Comprehensive Technologies International, Inc. v. Software Artisans, Inc.
3 F.3d 730 (1993)
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Rule of Law:
Under Virginia law, a covenant not to compete with a nationwide geographic scope is enforceable if it is narrowly tailored to protect the employer's legitimate business interests, is not unduly harsh in restricting the employee's ability to earn a living, and is reasonable from a public policy standpoint.
Facts:
- Comprehensive Technologies International, Inc. (CTI), a defense contractor, established a Software Products Group led by Dean Hawkes to develop and market Electronic Data Interchange (EDI) software.
- The group developed two PC-based software packages: 'Claims Express,' an electronic medical billing system, and 'EDI Link,' a generic forms program.
- Hawkes's employment agreement contained confidentiality and non-compete provisions. Other defendant employees signed standard confidentiality agreements.
- In February 1991, Hawkes and the other key members of the Software Products Group all resigned from CTI.
- Upon his departure, Hawkes signed a Termination Agreement, receiving over $70,000 in exchange for agreeing to a new one-year covenant not to compete with CTI's business 'within the United States.'
- The agreement specifically defined CTI's business as the design, development, marketing, and sales of 'CLAIMS EXPRESS and EDI LINK type PC-based software with the same functionality and methodology.'
- In April 1991, Hawkes and the other former CTI employees incorporated a new company, Software Artisans, Inc. (SA).
- By July 1991, SA began marketing its own EDI software program called 'Transend,' which had similar functionality to CTI's products.
Procedural Posture:
- Comprehensive Technologies International, Inc. (CTI) filed a lawsuit in the United States District Court against its former employees and their new company, Software Artisans, Inc. (SA).
- The complaint alleged copyright infringement, trade secret misappropriation, and breach of Dean Hawkes's covenant not to compete, among other state law claims.
- Following a bench trial, the district court entered a judgment in favor of the Defendants on all counts.
- The district court specifically held that Hawkes's covenant not to compete was unreasonable and therefore unenforceable.
- CTI, as the appellant, appealed the district court's judgment to the United States Court of Appeals for the Fourth Circuit.
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Issue:
Is a one-year covenant not to compete that restricts a former executive from engaging in a narrowly defined software business 'within the United States' enforceable under Virginia law when the employer markets its products on a national scale?
Opinions:
Majority - Williams, Circuit Judge
Yes, the covenant not to compete is enforceable. The court applied Virginia's three-part test for reasonableness and found the covenant met all criteria. First, the restraint was no greater than necessary to protect CTI's legitimate business interests; the nationwide geographic scope was justified because CTI had a national market with customers and resellers across the country, and the functional scope (restricting employment in any capacity with a competitor) was reasonable because Hawkes's access to confidential information made him a 'formidable competitor.' Second, the restraint was not unduly harsh on Hawkes because it was narrowly limited to a specific type of software, leaving him broad opportunities for other employment. Third, the covenant was not contrary to public policy.
Concurring-in-part-and-dissenting-in-part - Murnaghan, Circuit Judge
No, the covenant not to compete is not enforceable. While concurring with the judgment on the copyright and trade secret claims, the dissent argues the covenant is geographically overbroad and therefore invalid under Virginia law. Virginia courts strictly construe such covenants against the employer and have never approved a restriction covering the entire United States. The dissent contends that because CTI's business did not extend to all 50 states, a nationwide ban is greater than necessary to protect its interests. The proper course would have been to defer to the district judge's familiarity with Virginia law or certify the question to the Supreme Court of Virginia.
Analysis:
This decision is significant for its application of traditional non-compete principles to a modern business with a national, but not necessarily ubiquitous, market. It establishes that a nationwide geographic restriction can be deemed reasonable under Virginia law if the employer's business interests are genuinely national and the restriction on the employee's activities is very narrowly defined. The ruling provides a key precedent for technology and other companies whose market is not tied to a specific physical location, suggesting that courts may be willing to enforce broader geographic scopes if they are counterbalanced by narrow functional limitations. The dissent's strong objection highlights the tension between this modern approach and Virginia's historical hostility toward broad restraints on trade.
