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North Carolina Tightens Rules on Employee Non-Solicitation Agreements

    Client Alerts
  • January 14, 2011

In July, the North Carolina Court of Appeals issued an unpublished decision that could affect employers' use of customer non-solicitation agreements with employees. Non-solicitation agreements are often favored by employers because they are not subject to territorial requirements applicable to non-competition provisions. Also, employees may be more willing to sign a customer non-solicitation agreement that does not directly prevent him or her from working for a competitor.

In MJM Investigations, Inc. v. Sjostedt, the defendant agreed not to solicit any customer or prospective customer of the company for a two year period following termination of employment, for purposes of any insurance or corporate services. He contended that the agreement was invalid because it failed to specifically define what the terms client or prospective client meant. Sjostedt argued that the non-solicitation agreement was overbroad because this term could be considered to include branches, divisions or affiliates of clients having nothing to do with his former employer's business relationship.

He contended that prospective clients could be read to include entities that were prospective clients at the time the agreement was signed, even if they had not done business or had any contact with the plaintiff for years. Finally, Sjostedt contended that the non-solicitation provision was overbroad because it did not restrict his activities to clients and prospective clients with whom he personally dealt during his employment.

The Court of Appeals agreed, reversing a lower court decision upholding the validity of the non-solicitation agreement. The opinion was unpublished, meaning that although it can be cited in other cases, it should not be considered controlling legal authority.

Regardless, employers should interpret this opinion as guidance with respect to North Carolina courts' position with respect to similar agreements. As with non-competition covenants, non-solicitation agreements should be narrowly drawn. If specific customers cannot be listed, the agreement should define prohibited contacts as business units of clients with whom the employee had material contact within the time period closely preceding separation from employment. Prospective clients should be limited to those with whom the employer has a real and recent expectation of continuing business.

Employers may want to review existing non-solicitation agreements, and offer amendments to employees to narrow their scope in line with this decision. Reducing the scope of such agreements should not require the employer to provide additional consideration in return for the change.