Assurance Data, Inc. v. Malyevac

• Decision Date: 12 September 2013
• Docket Number: Record No. 121989.
• Citation: 286 Va. 137,747 S.E.2d 804
• Parties: ASSURANCE DATA, INC. v. John MALYEVAC.
• Court: Virginia Supreme Court

286 Va. 137

747 S.E.2d 804

ASSURANCE DATA, INC.

v.John MALYEVAC.

Record No. 121989.

Supreme Court of Virginia.

Sept. 12, 2013.

C. Dean Latsios (Matthews, Snider & Fitzner, Fairfax, on briefs), for appellant.

Christopher T. Craig (Lee B. Warren; Cook, Craig & Francuzenko, Fairfax, on brief), for appellee.

Present: All the Justices.

Opinion by Chief Justice CYNTHIA D. KINSER.

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 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).

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 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

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).

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 unnecessaryfor 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. Stinnett, 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 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. U.S. 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...