After Mass Resignation, Engineers Sued for Non-Compete Violations

A group of engineers resigned en masse to join a competitor. Before quitting, they copied client files.

The employer sued for breach of the non-compete contract. The trial court awarded a multi-million dollar judgment in favor of the employer for lost profits, lost goodwill, and attorney’s fees.

On appeal, the engineers challenged whether the non-compete contract was enforceable. The Court denied their appeal and enforced the non-compete contract, which prohibited rendering competitive services, or soliciting such services, for a period of eight months over a 50-mile radius.

Facts

PRC provided marine engineering services to the United States Navy. As a condition of employment, PRC required every employee to sign a non-competition contract, which read:

Employee agrees not to compete with PRC for a period of eight months following termination of employee’s employment, by rendering competing services to or, with respect to such services, solicit any customer of PRC for whom Employee performed services while employed by PRC, within 50 miles of a PRC office.

In mid-1995, PRC announced that it would be merging with another company.

Prior to the sale, a manager in PRC’s marine engineering department contacted PRC’s competitor, Advanced Marine Enterprises, to inquire about a job for himself and six other PRC marine engineering managers (the PRC managers). Advanced Marine Enterprises agreed to hire the PRC managers. Then, they hatched a plan to hire every employee in the PRC marine department.

Under the plan, Advanced Marine Enterprises would hire the entire marine engineering department, who, without notice, would resign en masse.

The PRC managers distributed offers to the department. The offers indemnified each employee against any claim asserted by PRC after they resigned. Basically, if PRC sued, Advanced Marine Enterprises would pay for any lawsuit.

On December 29, 1995, as scheduled, the entire marine engineering department resigned. Before leaving, many employees copied client files, which they removed without PRC’s permission.

Engineers Sued After Group Resignation 

After the group resigned, PRC sued Advanced Marine Enterprises and the former PRC managers and employees. PRC accused the defendants of breach of fiduciary duty, breach of contract, intention interference with contract, tortious interference with contract, and statutory business conspiracy.

The case proceeded to trial. PRC claimed economic damages for lost profits, based on its lost client contracts, and lost goodwill, based on the excess of the sales price of PRC’s business over the fair market value of the business’s identifiable assets.

The Court awarded $1,245,062 in compensatory damages. Under the conspiracy statute, the amount of compensatory damages was tripled. Therefore, the judgment in favor of PRC totaled more than $3,735,186, plus $350,000 in punitive damages, $450,000 in attorney’s fees and $175,000 in costs. Additionally, the Court entered an injunction ordering the former PRC managers and employees to abide by the non-compete contract for the full time period.

Engineers Appeal After Losing Trial

The engineers appealed. They argued PRC’s non-compete agreement was unenforceable under Virginia law.

The Supreme Court of Virginia disagreed.

Under Virginia law, a non-compete agreement must be “reasonable in the sense that it is no greater than necessary to protect the employer in some legitimate business interest,” “not unduly harsh and oppressive in curtailing [the employee’s] legitimate efforts to earn a livelihood,” and “reasonable from the standpoint of a sound public policy.” New River Media Group, Inc., v. Knighton, 245 Va. 367 (1993).

In weighing each of these factors, the key question in determining whether a non-compete contract is valid is whether the functional limitation, geographic limitation, and duration, are reasonable.

So how did the Court define whether a non-compete is “reasonable”?

First, the Court looked at the functional limitation. The engineers were prohibited from “rendering competing services to” or “solicit[ing] such services” from “any customer of PRC for whom Employee performed services while employed by PRC.”

The Court held that a prohibition tailored to performing competitive services, or soliciting competitive services, for an engineer’s former clients is reasonable.

Second, the Court looked at the geographic restriction. The engineers were prohibited from working within 50 miles of PRC’s offices. The Court held that 50 miles was reasonable, since the engineers were permitted to move elsewhere in Virginia to continue practicing their profession.

Third, the Court evaluated the duration of eight (8) months, which the Court held was reasonable. In previous cases, the courts had refused to enforce a non-compete that lacked a duration (and would, essentially, would continue forever) or was so broad as to prohibit competition for over 5 years. But when the non-compete is less than a year, the Court was inclined to enforce it.

Finally, the Court held that PRC was entitled to the “benefit of its bargain” and could enforce the eight (8) month restriction at the conclusion of the case. Even though years had passed since the engineers quit, the clock was paused while the engineers challenged the contract. PRC had never received the full benefit of its bargain. Therefore, now that the case was over, the clock resumed, and the engineers were prohibited from competing for full duration under the non-compete contract.

The bottom line: Courts will likely enforce a non-compete that prohibits rendering competitive services, or soliciting such services, to an employee’s former clients, over a 50-mile radius, for up to a year. Additionally, companies are entitled to the “benefit of their bargain” if the employee challenges the non-compete, and enforce the entire period of time for the restriction after the lawsuit is over.

Click here to download: Advanced Marine Enterprises, Inc., v. PRC, Inc., 256 Va. 106 (1998)

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