The recent Supreme Court decision in Home Paramount Pest Control v. Shaffer brings home, in stark fashion, why prudent companies should not rely on possibly-obsolete language in existing contracts with key employees and executives. While properly drafted agreements can restrict post-employment competition by key employees, the Virginia Supreme Court’s decisions exhibit a continuing reluctance to give employers any latitude in enforcing overly-broad covenants not to compete. Home Paramount gives us an extreme case why employers should rely only on language crafted with the most recent decisions in mind.
In 1989, Home Paramount’s predecessor corporation found itself in the same situation: a valued employee had left the company and, in apparent violation of his written agreement, proceeded to compete with his former employer. That case made it all the way to the Virginia Supreme Court as well, and the Court upheld the covenant as reasonable, narrowly-tailored, and enforceable. This next time around, Home Paramount tried to enforce an agreement that was word-for-word identical to the agreement the Virginia Supreme Court held was enforceable in 1989. However, the Court – citing some of its intervening decisions disapproving covenants over the past decade – held that the same language that was enforceable in 1989 was not enforceable in 2011. What’s more, the Court held that the contract was unenforceable “on its face,” regardless of the facts surrounding the violation.
What does this mean for employers? More than anything else, the Home Paramount decision signals the need for periodic review, and perhaps modification, of existing non-competition agreements. What was enforceable a few years ago may not be enforceable now, and the time to find out about the problem and fix it is before, not after, a key employee sets up a competing business next door. As a matter of good human resources practice, we recommend a thorough review of any non-competition agreements drafted more than five years ago, with periodic review of all such agreements perhaps every five years. That way, the Home Paramount Pest Control decision will not end up, er, “bugging” you. –David J. Sullivan