Non-Compete Agreement is Valid Between Government Contractors

A state court in Virginia sustained a non-compete agreement between a government contractor and a single-member LLC in Preferred Systems Solutions, Inc. v. GP Consulting, LLC Case No. CL 2010-6693 (Fairfax, Va. 2011). It awarded the company $172,395 in damages. “Non-compete” agreements are also called “non-competition agreements” and “covenants not to compete.”

This case demonstrates the power of drafting a narrowly tailored non-compete agreement.

Many employers, including government contractors who hire employees and sub-contractors to work “on-site” at government agencies, use non-compete agreements. Because employers often have the most power at the time of hiring, they frequently can get new hires to sign almost anything. However, if an employer overreaches and drafts the non-compete agreement too broadly, it may wind up with an unenforceable agreement.

Generally, non-compete agreements are “disfavored restraints on trade.” Therefore, they are construed in favor of the employee wherever possible. However, they are very enforceable if narrowly targeted. Courts will look at the contract in three ways: (1) from the perspective of the employer – is the contract sufficiently narrowly drawn to protect the employer’s legitimate business interest; (2) from the perspective of the employee – is the contract unduly burdensome on the employee’s ability to earn a living, and (3) from the perspective of the public – is the contract bad public policy?

In this case of Preferred Systems Solutions, the contract was narrow in scope – it only lasted 12 months and named only two companies for which the employee could not work. As one would expect, these two companies were the chief competitors to the employer on a particular government contract.

In the government contract world, it is common for employees who work at a government agency — almost as if they were government employees — to want to keep their jobs at the agency by migrating to whichever company wins the next contract. They want to continue working at the agency and the agency wants them to continue working. The new contractor-company also wants keep them working to avoid new recruiting expenses. Everyone is happy – except for the original contractor-company that hired the employee in the first place! They lose the value of their investment. They also lose their significant competitive advantage over rival contractors. So, by effectively blocking its employees from “migrating” to a competing contractor, the proper use of non-compete agreements can actually help a company keep a government contract from an agency that really wants to maintain the incumbent workers.