Assurance Data, Inc. v. Malyevac

PRESENT: All the Justices
ASSURANCE DATA, INC.
OPINION BY
v. Record No. 121989 CHIEF JUSTICE CYNTHIA D. KINSER
SEPTEMBER 12, 2013
JOHN MALYEVAC
FROM THE CIRCUIT COURT OF FAIRFAX COUNTY
Robert J. Smith, Judge
This appeal concerns an employer's action to enforce
certain provisions of an employment agreement that, among other
things, restrain competition. In sustaining a demurrer, the
circuit court resolved the employee's challenge to the
enforceability of the restraints on competition. Because a
demurrer cannot be used to decide on the merits whether a
restraint on competition is enforceable, we will reverse the
circuit court's judgment. This case is an example in which the
trial court "'incorrectly . . . short-circuited litigation
pretrial and . . . decided the dispute without permitting the
parties to reach a trial on the merits.'" CaterCorp, Inc. v.
Catering Concepts, Inc., 246 Va. 22, 24, 431 S.E.2d 277, 279
(1993) (quoting Renner v. Stafford, 245 Va. 351, 352, 429 S.E.2d
218, 219 (1993)); see also Breeding v. Hensley, 258 Va. 207,
214, 519 S.E.2d 369, 372 (1999).
I. RELEVANT FACTS AND PROCEEDINGS
John Malyevac and Assurance Data, Inc. (ADI) entered into
an agreement (the Agreement), pursuant to which Malyevac sold
ADI's computer products and services to its customers. As
relevant to the issues on appeal, the Agreement contained non-
compete, non-solicitation, non-disclosure, and return of
confidential information provisions. Specifically, paragraph 5
required that Malyevac
shall not, during the term of this Agreement
and for 6 months after the termination
hereof (within a fifty (50) mile radius of
[ADI's] Virginia office(s)), solicit,
provide, promote or sell, directly or
indirectly, except through and for the
direct benefit of [ADI]:
(a) computer, software or hardware products
in competition with the products which are
available through [ADI]; (b) services for
customers or prospective customers that are
competitive with services provided by or
available through [ADI]; or
(c) training, managed services,
installation, implementation or related
professional services for software and/or
hardware which are provided by [ADI], except
as pre-approved in writing by [ADI].
Under paragraph 10, Malyevac agreed that he would not
at any time during or after the term of this
Agreement use . . . or disclose any
Confidential Information to any person
whatsoever (except for the sole purpose of
selling [ADI's] services and products for
[ADI] in a good faith and professional
manner as provided herein), or permit any
person whatsoever to examine and/or make
copies of any reports or any information or
documents prepared by him/her or that come
into his/her possession or under his control
by reason of his/her consulting services,
and that upon termination of this Agreement
he/she will turn over to [ADI] all
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Confidential Information, including, without
limitation, all copies thereof, in any
format whatsoever, and any documents, papers
and other items in his/her possession or
under his/her control that relate to [ADI].
Next, in paragraph 12, Malyevac agreed that
[e]xcept for the sole benefit of [ADI] and
consistent with the terms hereof, during the
term hereof, and for a period of twelve (12)
after the date of termination hereof, [he]
will not, directly or indirectly, seek,
engage in or solicit, from any "Company
Customer" (as hereafter defined) any
business which is competitive with [ADI's]
offering of services or products or in any
way discourage client or customer usage of
[ADI's] services or products. A "Company
Customer" shall mean any past, present or
prospective customers of [ADI] or its
subsidiaries, with whom [Malyevac] has been
in contact or obtained contact/user
information in connection with his/her
consulting activities for [ADI] or its
vendors.
Finally, in paragraph 17(b), Malyevac agreed that
upon termination of the Agreement, he would
[d]eliver to [ADI] all [ADI] or [ADI's]
customer or vendor keys, passwords,
property, equipment, vendor marketing info
and materials, data, reports, summaries,
test results, computer software, and such
other items and materials and/or
Confidential Information (and copies
thereof) as may have been prepared for
and/or accumulated by [Malyevac] in
performing this Agreement or services for
[ADI], whether completed or in process
(including all copies thereof in whatever
format).
3
A few months after entering into the Agreement, Malyevac
resigned. Subsequently, ADI filed a complaint in the circuit
court alleging that Malyevac was violating paragraphs 5, 10, 12,
and 17(b) of the Agreement by performing work and services and
selling products in direct competition with ADI, by engaging in
other prohibited activities, and by failing to return
confidential information. ADI requested injunctive relief, the
return of all confidential information, and compensatory
damages.
In response, Malyevac filed a demurrer, asserting that
ADI's allegations set forth in the complaint fail to state a
claim upon which relief may be granted. Malyevac specifically
asserted that the Agreement's non-compete and non-solicitation
provisions are overbroad and thus unenforceable. At a hearing
on the demurrer, Malyevac pointed out, as an example, that the
non-solicitation requirements in paragraph 12 are in force for a
period of "twelve (12)" but that language indicating whether the
duration is days, weeks, months or years is omitted. Due to the
over-breadth, Malyevac argued that a demurrer can be used to
challenge the provisions' enforceability.
ADI responded that a demurrer only tests whether a cause of
action has been pled and that it cannot be used to decide the
merits of a claim. Acknowledging its burden to demonstrate the
reasonableness of the provisions restraining competition, ADI
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argued that it was entitled to present evidence to meet that
burden. Thus, according to ADI, a demurrer cannot be used to
determine whether the restraints are enforceable.
The court sustained the demurrer without granting ADI leave
to amend its complaint. Explaining its decision, the circuit
court stated:
So then the question becomes why can't we do
it with a demur[rer] if the court finds as a
matter of law that a contract, a part of a
contract is unenforceable then to state, to
bring a lawsuit based on that unenforceable
contract . . . fails to state a cause of
action.
Applying that rationale, the court concluded "as a matter of law
the provision is unenforceable." The court entered a final
order dismissing the action with prejudice.
We awarded ADI this appeal. The dispositive question is
whether the circuit court erred by using a demurrer to decide,
on the merits, the enforceability of the Agreement's non-compete
and non-solicitation provisions. 1
1
At the hearing on the demurrer, the parties' arguments
focused primarily on the enforceability of the Agreement's non-
compete and non-solicitation provisions and whether that issue
could be decided on demurrer. Malyevac, however, also argued at
that hearing and in a memorandum in support of the demurrer that
the allegations concerning Malyevac's violation of paragraphs 10
and 17(b) requiring non-disclosure and return of confidential
information, respectively, are conclusory and therefore
insufficient to state a claim, and that the complaint fails to
identify actual damages suffered by ADI as a result of
Malyevac's alleged actions. The circuit court did not address
these arguments but sustained the demurrer as to the entire
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II. ANALYSIS
The purpose of a demurrer is to determine whether a
complaint states a cause of action upon which the requested
relief may be granted. Dunn, McCormack & MacPherson v.
Connolly, 281 Va. 553, 557, 708 S.E.2d 867, 869 (2011). "A
demurrer tests the legal sufficiency of facts alleged in
pleadings, not the strength of proof." Id. (internal quotation
marks omitted). Thus, unlike a motion for summary judgment, a
demurrer "does not allow the court to evaluate and decide the
merits of a claim." Fun v. Virginia Military Inst., 245 Va.
249, 252, 427 S.E.2d 181, 183 (1993); see also Concerned
Taxpayers v. County of Brunswick, 249 Va. 320, 327-28, 455
S.E.2d 712, 716 (1995).
complaint, including the allegations regarding paragraphs 10 and
17(b), for the stated reason that "as a matter of law the
provision is unenforceable."
In a motion to reconsider, ADI pointed out that Malyevac
challenged only the enforceability of the non-compete and non-
solicitation provisions and that he asserted other reasons in
the demurrer and supporting memorandum as to why the allegations
asserting violations of paragraphs 10 and 17(b) fail to state a
claim. ADI argued that the circuit court's order sustaining the
demurrer and dismissing the entire complaint did not accurately
reflect its ruling that pertained only to the non-compete and
non-solicitation provisions. The circuit court denied the
motion to reconsider, stating that its prior order was an
accurate statement of the court's ruling on the demurrer. Thus,
the circuit court sustained the demurrer and dismissed the
complaint with prejudice and without leave to amend because "as
a matter of law the provision is unenforceable." When the
circuit court used the term "the provision," it did not specify
to which provision it was referring. We will address them
collectively.
6
Like the circuit court, "we consider as true all the
material facts alleged in the . . . complaint, all facts
impliedly alleged, and all reasonable inferences that may be
drawn from such facts." Concerned Taxpayers, 249 Va. at 323,
455 S.E.2d at 713. When a complaint "contains sufficient
allegations of material facts to inform a defendant of the
nature and character of the claim, it is unnecessary for the
pleader to descend into statements giving details of proof in
order to withstand demurrer." CaterCorp, 246 Va. at 24, 431
S.E.2d at 279. "[E]ven though a . . . complaint may be
imperfect, when it is drafted so that defendant cannot mistake
the true nature of the claim, the trial court should overrule
the demurrer." Id. "'Because the decision whether to grant a
demurrer involves issues of law, we review the circuit court's
judgment de novo.'" Dunn, McCormack & MacPherson, 281 Va. at
557, 708 S.E.2d at 869 (quoting Abi-Najm v. Concord Condo., LLC,
280 Va. 350, 357, 699 S.E.2d 483, 487 (2010)).
Citing the decisions in Modern Environments, Inc. v.
Stinnet, 263 Va. 491, 561 S.E.2d 694 (2002), and Home Paramount
Pest Control Cos. v. Shaffer, 282 Va. 412, 718 S.E.2d 762(2011), Malyevac argues that the circuit court did not err in
sustaining the demurrer because the Agreement's non-compete and
non-solicitation provisions are overbroad on their face and
therefore unenforceable. According to Malyevac, when analyzing
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overly broad restraints on competition, a court could determine
that no amount of evidence would render the restraints
reasonable and enforceable. As it did before the circuit court,
ADI argues that in the context of ruling on a demurrer, the
court could not decide the merits of Malyevac's challenge to the
enforceability of these provisions. To do so, according to ADI,
denies it the opportunity to present evidence that the
restraints are reasonable and no greater than necessary to
protect its legitimate business interests.
An agreement that restrains competition "must be evaluated
on its own merits, balancing the provisions of the contract with
the circumstances of the businesses and employees involved."
Omniplex World Servs. Corp. v. US Investigations Servs., Inc.,
270 Va. 246, 249, 618 S.E.2d 340, 342 (2005). Each case
involving the enforceability of a restraint on competition "must
be determined on its own facts." Modern Env'ts, 263 Va. at 493,
561 S.E.2d at 695. The employer bears the "burden to show that
the restraint is no greater than necessary to protect a
legitimate business interest, is not unduly harsh or oppressive
in curtailing an employee's ability to earn a livelihood, and is
reasonable in light of sound public policy." Id. In
determining whether an employer has carried that burden, "we
consider the 'function, geographic scope, and duration' elements
of the restriction." Home Paramount, 282 Va. at 415, 718 S.E.2d
8at 764 (quoting Simmons v. Miller, 261 Va. 561, 581, 544 S.E.2d
666, 678 (2001)). "We assess these elements together rather
than as distinct inquiries," and to be enforceable the agreement
must be found reasonable as a whole. Preferred Sys. Solutions,
Inc. v. GP Consulting, LLC, 284 Va. 382, 393, 732 S.E.2d 676,
681 (2012) (citing Home Paramount, 282 Va. at 415-16, 718 S.E.2d
at 764).
The premise running through Simmons, Modern Environments,
Home Paramount, and our other decisions is that restraints on
competition are neither enforceable nor unenforceable in a
factual vacuum. Based on evidence presented, a trial court must
ascertain whether a restraint "'is narrowly drawn to protect the
employer's legitimate business interest, is not unduly
burdensome on the employee's ability to earn a living, and is
not against public policy.'" Home Paramount, 282 Va. at 415,
718 S.E.2d at 763-64 (quoting Omniplex World Servs., 270 Va. at
249, 618 S.E.2d at 342); Modern Env'ts, 263 Va. at 493, 561
S.E.2d at 695. An employer may prove a seemingly overbroad
restraint to be reasonable under the particular circumstances of
the case. Simmons, 261 Va. at 581, 544 S.E.2d at 678 (citing
cases). 2
2
Contrary to Malyevac's argument, our decision in Modern
Environments does not support his assertion that a restraint on
competition can be found unenforceable as a matter of law
without the presentation of evidence. There, the employer
9
As explained earlier, a demurrer has one purpose - to
determine whether a complaint states a cause of action upon
which the requested relief may be granted. Dunn, McCormack &
MacPherson, 281 Va. at 557, 708 S.E.2d at 869. In ruling on the
demurrer, the circuit court, however, examined the Agreement's
non-compete and non-solicitation provisions and determined that
the provisions are overbroad and thus unenforceable as a "matter
of law." The court ruled on the merits of whether the Agreement
is enforceable without permitting ADI to present evidence to
demonstrate that the restraints are no greater than necessary to
protect its legitimate business interests, are not unduly harsh
or oppressive in curtailing Malyevac's ability to earn a
livelihood, and are reasonable in light of sound public policy. 3
See Modern Env'ts, 263 Va. at 493, 561 S.E.2d at 695.
failed to offer argument or evidence to prove its legitimate
business interests were served by the particular restraint at
issue. 263 Va. at 495-96, 561 S.E.2d at 696. In contrast, ADI
opposed the demurrer precisely on the ground that it sought to
present evidence to prove that the restraint is reasonable and
no greater than necessary to protect its legitimate business
interests.
3
Because a demurrer cannot be used to decide the merits of
a claim alleged in a complaint, we disagree with Malyevac's
assertion that this Court cannot review the circuit court's
decision because ADI failed to proffer the evidence that it
would have introduced to support the enforceability of the
provisions restraining competition.
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III. CONCLUSION
Because "[a] demurrer does not permit the trial court to
evaluate and decide the merits of the claim set forth in a . . .
complaint," Concerned Taxpayers, 249 Va. at 327, 455 S.E.2d at
716, the circuit court erred when it sustained Malyevac's
demurrer on the ground that "the provision is unenforceable" as
a matter of law and dismissed the entire complaint for that
reason. Therefore, we will reverse the circuit court's judgment
sustaining the demurrer and remand the case for further
proceedings. 4
Reversed and remanded.
JUSTICE McCLANAHAN, concurring.
Because an employer is entitled to present evidence to
prove its restraints on competition are reasonable under the
particular circumstances, I agree the circuit court erred in
sustaining the demurrer. I would end my analysis there.
4
In light of our decision, it is not necessary to address
ADI's other assignments of error.
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