Virginia Business Law Blog

In FBR Capital Markets & Co. v. Short, the plaintiff sought a temporary restraining order (“TRO”) against its former employee (Ms. Short) to stop her from working for a competitor, alleging that her doing so violated her non-compete agreement and left FBR at risk of losing clients and income to her new company.  The U.S. District Court for the Eastern District of Virginia applied the U.S. Supreme Court’s standard in Winter v. Natural Resources Defense Council, Inc., 129 S. Ct. 365 (2008), to FBR’s TRO request (see more about the Winter test here), and denied the request for the TRO.  In particular, FBR failed to make an “actual showing that they have lost or that there is even a significant chance that they are going to lose either customers or income.”  Thus, the harm was not “actual” and “immediate.”  Judge Liam O’Grady also was unconvinced that the harm would be “irreparable,” which typically means the kind of harm that money damages cannot compensate or cannot be accurately calculated. 

This opinion is perhaps an initial indication that courts in Virginia have become less willing to entertain preliminary injunctions as a result of the Winter test.  But more important, this case makes it clear that if a plaintiff wants to stop a former employee from working for a competitor, that plaintiff must show actual lost clients and/or business before the courts will step in to grant an injunction at the outset of litigation.

An article in this week’s Virginia Lawyers Weekly examines the ruling in Lasership, Inc. v. Watson, in which Fairfax Circuit Court Judge Robert J. Smith sustained the demurrer of an employee sued by his former employer for violating his covenant not to compete, on the basis that the covenant was overbroad and unenforceable.  Here’s what the employer got wrong:

1. The provision barred the employee from providing not only the services he rendered to the company to a competitor, but also services rendered by any “officer or unit of the Company in which Employee worked.”  This violates the so-called “Janitor Rule” which deems any noncompete overbroad if it prohibits the employee from even serving as a janitor for a competitor.
2. The nonsolicitation clause prevented the employee from contacting any customer of the employer for any reason whatsoever, which was deemed an “unreasonable burden.”  The contact should have been limited to actual solicitation for the same services that the employer provided.
3. The confidentiality clause prevented the employee from saying anything about the employer’s business for the rest of his life.  Only truly proprietary information can be kept confidential permanently.
4. The provision included a clause allowing the Court the power to modify any provision deemed unenforceable; however, as is the custom in Virginia, the Circuit Court declined to accept this responsibility, and simply struck down the whole thing.

The opinion provides good pointers for employers seeking to craft enforceable noncompete provisions, although it’s obviously a little too late for Lasership, Inc.

Your worst fear has been realized: a former employee with access to your trade secrets or confidential client information has joined a competitor, or has started a new firm in direct competition with yours.  What can you do to protect your business from this threat?  If you act swiftly, with the assistance of legal counsel, there are a host of legal remedies available that may immediately stop the former employee from continuing to harm your business, recover monies lost due to unfair competition, and even sanction the competitor that hired your former employee.  Which remedies are available to you will depend on the factual circumstances of each case and the terms of your covenant not to compete.

Perhaps the most crucial concern for any employer in this situation is to move quickly to address the problem.  Failure to enforce your rights in a timely fashion can render your claims time-barred under the applicable statutes of limitation.  Failing to act expediently also lends credence to the defense that you have failed to mitigate your damages.  In other words, the longer you wait to act, the more you exacerbate your own damages and make it harder to recover.

An enforceable covenant not to compete affords the greatest access to legal remedies.  Without such a covenant, the options are much more limited.  Read more about those remedies after the jump.

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In Bank of America Investment Servs., Inc. v. Byrd, et al., the U.S. District Court for the Eastern District of Virginia declined to issue preliminary injunctions on behalf of Bank of America against two former employees, now working at Wells Fargo Advisors, who were alleged to have violated the terms of their non-solicitation agreement with Bank of America.  Bank of America sought to rely on affidavits instead of live testimony to support its request for the injunctions — affidavits largely conveying statements made by third parties, which are “double hearsay” under evidentiary rules and thus of even less evidentiary weight than typical hearsay.  Judge Mark S. Davis not only found these affidavits to be insufficient — thus underlining the importance of live testimony to obtain a preliminary injunction — but also questioned whether the underlying non-solicitation clauses were enforceable, thus indicating that Bank of America was not necessarily likely to win on the merits.  More on the non-solicitation agreement after the jump.

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