Modern Environments, Inc. v. Stinnett
561 S.E.2d 694, 18 I.E.R. Cas. (BNA) 914, 263 Va. 491 (2002)
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Rule of Law:
A covenant not to compete that prohibits a former employee from working in any capacity for a competitor is an over-broad and unenforceable restraint on trade unless the employer demonstrates a legitimate business interest that justifies such a sweeping prohibition.
Facts:
- Johnetta R. Stinnett worked as a salesperson for Modern Environments, Inc. (Modem), an office furniture company, from 1995 until the fall of 2000.
- In April 2000, Stinnett signed an employment agreement with Modem containing a non-compete clause.
- The clause prohibited Stinnett, for one year after her employment ended, from being employed by or associated 'in any manner' with a competing business within a 50-mile radius.
- After leaving Modem in the fall of 2000, Stinnett accepted employment with a competitor of Modem within one year.
- Modem sent a letter to Stinnett and her new employer asserting that her employment violated the non-compete clause and threatening legal action unless she terminated the new employment.
Procedural Posture:
- Johnetta R. Stinnett filed a declaratory judgment action in a trial court seeking a declaration that the non-compete provisions of her employment contract were unenforceable.
- Modem filed a demurrer and a cross-bill seeking an injunction against Stinnett's continued employment with its competitor.
- The trial court entered an order holding that the restrictive covenants in the agreement were 'over-broad and unenforceable as a matter of law.'
- The Supreme Court of Virginia awarded an appeal to Modem.
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Issue:
Does a covenant not to compete that prohibits a former employee from being employed in any capacity by a competing business constitute an unreasonable and unenforceable restraint on trade when the employer offers no evidence of a legitimate business interest justifying such a broad restriction?
Opinions:
Majority - Justice Lacy
Yes, a covenant not to compete that prohibits a former employee from being employed in any capacity by a competitor is an unreasonable and unenforceable restraint on trade without justification. The employer bears the burden to show that the restraint is no greater than necessary to protect a legitimate business interest, is not unduly harsh on the employee, and is reasonable under public policy. Modem argued that prior cases upheld similar language, but the court distinguished those cases, noting they were highly fact-specific and did not establish that such language was reasonable as a matter of law. In one key precedent, a similar clause was upheld only because another provision expressly permitted the employee to work in a non-competing role within the industry. Here, Modem failed to offer any argument or evidence of a legitimate business interest served by prohibiting Stinnett from being employed in any capacity by a competitor. In the absence of any justification for this broad restraint, Modem did not carry its burden of proving the covenant's reasonableness.
Analysis:
This decision reinforces the principle that non-compete agreements are strictly construed against the employer in Virginia. It clarifies that the functional scope of a restraint is as important as its temporal and geographic scope. The ruling establishes that a clause prohibiting employment 'in any capacity' is presumptively over-broad and will be struck down unless the employer provides specific evidence linking such a broad prohibition to a legitimate, protectable business interest. This holding makes it significantly more difficult for employers to enforce boilerplate non-compete agreements that are not narrowly tailored to the employee's specific role and the actual risks they pose to the former employer's business.
