Motion Control Systems, Inc. v. East

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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