"So-What" Defense Prevails: Virginia Contractor's Agency-Wide Non-Compete is Unenforce
Competition in the government contracting marketplace is fierce. One need only attend an industry day event or scroll through LinkedIn to catch a glimpse into just how many contractors are vying for or winning contracts or spots on coveted multiple award ID/IQ vehicles. To be successful, it is often said that contractors must have not only the "right stuff" but also the "right people."
Given that your staffing approach can play such a critical role in winning contracts, it's no surprise when contractors want to prevent their employees and independent contractors from working with the competition. Enter: non-compete and non-solicitation clauses (agreements). When properly drafted, restrictive covenants can offer significant protections for your business interests. On the other hand, when the restrictions are too broad, a court might determine that they are unenforceable.
Unfortunately, that is exactly what happened in a recent case in Virginia, where a Fairfax court ruled that a contractor's non-compete and non-solicitation covenants were unenforceable because they were overly broad and violated public policy. The Metis Group, Inc. v. Stephanie P. Allison, et. al., Case No. CL 2019-10757 (Va. Cir. January 8, 2020). [1]
Notably, while Virginia courts do not "blue pencil" (modify) unenforceable restrictive covenants, the opinion is also instructive as it provides insight into what the Court would have done if it had the opportunity to do so.
Brief Background
Metis was one of multiple contractors on a U.S. Army ("Army") blanket purchase agreement ("BPA") for psychological and related services.
Metis hired two consultants (doctors) to work as independent contractors under an Independent Contractor Agreement containing 1) a non-compete covenant, and 2) a non-solicitation of employees and independent contractors covenant (the "Agreement"). [2]
The non-compete provision generally provided that the consultant was not allowed to provide "any professional services" to the Army during the term of the Agreement (which would continue until either party gave written notice of termination).
The non-solicitation provision generally provided that the consultant was not allowed to solicit Metis' employees or independent contractors during the term of the Agreement and for 24 months thereafter. [3]
In November 2017, both consultants worked for Metis on BPA task orders. The applicable task orders provided for a one year period of performance and were not renewed.
Following the completion of the task orders, neither consultant terminated their Agreement (i.e., they technically remained bound to the restrictions).
In June 2019, Metis learned that both consultants were working for another contractor under the same BPA and subsequently filed a Complaint alleging breach of contract against the consultants and tortious interference of contract against the contractor. [4]
In response, all of the defendants filed a plea-in-bar on grounds that the restrictive covenants were unenforceable.
Generally, a plea-in-bar is known as the "so-what" defense, meaning that even if the alleged wrong had occurred, the plaintiff is barred from bringing the claim against them. [5] As discussed below, the Court ruled that the restrictive covenants were unenforceable and sustained the defendants' plea-in-bar.
So, what exactly happened?
The Restrictive Covenants are Unenforceable
Under Virginia law, courts will enforce a restrictive covenant where it is:
narrowly drawn to protect the employer's legitimate business interest,
not unduly burdensome on the employee's ability to earn a living, and
not against public policy. [6]
To determine whether the employer has met its burden, courts look to the "function, geographic scope and duration" of the restriction in conjunction with the three factors above. [7] Requiring plaintiffs to prove all of these factors is consistent with Virginia contact law, which states that there must be a legally enforceable obligation for a court to enforce it. [8]
Here, the Court found the restrictive covenants unenforceable because Metis could not prove the first and third factors. [9]
1. Restrictions Were Not Narrowly Tailored
Under the first factor, the Court determined that the non-compete prevented the consultants from providing services to the Army anywhere in the world and for any purpose, regardless of whether those purposes compete with Metis' business. Metis argued that Virginia precedent in Preferred Systems supported a worldwide ban on providing competing services to a single client. [10]
The Court, however, was not persuaded because the restrictive covenant in Preferred Systems was "limited to the support of a particular program run under a particular government agency and limited to the same or similar type of information technology support offered by the employer." In essence, the restriction was so narrowly tailored that Preferred Systems' subcontractor was free to offer support to both the team-leader contractor (Accenture) and the agency under any other program.
The non-compete at issue here, however, was not narrowly tailored. In that regard, the Court focused on the scope of services, which encompassed all services that could have been provided "regardless of whether the services fall outside those services generally provided by [Metis] or their competitors." In other words, instead of narrowly defining the prohibited services, Metis used a broad definition so the consultants were tied to Metis if they wanted to provide any professional services to the Army.
Likewise, the non-solicitation covenant, as the Court described, "prohibited the solicitation of covered employees or contractors even if the reason for causing the employees or contractors to pursue opportunities elsewhere was unwholly unrelated to [Metis'] business needs." As a result, the Plaintiff could not rely on another Virginia case "because the restrictions here do not confine themselves to competing services." [11] At bottom, the Court concluded that Metis' "restrictive covenants seek to hoard the services of the defendants and prevent any disruption of the workplace regardless of whether the disruption comes from a competitor."
2. Restrictions Violate Public Policy
Under the third factor, the Court determined that the restrictive covenants violated public policy because they were essentially designed to perpetrate a monopoly. The Court noted that the consultants were hired to perform services under a specific task order and that there was no more work to be done when the task orders ended. The Court characterized this situation as almost unconscionable:
A contract that prohibits a party from seeking employment at a time the employer had no work for the contractor and did not offered to subsidize the contractor's livelihood is almost unconscionable.
Indeed, in the Court's view, there was no credible evidence as to why Metis "needed to create an impermeable barrier preventing others from soliciting their employees or other independent contractors to perform any other work regardless of the nature of the work or location." Ultimately, the Court noted that while Metis may require independent contractors to agree to restrictive covenants, Metis "may not impose such broad and overreaching restrictions."
How the Court Would Modify the Restrictive Covenants
In trying to save the restrictive covenants, Metis argued that the Agreements contained severability and modification clauses so that Court could edit them to become valid. The Court noted that while severability clauses are valid clauses, they are only valid to the extent that they don't violate Virginia's rule on blue-penciling. In other words, a Virginia court will not rewrite unenforceable provisions; rather, the court will simply remove them from the contract. [12]
Following that rule, the Court declined to modify the restrictive covenants but nonetheless offered insight into what it would have done if it had the opportunity to do so. In that regard, the Court offered the following guidance:
First, the Court would have limited the definition of "Client" to the "1st Capabilities Integration Group at Fort Belvoir" and not the entire U.S. Army.
Second, the the Court would have limited the types of services to "the same or similar services provided under the task order" and not just "any psychological services."
Third, the Court would have limited the term of the restriction to end upon completion of the task order without need for further notice.
Fourth, for the non-solicitation of employees clause, the Court would have limited the restriction to soliciting employees/independent contractors working on the same task order to work on behalf of another contractor on the same task order.
Finally, the Court would have limited the time to the end of the task order (discussing a post separation time for employees who receive severance pay).
Takeaway
While contractors may have legitimate business reasons for requiring employees or independent contractors to sign non-compete and non-solicitation covenants, the restrictions must be narrowly tailored (among others) to be enforceable. For businesses competing for government contracts, including task orders, an invalidated restrictive covenant could harm your chances at securing future work and the profits derived therefrom. Again, Virginia will not blue-pencil your agreements, which means they must be drafted carefully to withstand judicial review. To that end, the Court's opinion is also helpful in that it provides insight into what contractors should be thinking about when crafting non-compete and non-solicitation provisions.
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[1] While the Opinion Letter briefly touches upon Plaintiff's tortious interference with contract claim, it is not discussed in this article.
[2] One of the consultants filed a demurrer arguing that he was not a party to the Agreement. Rather, the Agreement was between a limited liability company he formed and Metis Group. The Court dismissed this demurrer as moot since it found the restrictive covenants unenforceable.
[3] The restrictive covenants are lengthy and are set forth in full in the Opinion Letter.
[4] Prior to the plea-in-bar hearing the individual defendants sent written termination notices.
[5] See Ferguson Enterprises, Inc.v. F.H. Furr Plumbing, 297 VA. 539, 549 (2019).
[6] Home Paramount Pest Control Companies, Inc. v. Shaffer, 282 Va. 412, 415 (2011).
[7] Simmons v. Miiller, 261 Va. 561 581 (2001).
[8] Filak v. George, 267 Va. 612, 614 (2004) (The elements of a breach of contract action are (1) a legally enforceable obligations of a Defendant to a plaintiff; (2) the Defendant's violation or breach of that obligation; and (3) injury or damage to the plaintiff caused by the breach of obligation).
[9] Specifically, the Court determined that, "[w]hile the second factor was proven insofar as the evidence was insufficient, suggesting that it would unduly interfere with the defendant's ability to earn a livelihood, it is more than enough that The Metis Group failed to prove the first and third factors."
[10] See Preferred Systems Solutions, Inc. v. GP Consulting, LLC, 284 Va. 382 (2012).
[11] Advance Marine Enterprises, Inc. v. PRC, Inc., 256 Va. 106, 111(1998).
[12] Resitroffer v. Person, 247 Va. 45, 49-50 (1994).
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