Archive for year: 2020

by M. Jarrad Wright
DiMuroGinsberg, PC

Noncompete agreements can be an effective way to protect your business if former employees or independent contractors are working for a rival business and using the skills, information, and contacts they acquired while working for you. A recent Virginia Circuit Court decision, however, highlights the need for companies that do government contracting to reevaluate the legality of their existing noncompetes. In the case, Fairfax County Circuit Judge John M. Tran invalidated a government contractor’s noncompete for being unduly restrictive and overbroad in violation of public policy. The decision offers a number of lessons to help you avoid seeing your noncompetes meet a similar fate.

Facts

The Metis Group was one of several government contractors receiving a blanket purchase agreement to provide psychological services to the U.S. Army. The agreement allowed the Army to enter into various types of task orders to the contractors, which competed to provide the services.

The Metis Group had been awarded several task orders. To service the orders, the company entered into independent contractor agreements with several doctors and/or their practices. The independent contractor arrangements contained a noncompete providing that upon termination of the agreement by either party, the contractor would not seek to perform psychological services for the Army for 24 months. After the Metis Group’s task orders ended, the Army didn’t renew them. Nevertheless, the company’s independent contractor agreements with the doctors remained in force.

Approximately a year and a half later, the Metis Group discovered the doctors with whom it had contracted were providing psychological services to the Army for a competitor that had been assigned a task order. The Metis Group sued the doctors claiming they were violating their noncompetes. The doctors responded by asking the court to dismiss the lawsuit because the agreements they had signed were unenforceable.

Noncompetes ‘perpetuate a monopoly’

The court granted the doctors’ request and invalidated the noncompetes. Why? Judge Tran explained the agreements weren’t limited to preventing the doctors from seeking to provide psychological services in competition with the Metis Group. Instead, they prevented the doctors “from engaging in any professional services with the United States Army anywhere in the world for any purpose, whether or not such purposes compete with [Metis’] business model.”
Accordingly, Judge Tran found the noncompetes were “designed to perpetuate a monopoly” so that the Metis Group would be “the only contractor able to provide such services.” Consequently, the judge said the restrictive covenants violated public policy, explaining a “contract that prohibits a party from seeking employment at the time the employer had no work for the contractor and did not offer to subsidize the contractor’s livelihood is almost unconscionable.” The Metis Group, Inc. v. Allison, 2020 Va. Cir. LEXIS 6.

Lessons to be learned

The case presents a cautionary tale if you are engaged in government contracting and rely on independent contractors to fill positions and do the work. To gain a competitive advantage, government contractors often team together and attempt to lock in key independent contractors (who have specialized knowledge or skills) through covenants not to compete. After Metis Group, that strategy may not be worth the risk your noncompete will be struck down.

• Instead, you should follow two principles in drafting enforceable noncompetes:
• Limit the covenants to the specific programs or contracts at issue.Tailor the employee nonsolicitation provisions to cover services that actually compete with your company.

In Metis Group, the restrictive covenants ran afoul of both principles.

Bottom line

Take immediate steps to consult with experienced employment counsel to review the restrictive covenant language in your agreements with independent contractors working on a government contract. In consultation with counsel, make sure:
The restrictions aren’t overbroad;
The contract language actually fits the task at hand; and
The restrictions don’t unduly limit the independent contractor’s livelihood after the work for you is completed.

Following the above rules should allow you to put noncompete agreements in place that are enforceable and will protect your legitimate business needs.

Editor’s note: For more information about the law governing noncompete agreements, please see the following Virginia Employment Law Letter articles: “Noncompete void if employee misclassified as independent contractor” (December 2016), “Virginia court voids employer’s noncompete” (June 2017), “Alexandria court upholds VA employer’s noncompete, nonsolicitation agreements” (August 2018), and “Court enforces drone company’s nonsolicitation agreement” (December 2018).

M. Jarrad Wright is an attorney with DiMuroGinsberg PC and a contributor to Virginia Employment Law Letter. He may be reached at mjwright@dimuro.com.

by M. Jarrad Wright
DiMuroGinsberg, PC

The potential pitfalls of using a consumer reporting agency and maintaining compliance with the federal Fair Credit Reporting Act (FCRA) were highlighted in a recent decision by the federal district court in Richmond, Virginia. In the case, job applicants filed a class action lawsuit against Wells Fargo Bank and the First Advantage Background Services, a consumer reporting agency the bank retained to perform background checks.

Facts

According to the class action suit, the language of the disclosure authorization form used by First Advantage failed to comply with the FCRA’s disclosure requirements. Among other things, the applicants argued the form, which contained a release of FCRA rights, was effectively hidden in Wells Fargo’s lengthy job application form. As a result, the applicants said First Advantage had no legal right to run a background check or provide a background report to the bank.

Court’s decision

Central to the federal court’s assessment of the applicants’ claims was whether they could establish an actual injury as required by the U.S. Supreme Court’s 2016 decision in Spokeo v. Robins. In that case, the Supreme Court said anyone pursuing an FCRA claim must show “an invasion of a ‘legally protected interest’ that is ‘concrete and particularized’ and ‘actual or imminent,’ not conjectural or hypothetical.”

In this case, the federal court concluded the applicants had failed the Spokeo test. It reasoned they “knowingly and actively consented to the dissemination of their information to Wells Fargo” when, as part of the application process, they went to a website controlled by First Advantage and entered their private information for the explicit purpose of having a background check run. According to the court, “because [they] consented to this disclosure, they have not alleged a sufficient FCRA violation.” Frazier v. First Advantage Background Servs. Corp., Civil Action No. 3:17cv30.

Steps to compliance

Although Wells Fargo was successful in fending off the class action lawsuit, the case represents a cautionary tale for all employers that conduct background checks. Had the applicants not “actively and independently” used First Advantage’s website to provide their information, the outcome could have been much different. Accordingly, to avoid being the target of an FCRA lawsuit, it’s important to fully vet the company you use to conduct background checks and to thoroughly understand the processes used for satisfying the FCRA requirements. Questions you should ask include:

• What warnings are given to applicants during the background check process?
• Is there a separate website where applicants enter their information, or is another process used?
• Are the disclosure forms for applicants fully vetted, and are they in compliance with the disclosure requirements of the FCRA?
• Is your company using a standalone disclosure authorization form that has been properly vetted? (Using a standalone form is preferable to one that is combined with other information and will reduce the possibility of an FCRA violation.)

Bottom line

Background checks are an increasingly useful hiring tool, but there remain pitfalls with FCRA compliance. Having a formal policy on the use of background checks and the methods for instituting them can help ensure you don’t run afoul of the law. When in doubt, you should have experienced employment counsel review your policies and procedures to ensure FCRA compliance. When dealing with the FCRA, an ounce of prevention is worth even more than a pound of cure.

Editor’s note: For additional information on the requirements of the FCRA and the Supreme Court’s Spokeo decision, please see the following two articles in Virginia Employment Law Letter: “Know the rules before conducting background checks,” Vol. 28, Issue 1, February 2016, and “U.S. Supreme Court clarifies FCRA liability,” Vol. 28, Issue 5, June 2016.

M. Jarrad Wright is an attorney with DiMuroGinsberg PC and a contributor to Virginia Employment Law Letter. He may be reached at mjwright@dimuro.com.