Covenant Not to Compete
There have been two written decisions recently dealing with the interpretation and enforcement of non-competition, non-solicitation, and non-inducement clauses in the employment context in North Carolina. This blog post will examine the rulings on the non-compete clauses. The first, chronologically, is the decision in the case of RLM Communications, Inc., v. Tuschen, from the Fourth Circuit of the United States Court of Appeals. The second is the decision in the case of Sandhills Home Care, L.L.C., v. Companion Home Care Unimed, Inc in the North Carolina Business Court.
The cases involved employees who left their job to work at a competitor and their original employer sued to enforce non-compete, non-solicitation, and non-inducement clauses that were signed.
North Carolina courts will enforce a covenant not to compete if is “(1) in writing; (2) made a part of the employment contract; (3) based on valuable consideration; (4) reasonable as to time and territory; and (5) designed to protect a legitimate business interest.” The restrictions on the employee’s future employment must be written to be “no wider in scope than is necessary to protect the business of the employer.” Manpower of Guilford Cty., Inc. v. Hedgecock, 257 S.E.2d 109, 114 (N.C. Ct. App. 1979). The first three factors are relatively easy to determine; but, the last two are the subject of much litigation, including these two cases. Below are the three non-compete clauses the courts looked at with notes on what made them overbroad and what provisions the court deemed to be enforceable.
For ease in understanding the impact in these decisions we have added suggested language, which is underlined, that would have made the non-compete clause enforceable and stricken language the court took issue with.
RLM Communications, Inc. v. Tuschen
“While I, the Employee, am employed by Employer, and for 1 years/months afterward, I will not directly or indirectly participate in a business that is similar to a business now or later operated by Employer in the same geographical area performing the same type of work. This includes participating in my own business or as a co-owner, director, officer, consultant, independent contractor, employee, or agent of another business.”
The court found that the non-compete clause was overbroad and unenforceable. The non-compete as it was written did not only keep Tuschen from performing the same type of job at a competitor, it also kept her from “mow[ing] their lawns, cater[ing] their business lunches and serve[ing] as their realtor.” RLM Communications at pg. 9. A non-compete is overbroad when it keeps an employee from having any sort of association whatsoever with a competitor company. For a non-compete to be valid it needs to focus on preventing the employee from performing the same type of job for a competitor company.
The court also took issue with the clause that prevented Tuschen from performing work for a competitor in a line of work that RLM had not established at the time Tuschen signed the non-compete. For example, if RLM took up software development (their business was cyber security) under the non-compete Tuschen would be barred from being a sales representative to a software developer even though at the time Tuschen signed the non-compete RLM did not participate in software development
The court also noted the prohibition on indirect participation in a competitor business as an overbroad aspect of the non-compete. The “directly or indirectly” language is something that we see time and time again being admonished by the courts as being overbroad.
Sandhills Home Care, L.L.C. v. Companion Home Care Unimed
The employees who left Sandhills were subject to one of two non-compete clauses. The first is as follows, again with our additions:
“Employee hereby covenants and agrees that, for a period of one (1) year following the termination of his/her employment relationship with Employer, for whatever reason, whether voluntarily or involuntarily, and for cause or no cause, he/she shall not directly or indirectly, on behalf of himself or any other person, company, or entity:
- work for, provide services for, consult with, or otherwise assist any individual or entity who is in the home health or personal care business competing with the Employer in the same or similar capacity as the work done while in the employ of Employer. This covenant not to compete shall be limited to any county in North Carolina where Employer is providing services at the time of Employee’s separation;”
In general, and as stated above, covenants that keep an employee from working for a competitor in any capacity are overbroad and unreasonable. Because this section (i) of the non-compete was not narrowly tailored enough to protect only their legitimate business interests, and therefore it was not enforceable. In order for the non-compete to be enforceable the employer would have to have a clause narrowing the non-compete to only prohibiting an employee from working in the same or similar position and a competitor.
The second non-compete agreement Sandhills had some of its employees sign stated:
“NON-COMPETE COVENANT. Worker will not compete with Sandhills Home Care for a period of (1) year after Worker’s separation from Sandhills Home Care within the geographical area that defined by a 100-mile radius of Sandhills Home Care, LLC, 401 E. Third Street, Ste. 3C, Pembroke, N.C., 28372
Further, Worker agrees for a period of (1) year from the date of Worker’s separation from Sandhills Home Care not to perform any work or services for any customer or account for which Sandhills Home Care or its agents, including Worker, performed work or services during the six months preceding the date of Worker’s separation.”
In another section the agreement defined the word “compete” as “holding any ownership interest in, operating, managing, or advising a home health aide business or any other business that performs substantially the same services as Sandhills Home Care.” Again, when a non-compete agreement would prohibit an employee from investing in a similar company it is likely too broad. The court also found that the word “advising” would encompass all sorts of employment opportunities that would not impede on Sandhills legitimate business interests in any way. An example the court gave was that under the agreement, as written, the employee could not advise another Home Care business on interior decorating without being in breach of the agreement.
The defendants claimed that the 100-mile restriction was overbroad; however, the court found that because the Plaintiff alleged that it did in fact provide services in that 100 mile radius the court could not conclude that the 100 mile geographic restriction was unreasonable. Even though the geographic restriction was found to be reasonable, the definition of compete was overbroad and therefore the court struck the first paragraph of the non-compete.
The second paragraph also has its problems, namely the prohibition against providing any type of service to the Employer’s customers or accounts. Part of this is that the prohibition encompasses all types of services from food preparation to real estate and is not narrowly tailored to prohibit former employees from competing against Sandhills in the same or similar role. The other problem the court had was that it prohibits former employees from providing services to all of Sand Hills customers, regardless of whether or not the employee had any contract with that customer.
Due to the above outlined issues with the non-compete clause the court found it unenforceable.
Overall, it is clear that if an employer is going to have employees sign a non-compete clause, it is imperative that the clause be narrowly tailored to protect the employer’s legitimate business interests. Words like “indirectly” should not be in the non-compete because time and time again courts have held that prohibiting an employee from indirectly being involved competitor companies would limit their investment opportunities in a way that has nothing to do with protecting legitimate business interests. Protecting an employer’s legitimate business interests, at least with these two decisions, seems to mean that the employee is prohibited from doing the same or similar work for a competitor company and nothing more.