The Noncompete Quandary Employee restrictions are common in medical practices and high-tech companies, but are they enforceable?

Because of a noncompete clause, prosthetist Joseph A. Miller spends weekdays in Christiansburg and weekends in Fredericksburg with his family.

By Marjolijn Bijlefeld
Joseph A. Miller has a long commute — 208 miles, to be exact. Every Monday morning he leaves his home in Fredericksburg to start the four-hour drive to Christiansburg. He spends the work week in an apartment there and commutes home again on Fridays.

It’s not what he wants. But he signed a noncompete clause with a previous employer that left him with this choice: Take the position in Christiansburg for two years or uproot his family.

When Miller, a certified prosthetist, left one Fredericksburg-area employer for another a few years ago, he signed a two-year contract that included a noncompete clause — the first he’d seen in his 15-year career.

Things didn’t work out, though, and after six months he was no longer with the company. When Virginia Prosthetics, the Christiansburg-based business where he now works, offered him a job and a new Fredericksburg office, he jumped at the chance. But Miller’s former employer, American Orthotic and Prosthetic Center, said no way and obtained a temporary injunction to keep Miller from working in town.

Michael P. Smith, president of American Orthotic, says the noncompete clause is essential to protect his interests. Prosthetic centers get their referrals from hospitals, physical therapists and physicians. It’s a relatively small client list. "In this profession, we don’t advertise directly to the public," he says. Protecting referral sources is a prime concern.

The company set up the Fredericksburg site as a new office. "We brought him in and, in return for a guaranteed salary, exposed him to our established contacts and our marketing style. If that employee were to set out on his own, that person is who the referral sources will know — not the company he used to work for."

Smith notes that employers need to be able to trust new employees with valuable information, and noncompete clauses create that trust. And because the company also has offices in Chesapeake and Richmond, the geographic scope of a noncompete has to be large enough to protect the majority of the company’s referral sources.

Miller might have been able to battle the injunction — and the noncompete clause — in court, but his attorney told him it could take a year and cost up to $30,000. Neither Miller nor his new employer were willing to gamble.

So Miller was left with the terms of his contract: no practicing orthotics or prosthetics, augmentation or replacement of a weak or missing body part, within a 100-mile radius for two years. That two-year period and Miller’s long commute end in May — just in time for his son’s second birthday. For the next few months, Miller will continue to bounce between the burgs.

It was not an easy adjustment for Miller and his family, but Miller says he also feels for his patients. Not surprisingly, patients develop a bond with their prosthetist. Miller had been working with some adults and children in the area for years, patients who followed him from one employer to the next. "Practically overnight" he was gone, he says. Physicians and therapists who referred patients to him wondered what happened, too.

What happened, Miller says now, was that he signed the noncompete without thinking about the implications. He was told it was a standard requirement. Now he wishes he had been more cautious. The contract had no protections for Miller in case the job didn’t work out. And the 100-mile radius, in a city halfway between Washington, D.C., and Richmond, and only 50 miles from each, also seemed excessive in retrospect, he says.

Noncompete clauses are often associated with physicians and other medical providers, but they are used in a wide number of industries — from beauty salons to high-tech businesses. Employers use them to protect one of two things: a customer base or intellectual property. Hairdressers are an example of the first; high-tech employees are an example of the second.

Simply because noncompete clauses exist, however, doesn’t necessarily mean they are enforced. In Virginia, courts have consistently ruled that noncompete clauses must be narrowly focused. Overly broad noncompete clauses don’t cut muster here, attorneys say. That places Virginia somewhere in the middle. In California, noncompetes are rarely enforced. In Massachusetts, courts tend to favor the employers.

It’s likely a large number of noncompete clauses never make it to court. Many employees, like Miller, decide they’d rather flee than fight.

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To be enforced in Virginia, noncompete agreements that do make it to court must be narrowly written, fair to employer and employee, and be sound public policy. The courts won’t interpret the agreements to determine what the parties intended. They go with what’s written: It either works, or it doesn’t.

When the state Supreme Court heard the case of Clinch Valley Physicians Inc. vs. Garcia in 1992, it acknowledged that the employer may have intended something different than what was in the contract. The Richlands medical practice had its physician employees sign annual employment contracts. Those contracts contained a noncompete clause that would be enforced if the employee "were terminated for any reason whatsoever."

The annual contracts were renewed twice, but then the employer offered new contracts with new terms. Dr. Louis A. Garcia didn’t like the new terms, didn’t sign the new contract and let his old contract lapse. He left the practice but continued practicing near Richlands. The Supreme Court ruled that nonrenewal of a contract was not the same as a termination, so the agreement could not be enforced. "Even if this may not have been what [Clinch Valley Physicians] intended when it drafted this provision, we are limited to the language of the contract, strictly construed," the court wrote in its decision.

While state courts stick with a strict interpretation, there is plenty of case law favoring noncompete agreements. In a 1993 case, New River Media vs. Knighton, David C. Knighton was a radio DJ and operations manager for WPSK in Fairlawn. As a morning announcer, he had the highest profile of any of the station’s on-air personalities. New River terminated Knighton in February 1992, and the two sides entered into a noncompete agreement, according to court documents. Knighton was paid $2,000 in consideration for agreeing not to work for 12 months for a competing station within 60 miles.

Two weeks later, Knighton returned the $2,000 to New River and took a job with a Radford station, WPSK’s main competitor. The case went to trial, and a jury found in Knighton’s favor, awarding him $15,000 in compensatory and punitive damages. In 1993, the state Supreme Court overruled, finding that both the time and geographic limitations were fair. Because New River had invested time and money in promoting Knighton’s shows, and because the two stations competed for advertisers and listeners, a noncompete protected WPSK’s interests. In the end, Knighton received the $2,000 from New River under the terms of the original agreement but had to temporarily stop working at the Radford station.

In a 1990 case, Blue Ridge Anesthesia and Critical Care Inc. vs. Robert J. Gidick et al, the Supreme Court found for the Lynchburg employer. Contracts with three former sales and service employees prohibited them from selling similar equipment in Blue Ridge’s operating area for three years. The court determined that the sale of critical-care and anesthesia equipment is sufficiently narrow and the employment contract "expressly provided (that it) does not preclude them from working in the medical industry in some role that’s noncompeting." Aside from arguing that the limitations were overly broad, the employees also suggested that the agreements stifled competition, which was bad public policy. The court disagreed, and said there was heavy competition.

Among the most recent noncompete cases is a suit filed in November in Danville, in which American of Martinsville charges Pulaski Furniture Corp. with illegally copying its hotel room furniture collection. At issue is the question of whether a former Martinsville furniture designer, who left American after 15 years to join Pulaski, violated a noncompete agreement. The case was pending in mid-January.

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When it comes to employment agreements, attorneys give employers and employees the same advice: proceed with caution. Businesses can’t simply throw a noncompete clause in the contract and hope it’s never challenged. Determine exactly what needs protecting and tailor the noncompete clause to address those concerns.

Noncompete agreements are not boilerplate, says Thomas R. Bagby of the labor and employment section of Woods, Rogers & Hazlegrove in Roanoke. "You have to look at the kind of business it is, where you’re operating and what you’re trying to protect." Companies come to his firm with a description of the areas in which they want protection, and the attorneys write a noncompete that’s enforceable.

The time period in a noncompete is particularly important. "We’ve seen ... anywhere from a six-month restriction to a five-year restriction," he says. The latter was a case prohibiting a partner in an insurance company from competing for five years — that’s how often policies came up for renewal. For a technology worker in a rapidly evolving industry, a reasonable time would be much shorter. For salespeople, the time restrictions are typically two to three years.

Attorney John B. Mann of the Richmond firm Levit & Mann says employees should recognize that noncompete clauses are negotiable. Typically, employees don’t consult with an attorney prior to signing because they don’t realize the potential impact, he says. "My advice is not to sign one in the first place. If you can’t avoid it, make sure it’s reasonable and that you understand what the obligations are under the agreement. Once an employee has signed and wants to leave for a better job, they might have to face that they can’t get another similar job in the same area," he says.

Still, he has found room for some negotiation after the fact. In one case, an employee of one beer distributor wanted to leave for another. Mann and the second employer convinced the first that losing the employee wouldn’t hurt his business. The first employer released the employee from his noncompete.

It’s not always that easy. In another case, an apprentice in a beauty salon wanted to work elsewhere. To escape the noncompete, and because the client had some financial issues, Mann helped the client declare bankruptcy.

When the clause has been negotiated, it’s more likely to stick, notes John E. Quinn, a partner with Reed, Smith, Shaw & McClay, a Philadelphia law firm that recently merged with Hazel & Thomas. "The more the employer can show there was give and take in negotiating — the contract said one year, you asked for six months and both compromised on nine months — the more enforceable it will be because it shows that you knew what you were getting into."

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Paula Gulak doesn’t want her employees to feel trapped. The vice president of marketing and public relations for the consulting firm Sycom Technologies notes that since the company opened in April 1996, only a handful of its 85 employees have left. A few made career changes, and one was hired by a customer.

A noncompete agreement may have prevented that one departure, but by letting the employee go, the Richmond-based company avoided a fight and maintained great relations with its customer, Gulak says.

Gulak and her four partners had all come from companies that merged or were acquired. Employees were forced either to sign noncompetes or were passed over for promotions or raises. But Gulak believes there are better ways for high-tech employers to protect their interests. The employee handbook defines the company’s ownership of intellectual property, and there are stipulations about reimbursing the company for recent training if an employee leaves. "We feel comfortable with that," she says.

Gulak has heard from other employers who think Sycom is too trusting. But it makes her nervous that employees so willingly sign noncompetes. Her company has had to pass over qualified applicants because of noncompetes they signed.

"That’s a whole category of cases you never hear about," says attorney Jim Quarles, a managing partner in the Washington, D.C., office of Hale and Dorr. "A business says, ‘I’d like to employ you, but because of what you’ve been doing and the restrictions you have, I ought to take a pass.’" Quarles’ firm handles many noncompete cases from the Dulles technology corridor.

Whether noncompete clauses have a stifling effect on innovation depends on whom you ask, he says. "If you called someone from California, they might say one of the reasons California has had incredible growth is because they don’t enforce noncompetes." The best ideas hop from one company to another. "And in Massachusetts, which enforces noncompetes strictly, they might say it keeps people focused so you’ll get better results from the employees."

Miller, the prosthetist who commutes between Christiansburg and Fredericks-burg, says he understands employers’ concerns. In fact, he signed another noncompete with his current company — but only after having an attorney scrutinize the entire employment contract, something he says he’ll do from now on. The current noncompete clause is sufficiently narrow, he says.

"I do read them more carefully. I hire an attorney every time now," he says. It’s an added, but necessary, expense. "I don’t think I’d sign another one unless there were real strict provisions and they benefited me."