Virginia Government Contractor Enforces Non-Compete Contract

By Rob Dean on Jan 18, 2015

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

No contractor wants to invest time and resources to win a bid, only to lose key personnel to a competitor.
Government contracts involve trade secrets. Non-compete clauses protect the company’s proprietary information.

Given their importance, it was not surprising to see the Supreme Court of Virginia enforce a contractor’s non-compete clause in a recent case, Preferred Sys. Solutions, Inc. v. GP Consulting, LLC, 284 Va. 382 (2012). 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 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 contractors for work.

One of the contractors, Preferred Systems Solutions, Inc., successfully bid on the agency’s Business Systems Modernization program. Preferred delegated some of the work to a subcontractor, GP Consulting. Preferred and GP signed a Subcontractor Agreement which included a 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 a 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 quit Preferred and joined its competitor, Accenture, to continue doing the same work. DLA transferred its work to Accenture after GP was hired. As a result, Preferred suffered lost future profits.

Preferred Sues for Breach of Non-Compete Contract

Preferred sued GP in Fairfax Circuit Court for breach of contract. The case proceed to a bench trial. 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.”

Since GP caused Preferred to lose future profits, the court awarded damages to Preferred 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 Preferred’s Non-Compete

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).

If the above elements – “narrowly drawn” “unduly burdensome” “against public policy” – seem fuzzy, you are not alone. There is no bright-line rule. Every case is different. An experienced non-compete lawyer will be familiar with how Virginia courts weigh these factors and predict what a court will do.

In this case, the duration (one year) and function (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, Accenture and the eight other competitors. GP’s employment was no unduly limited because, as a witness testified at trial, there were over 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 limited to a particular project. Therefore, it was enforceable.

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 is otherwise narrowly applicable to a certain project or list of companies

One last note: In Virginia, non-compete law is fact-specific and every case is different. An experienced non-compete lawyer can weigh the factors, e.g. the terms and conditions, context, and industry custom, to help mitigate risk during an employment transition.

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