United States: Federal Court Finds Choice Of Law That Permits Blue Penciling Does Not Violate Virginia Public Policy

Non-compete restrictions are creations of state law, which can sometimes vary on key aspects of contract formation and enforceability. One of those aspects is the extent to which states will reform or "blue pencil" the language of the restrictions. In many states a court will rewrite the terms of the restrictions to make them reasonable, thus fulfilling the parties' contractual intent. Courts in other states refuse to tamper with a restriction's language, requiring the non-competes to rise or fall on their literal terms.   

One means of avoiding state-specific nuances that might otherwise threaten enforceability is a choice-of-law provision that designates the law of an enforcement-friendly jurisdiction to apply to the agreement's interpretation. While states often honor the contracting parties' intent to apply another state's law, a potential problem arises when the chosen state's law violates a fundamental public policy of the state where enforcement is sought. To that point, the Restatement (Second) of Conflict of Laws, Section 18, provides that parties' choice of law will not apply if "application of the law of the chosen state would be contrary to a fundamental policy of a state which has a materially greater interest than the chosen state in the determination of the particular issue." Hence, in a lawsuit brought outside a home jurisdiction, one argument to avoid enforceability of a non-compete is that the chosen law violates the policy of the forum state.

Virginia is one such state that refuses to blue pencil an overbroad restriction, and its position on the issue conceivably embraces the state's public policy. In Virginia, a potential hurdle in enforcement actions arises when the chosen law applicable to an agreement is contrary to Virginia's purported public policy. This is a seemingly solid theory. 

But, a federal district court in Virginia has squarely rejected it. In Edwards Moving & Rigging, Inc. v. W.O. Grubb Steel Erection, Inc., the U.S. District Court for the Eastern District of Virginia considered the argument based on a non-compete agreement that selected Kentucky law to govern its interpretation. While observing that Virginia will not apply another state's law that offends Virginia public policy, the court went on to say that both Virginia and Kentucky favor enforcement of non-compete clauses in employment agreements. In the same breath, the court recognized that Kentucky allows blue-penciling of agreements but Virginia does not – a distinction the court concluded was not material. The court also noted that "[a]pplying the law of a state that allows 'blue penciling' is not so repugnant to Virginia public policy as to overcome Virginia's preference for enforcing choice-of-law and forum-selection clauses." In the end, the court applied Kentucky law, notwithstanding its more liberal approach, to allow reformation of overbroad non-compete restrictions. 

The Edwards Moving court's view that Virginia favors enforcement of non-competes stands at odds with multiple state court decisions that have observed the exact opposite. See, e.g., Simmons v. Miller, 261 Va. 561, 580, 544 S.E.2d 666, 678 (2001) ("Restrictions on trade, such as non-compete and non-solicitation agreements, are disfavored under Virginia law."). Nonetheless, the decision should stand to diffuse any argument that Virginia public policy should reject a chosen state's law that allows reformation of non-compete agreements. Employers with Virginia-based employees who are subject to non-compete agreements are well advised to choose a governing law in those agreements that will likely circumvent Virginia's otherwise strict reliance on the plain language of a restriction.

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