Present: All the Justices
MOTION CONTROL SYSTEMS, INC.
v. Record No. 001940 OPINION BY JUSTICE ELIZABETH B. LACY
June 8, 2001
GREGORY C. EAST
FROM THE CIRCUIT COURT OF PULASKI COUNTY
Colin R. Gibb, Judge
Motion Control Systems, Inc. (MCS) appeals a decision of
the trial court holding that a covenant not to compete
executed by its former employee, Gregory C. East, was
overbroad and therefore unenforceable. East assigns as cross-
error the trial court's entry of an injunction under the
Uniform Trade Secrets Act, Code §§ 59.1-336 through -343,
permanently enjoining him from "disclosing to anyone any
confidential, proprietary or trade secret information of
Motion Control." We will affirm the trial court's
determination that the covenant not to compete was overbroad
and unenforceable, but because we conclude that the evidence
is insufficient to support the imposition of the injunction,
we will reverse that part of the trial court's judgment.
I. Facts
MCS engages in the business of designing and
manufacturing high performance drive systems, including
brushless motors as well as amplifiers and electronic controls
for the motors. Each motor is custom made. MCS protects its
proprietary information regarding its products in a number of
ways such as keeping customer lists confidential, restricting
product application information, and removing identifying
marks from component parts.
East began working for MCS as a test technician in 1991.
He received numerous promotions and in 1998 was the Quality
and Reliability Engineering Manager. In this position, he had
access to customer lists, customer specifications, and was
involved in new product development. He was considered an
integral member of the MCS management team.
In 1997, MCS asked its employees to sign a
"Confidentiality and Noncompetition Agreement" (the
Agreement). As presented to East, Paragraph 3(b) of the
Agreement provided:
Therefore, the Employee agrees that for a
period of two years after termination of their
employment with the Company in any manner whether
with or without cause, the Employee will not
within a one hundred (100) mile radius of the
Company's principal office in Dublin, Virginia,
directly or indirectly, own, manage, operate,
control, be employed by, participate in, or be
associated in any manner with the ownership,
management, operation or control of any business
similar to the type of business conducted by the
Company at the time of the termination of this
Agreement. The term "business similar to the
type of business conducted by the Company"
includes, but is not limited to any business that
designs, manufactures, sells or distributes
motors, motor drives or motor controls.
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East was concerned that the final sentence of this provision
could apply to prohibit work in areas beyond the scope of
MCS's business. Upon advice of counsel, East suggested the
deletion of the phrase "but is not limited to." MCS accepted
East's proposed changes and added the word "currently,"
changing the final sentence of paragraph 3(b) to read:
The term "business similar to the type of
business conducted by the Company" currently
includes any business that designs,
manufactur[es], sells or distributes motors,
motor drives or motor controls.
East then signed the Agreement.
East resigned from MCS in December 1998 and was hired by
Litton Systems, Inc. (Litton) in August 1999 as a supervisor
in Litton's slip ring manufacturing operation at its
Blacksburg plant. Litton makes brushless motors at its
Blacksburg facility.
The trial court found that MCS and Litton made some of
the same products and that MCS reasonably could be concerned
that Litton was "going to get into the production of [MCS's]
product and put [MCS] out of business." Nevertheless, the
trial court concluded that the covenant not to compete was
unenforceable because the final sentence of paragraph 3(b)
"imposed additional restraints which are far greater than
reasonably necessary to protect [MCS] in [its] legitimate
business enterprise." The trial court did, however, enjoin
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East from "disclosing to anyone any confidential, proprietary
or trade secret information of Motion Control," even though
the trial court found that Litton had not attempted to gain
any trade secrets and East had not "made any disclosure of any
trade secret or any other like fact."
II. Covenant Not to Compete
Covenants not to compete are restraints on trade and
accordingly are not favored. The validity of a covenant not
to compete is determined by applying not only the general
principles of contract construction, but also legal principles
specifically applicable to such covenants. The employer bears
the burden to show that the restraint is reasonable and no
greater than necessary to protect the employer's legitimate
business interests. The restraint may not be unduly harsh or
oppressive in curtailing the employee's legitimate efforts to
earn a livelihood and must be reasonable in light of sound
public policy. As a restraint of trade, the covenant must be
strictly construed and, if ambiguous, it must be construed in
favor of the employee. Richardson v. Paxton Co., 203 Va. 790,
794-95, 127 S.E.2d 113, 117 (1962). On appeal, our
examination of the covenant not to compete presents a question
of law which we review de novo. See, e.g., Musselman v. The
Glass Works, L.L.C., 260 Va. 342, 346, 533 S.E.2d 919, 921
(2000).
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In this appeal, the two-year time period and geographic
area covered by MCS' covenant not to compete are not at issue.
Rather, the sole issue is whether the language of Paragraph
3(b) is overbroad. Relying on our cases that have approved
language similar to that contained in Paragraph 3(b), MCS
argues that the present restraint is no greater than necessary
to protect its interests because the language is "narrowly
tailored" to protect MCS from former employees disclosing its
proprietary or confidential information to competitors. We
disagree.
The covenants not to compete in the cases upon which MCS
relies contained some, but not all, of the language used in
Paragraph 3(b). These covenants stated that the former
employee could not be involved in "any business similar to the
type of business conducted by" the employer, Roanoke Eng'g
Sales Co. v. Rosenbaum, 223 Va. 548, 551, 290 S.E.2d 882, 883
(1982), or that the employee would not work for a competitor
who "renders the same or similar services as Employer," Blue
Ridge Anesthesia & Critical Care v. Gidick, 239 Va. 369, 370,
389 S.E.2d 467, 468 (1990), thus limiting prohibited
employment to other business "similar" to the employer's
business. The prohibition in this case goes further, however.
By defining a "similar business" as "any business that
designs, manufactures, sells or distributes motors, motor
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drives or motor controls," MCS's covenant also prohibits
employment in any business, for example, that sells motors,
regardless of whether the motors are the specialized types of
brushless motors sold by MCS. As the trial court concluded,
under this provision, the restricted activities "could include
a wide range of enterprises unrelated to" the business of MCS.
Although the change in language suggested by East may have
narrowed the range of prohibited employment, neither before
nor after the alteration was the prohibited employment
restricted to businesses which engage in activities similar to
those in which MCS engaged.
Accordingly, we conclude that the trial court did not err
in holding that the covenant not to compete in this case
imposed restraints that exceeded those necessary to protect
the legitimate business interests of MCS and, therefore, was
unenforceable.
III. Injunction
The trial court, finding that East had knowledge of MCS's
trade secrets, enjoined East from disclosing MCS's
confidential, trade secret, or proprietary information to
anyone, pursuant to Code § 59.1-337. That section provides in
pertinent part:
A. Actual or threatened misappropriation
may be enjoined. Upon application to the court,
an injunction shall be terminated when the trade
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secret has ceased to exist, but the injunction
may be continued for an additional reasonable
period of time in order to eliminate commercial
advantage that otherwise would be derived from
the misappropriation.
By its terms, this section requires actual or threatened
disclosure of trade secrets. The only basis cited by the
trial court for issuing the injunction was that East had
knowledge of the trade secrets of MCS. The trial court made
no findings that East had actually disclosed or threatened to
disclose such information. To the contrary, the trial court
specifically found that East had not disclosed "any trade
secret or any other like fact." Mere knowledge of trade
secrets is insufficient to support an injunction under the
terms of Code § 59.1-337.
For the reasons stated, we will affirm that portion of
the trial court's judgment holding that the covenant not to
compete is overbroad and unenforceable and reverse that
portion of the judgment imposing an injunction against East
pursuant to Code § 59.1-337.
Affirmed in part,
reversed in part
and final judgment.
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