In an important decision, the North Carolina Court of Appeals held an employee non-competition agreement unenforceable because the scope of prohibited conduct was overbroad. Medical Staffing Network v. Ridgway demonstrates that in North Carolina restrictive covenants in an employee non-competition agreement must be limited so as not to prohibit the employee from engaging in work that is distinct from the duties actually performed by the employee. Specifically, the court in Medical Staffing found that the non-competition agreement at issue was overbroad on its face because it prohibited competition with not only the employer but also the employer’s subsidiaries and other affiliates – a prohibition that would have prevented the employee from working in certain businesses even though his employment duties were completely unrelated to those businesses.
In Medical Staffing Network v. Ridgway, Medical Staffing sued a former employee, Thomas Ridgway, for breach of a written non-competition agreement entered into in connection with Ridgway’s employment. The non-competition agreement was drafted to protect the business of Medical Staffing and that of “any parent, division, subsidiary, affiliate, predecessor, successor or assignee…” of Medical Staffing and included covenants restricting disclosure of confidential information, solicitation of employees and competition. Ridgway subsequently resigned from Medical Staffing and joined a competitor in the restricted territory. After he resigned and joined the competitor, Ridgway solicited employees and customers of Medical Staffing, both activities prohibited under the non-competition agreement. Medical Staffing subsequently sued Ridgway and his new employer for, among other things, breach of the non-competition agreement.
A North Carolina trial court found generally in favor of the plaintiff. On appeal, Ridgway contended that the non-competition agreement was overbroad and unenforceable because it was not limited to protecting the business interests of Medical Staffing but, rather, those of Medical Staffing and “any parent, division, subsidiary, affiliate, predecessor, successor or assignee…” of Medical Staffing.
The North Carolina Court of Appeals agreed with Ridgway on this point and reversed the trial court, holding that the non-competition agreement was overbroad on its face because it was not limited to protecting the rights of Medical Staffing, the specific company for whom Ridgway worked and the company with the business interest in limiting Ridgway’s behavior. The Court of Appeals noted that as drafted the non-competition agreement would prevent Ridgway from competing with Medical Staffing’s subsidiaries and other affiliates even though Ridgway’s employment duties had nothing to do with those other businesses.
Notably, the Court of Appeals did not “blue pencil” the non-competition agreement, as North Carolina courts have done in instances where the duration was too long or the restricted territory too large. Instead, the court found the entire agreement to be unenforceable, despite the fact that Ridgway was performing substantially the same duties for a direct competitor in the restricted territory.
Although this is an appeals court decision and may be subject to review by the North Carolina Supreme Court, employers in North Carolina should consider the following:
- Employers should review their existing employee non-competition agreements to determine if they prohibit competition with subsidiaries or other affiliates of the employer.
- When drafting employee non-competition agreements, employers should consider the realistic and most likely competitive threat posed by the employee.
- Restrictive covenants should be drafted narrowly so as not to prohibit the employee from engaging in work that is distinct from his or her actual employment duties.
- Employers should not rely on a North Carolina court “blue penciling” a restrictive covenant where the scope of prohibited conduct is overbroad – instead, employers should realize that such an agreement may be considered unenforceable.
To view the full text of Medical Staffing Network v. Ridgway please click here.