Virginia Court Strikes Down Homebuilder’s Non-Compete Agreement

On February 14, 2017, a federal judge denied a home builders’ motion for a preliminary injunction to stop a former employee covered by a non-compete agreement from working for a competing builder.  Applying Virginia law, Judge Liam O’Grady of the United States District Court for the Eastern District of Virginia, Alexandria Division, ruled that the geographic scope of the non-compete was overbroad and, therefore, the agreement was invalid.  NVR, Inc. v. David Nelson, Civil Action No. 1:16-cv-1328.

The case involved Mr. Nelson, a former Ryan Homes Division Manager in Charlotte, North Carolina. Nelson was responsible for sales, homebuilding efforts, and strategic decision-making.  Ryan terminated Nelson on August 24, 2016, and he joined another Charlotte-area homebuilder, Simonini, about two months later.

While employed by Ryan, Nelson signed stock option and incentive compensation agreements that precluded him, for a 12 month period,  from working for any entity in the “Restricted Area” that “competes with [Ryan] in the residential homebuilding, mortgage financing, or settlement services business where such services are competitive with any of the services you provided to [Ryan] during the 24 months prior to termination.” The “Restricted Area” included regions from which Nelson “received, as part of [his] work duties, Confidential Information regarding such business activity, at any time during the 24 months prior to termination.”

When Nelson went to work for Simonini, Ryan sought a preliminary injunction on the grounds that his employment violated the non-compete agreement. Nelson argued that the motion should be denied because the agreement was overbroad. Although the court found that the one year duration was reasonable and that the functional scope was reasonably limited to residential homebuilding, mortgage financing, and settlement service businesses, it took issue with the geographic scope of the agreement. Specifically, Judge O’Grady ruled that the prohibition on engaging in covered business activities in any region from which Nelson received Confidential Information made it unreasonably broad. Although Ryan argued that, in practice, Nelson only received Confidential Information from the Charlotte region, the Court concluded that the agreement could be read to apply to a much broader area.  For example, if a Ryan employee in Chicago sent an email to Nelson that included Confidential Information, then it would appear that Nelson would be prohibited from working in covered business activities in Chicago. Judge O’Grady held that the fact that Nelson could not reasonably determine the areas covered by the non-compete made the agreement indefinite in its geographic scope   and, therefore, unenforceable.

The court’s decision in NVR, Inc. v. Nelson highlights the importance of careful, narrow drafting of non-compete agreements. Virginia courts disfavor restrictive covenants, and many judges will readily seize on ambiguities like those in this case to strike down otherwise reasonable agreements.

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