A Virginia federal district court judge recently held that a noncompetition agreement included in a settlement agreement may be subject to a more liberal standard of reasonableness than a typical noncompete which might be found in an employment agreement. InMcClain & Co. v. Carucci, 2011 U.S. Dist. LEXIS 48404 (W.D. Va. 2011), Judge Norman K. Moon, of the United States District Court for the Western District of Virginia, denied a former employee’s motion to dismiss and found a noncompetition agreement included as part of a settlement agreement to be reasonable.
The former employee in this case was accused of misappropriating $285,000 from his former employer. In order to settle this claim, the former employee agreed to pay back $250,000 to the employer and agreed to a 30 month noncompete barring him from performing any competing services in his former sales territory, as well as from owning any business that provides services which compete with the employer.
After his departure, the employee allegedly worked with his grandfather in order to establish a competing business. The employer filed a suit against the employee seeking to enforce the 30 month noncompete. The employee filed a motion to dismiss claiming that the noncompete he signed did not contain reasonable restrictions and was unenforceable as a matter of Virginia law. Judge Moon declined to apply the “more restrictive standard designed to review covenants contained in employment contracts.” Id.at 16. Instead, the Court found that this “was not a ‘take it or leave it’ situation in which an employee must agree to a noncompete covenant in order to secure a job.” Id. at 17. Instead, the Court held that “bargaining power was more equally distributed, with Carucci [employee] allegedly in possession of over $250,000 in company funds, and McClain [employer] entitled to sue Carucci for their recovery or seek other legal remedies.” Id. Also, since the Court held that the noncompete in this case was part of an “agreement settling a private dispute, which, as a highly favored agreement in the law, should not be subjected to undue limitations on its enforceability.” Id.
This case contains many lessons for Virginia employers. Employers likely have greater latitude in crafting a broader noncompete if the covenant is included as part of settlement agreement signed by an employee accused of wrongdoing. Employers may be well served to include noncompete provisions in settlement agreements in order to provide a remedy in the event a former employee uses knowledge or property wrongfully gained during his employment to the disadvantage of their former employer. Also, this case demonstrates the flexible “reasonableness” standard applied by courts in Virginia and the ability of this standard to adapt to the particular circumstances of a given case.