 1
April 15, 2014
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NonCompetition Agreement Signing (00444031xAC2B5).jpgOn March 6, 2014, a Fairfax Circuit judge denied a preliminary injunction in a suit brought by Wings LLC to enforce a noncompete against two defector employees. In a letter opinion, Judge Bruce D. White said the noncompete was unenforceable because the geographical limits were overbroad. The ruling is not particularly unprecedented but offers another look into why noncompetes continue to get struck down and how to avoid it by examining the real business needs of an employer rather than imagined possibilities.

The Case

Founded in 1996 by John Kia, Wings LLC provides commercial and residential vinyl, fabric and leather repair services. Kia remains its sole owner. Technicians Jeffrey Manalansan and Cameron Fridey signed noncompetes when Kia hired them to work for Wings. The noncompete provided that the technicians could not, for 24 months after employment with Wings, directly solicit any customer that Wings serviced in the past 12 months prior to their departure. The noncompete also prohibited the technicians from accepting employment “in a position that is the same, or substantially the same” as their job with Wings with any business that had, within the past 12 months, provided “material, labor, or services” that competed with Wings. The restriction applied to “any U.S. state or foreign country in which the employer had conducted business during the 12 months prior to the employee’s departure.”

In late 2013, Manalansan and Fridey resigned from their positions at Wings. Kia then learned that Manalansan resigned from Wings to work for Kia’s son, who owned a competing company, and that Fridey was thinking of doing the same. Seeking an injunction against the former employees, Wings asserted that both Manalansan and Fridey violated their noncompete agreements. Wings asserted Manalansan was working as a technician for Capitol Leather, LLC, the competing business owned by Kia’s son, and Fridey was observed working at dealerships that were Wings customers.

Applying the usual four-factor test for injunctive relief, Judge White found the likelihood of winning on the merits was low because the agreements were unenforceable as geographically overbroad. White noted that, in the past 18 months, Wings served customers mainly in Northern Virginia, southern Maryland, and West Virginia. But the geographical scope of the noncompete was worldwide and Wings had no business interest beyond the local metropolitan area.

Even in the local area, Judge White found the restriction too broad. Although Wings’ customer market was limited to certain regions, the technicians nevertheless “would be prohibited from working as technicians for two years throughout the entire states of Virginia, Maryland and West Virginia and possibly in Washington D.C.” While a two year restriction might have been reasonable on its own, White added that, combined with such a broad geographical range, the noncompete simply became untenable. “As with geographic restriction, Plaintiff put forward no evidence as to why a restriction that lasts for two years was narrowly tailored to meet a legitimate business interest.”

The Takeaway – Tailor Restrictive Covenants to Meet Actual Needs, Not Potential Future Goals

Judge White’s decision underscores the importance of good drafting. But it also raises another point about when to use a noncompete and when other tools such as a non-solicitation and confidentiality agreement would better serve an employer’s business goals. Wings’ noncompete clearly suffered from overbreadth. Its geographical scope was worldwide but Wings did not conduct business beyond the Washington D.C. metropolitan area and part of West Virginia. Worse, it only conducted business in certain regions of Virginia, Maryland and West Virginia. This might not have doomed Wings’ noncompete if the duration was 6 months or possibly a year, and it would have taken on new life if the noncompete period was paid. But the restriction spanned the United States and any foreign country for a full two years without qualification. Regardless of time limits, the idea that Manalansan or Fridey could not accept a technician’s job in, say, Great Britain was indefensible. Judge White had no choice but to strike it down.

Such an outcome was not unexpected. A worldwide geographical range is not per se unenforceable, but it must be based on legitimate business interests and, traditionally, the remaining restrictions (duration, function) must be very narrowly tailored. Wings’ noncompete was missing all of these components, so it was destined to fail.

Also, Wings did not draft the noncompete to correspond to its actual needs. Wings needed to protect its customer base from being pilfered by Kia’s son’s business. A realistic examination of the actual span of Wings’ customer base would have led to a more narrow geographic range. Instead, like many employers, Wings imagined potential future competition in places the company had not yet conducted business. This view is simply too speculative for a noncompete to be enforceable. For example, Wings had no existing business in foreign countries and there was no indication it was forthcoming. To include foreign countries in the range of competition is merely prospective. Noncompetes aren’t intended to foretell the future of the competitive market—they can only protect against unfair competition in the present. Thus, noncompetes are most effective when the restrictions are limited to locations where business is currently being conducted and existing customers are located. Employers should approach the element of geographical range with the present in mind.

Part 2 of this post will focus on the purpose of non-competes and when other agreements might be better options in a case such as this.