Virginia Government Contractor Enforces Non-Compete Contract

In Virginia, non-compete contracts are common among government contractors. There are a couple of reasons:

  • Contractors want to avoid investing time and resources to win a bid and train staff, only to lose those key personnel to a competitor that wins the bid instead or who use key personnel to craft a better bid.
  • Government contracting relies heavily on trade secrets, and restrictive covenants help protect a company’s proprietary information.

The Supreme Court of Virginia enforcing a contractor’s non-compete agreement with a former subcontractor in Preferred Sys. Solutions, Inc. v. GP Consulting, LLC, 284 Va. 382 (2012), provides a cautionary tale set in the government contracting industry. The Court denied the contractor’s challenge to the enforceability of the non-compete contract and upheld a verdict against the contractor for violating it.

Here is a brief summary of the case with key takeaways for government contractors.

Facts

The U.S. Defense Logistics Agency (DLA) enlisted a group of ten government contractors to bid for projects. Accenture, LLP, was the “team leader” and supervised completion of the projects. Accenture itself would also compete with the other contractors to bid for DLA projects.

One of the contractors, Preferred Systems Solutions, Inc. (PSS), successfully bid on DLA’s Business Systems Modernization program (BSA program). PSS entered a subcontractor agreement with GP Consulting (GP) for GP’s assistance with PSS completing work for the BSA program. The subcontractor agreement included the following covenant not to compete:

During the term of this Agreement and for a period of twelve (12) months thereafter, GP hereby covenants and agrees that they will not, either directly or indirectly:

(a) enter into a contract as a subcontractor with Accenture, LLP, and or DLA to provide the same or similar support that Preferred is providing to Accenture, LLP and/or DLA and in support of DLA Business Systems Modernization program.

(b) enter into an agreement with a competing business and provide the same or similar support that Preferred is providing to Accenture, LLP and/or DLA and in support the DLA Business Systems Modernization program.

Several years into the project, GP terminated its subcontract with PSS and began working for PSS’s competitor, Accenture, to continue doing the same work. DLA transferred the entire the BSA program to Accenture after GP was hired. As a result, PSS suffered monetary damages through lost revenue.

PSS Sues for Breach of Non-Compete Contract

PSS sued GP in Fairfax Circuit Court for breach of contract. The judge held that GP “plainly breached” the non-compete contract “when it entered into a contract with Accenture for services in support of the DLA Business Systems Modernization program.”

Because GP caused PSS to lose revenue, the court awarded damages to PSS in the amount of $172,395.96.

On appeal, GP argued the non-compete’s prohibition against “indirect competition” rendered it overbroad and unenforceable.

Court Enforces PSS’s Non-Compete

On appeal, the Supreme Court of Virginia applied general principles of non-compete enforcement to decide whether GP’s contract was overbroad and unenforceable.

Under Virginia law, a non-compete contract must be “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.” Modern Env’ts, Inc. v. Stinnet, 263 Va. 491, 493 (2002). In evaluating these factors, the Court will consider the function, geographic scope, and duration of the restriction. Home Paramount Pest Control Cos. v. Shaffer, 282 Va. 412, 415 (2011).

In this case, the duration (i.e., one year) and function (i.e., prohibition on working on a particular program run under a particular government agency) were held reasonably limited as a matter of law.

Of note, the non-compete contract only prohibited working on the Business Systems Modernization project with a discrete number of companies (i.e., Accenture and the eight other competitors). The restrictions on GP were not unduly limited because, as a witness testified at trial, there were approximately 400-500 other programming jobs in the Washington, D.C., area that were not proscribed by the contract.

Furthermore, the Court held that the term “directly or indirectly” was not unreasonable or overbroad in non-compete contract under Virginia law. The word “indirect” is not a per se bar to enforcement of a Virginia non-compete contract. In other words, as the Court held, “GP cannot do indirectly what it is directly prohibited from doing.”

Finally, the Court held that the lack of a geographic limitation was not fatal to the contract because the non-compete was so specifically related to a particular project.

Conclusion

Key takeaways for government contractors:

  • Non-compete contracts must be reasonably limited in duration, function, and geographic scope.
  • A non-compete limited to a particular project is likely to be enforced.
  • The word “indirect” is not a per se bar to enforcement.
  • A geographic limitation is not necessary if the non-compete otherwise narrowly applies to a certain project or list of companies.

An experienced non-compete lawyer can weigh the factors—e.g. the terms and conditions, context, and industry customs—to  mitigate risk during an employment transition.