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Posted on Tuesday, November 27, 2012

Government Contractor’s Non-Compete Deemed Enforceable

The Virginia Supreme Court recently sent a strong message in favor of enforcing narrowly-drawn non-compete clauses in subcontracts between government primes and subs.

Preferred Systems Solutions, Inc. (PSS) was on a team led by Accenture that won a Blanket Purchase Agreement to support a Defense Logistics Agency (DLA) program called the Business Systems Modernization (BSM) Program. PSS had a subcontract with GP Consulting Services (GP) for the services of a GP programmer.  The subcontract had a non-compete clause in it that said GP “will not, either directly or indirectly, enter into a contract as a subcontractor for Accenture LLP and/or DLA to provide the same or similar support that PSS is providing to Accenture and/or DLA and in support of the DLA Business Systems Modernization (BSM) program.”

In 2007, the BSM program became operational so the agency then needed only periodic maintenance of the program.  Money for that work came out of a new source: the Enterprise Business Systems (EBS) program, a program that also paid for projects that were not part of the BSM program.

In 2010, while doing work on the EBS for PSS, GP properly terminated the subcontract with PSS, but three days later began working for Accenture on EBS.  In the words of the lower court, the GP employee “three days after leaving PSS went to work for Accenture on the same DLA project, at the same desk, at the same computer, and on the same problems.”

In a case that went all the way to the Virginia Supreme Court, PSS successfully enforced the non-compete agreement. Three rules can be drawn from the decision.

Be careful in drafting a non-compete clause because all the words will be given meaning. The non-compete clause had two phrases in it: GP could not be a sub to Accenture (1) for the same support PSS was providing Accenture and (2) in support of the BSM program. GP unsuccessfully argued that the clause was unenforceable because it was ambiguous. According to GP, the phrase “in support of the BSM program” could be read two ways: as a critical phrase narrowing the scope of the non-compete clause or as an extraneous phrase simply providing an additional description of the PSS work.

The court concluded that there was no ambiguity that would make the clause unenforceable: “although the language of the non-compete clause is not a model of artful construction, the ordinary meaning of the conjunctive ‘and’ suggests an additional requirement rather than a descriptive phrase. Moreover, if the phrase in question was merely descriptive, it would have been needlessly redundant.”

Whether a non-compete clause is enforceable is based on the “function, geographical scope and duration” of the restriction in the non-compete clause.  The court then concluded that the non-compete clause was enforceable based on the three-prong test considering the clause’s restriction on “function, geographic scope, and duration.”

Here, the “function” of the restriction was “narrowly drawn to work in support of a particular program run under the auspices of the particular government agency, limited to the same or similar type of information technology support offered by PSS on the BSM program.” There were 400 – 500 jobs “in the Washington DC area alone that were not proscribed by this agreement.”

Also, the narrowly drawn “function” of the clause eliminated any concern about the “geographical scope” of the restriction because it “is so narrowly drawn to this particular project and a handful of companies in direct competition with PSS.”

In addition, the 12 month “duration” of the non-compete clause was narrow.

Using the word “indirectly” need not invalidate a non-compete clause. Although words like “indirectly” could make the clause unenforceable as overly broad, that was not the case here: “This wording merely bars circumvention of the otherwise valid restrictive covenant by engaging in the series of subcontracts so as not to directly enter into a contract with the proscribed competitors. In other words, GP cannot do indirectly what it is directly prohibited from doing. The clause, in sum, does not prohibit indirect competition but rather prohibits GP from entering into a contract as a subcontractor or sub-subcontractor with Accenture, DLA or any other competing business to provide the same or similar support that PSS is providing in support of the BSM program.”

Terry O’Connor is the Director of Government Contracts with Berenzweig Leonard, LLP, a DC region business law firm that routinely drafts and litigates non-compete agreements in the Washington, DC area. He can be reached at TOConnor@BerenzweigLaw.com.      

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