Are your noncompetes enforceable? Government contractors face fresh scrutiny

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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.