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North Carolina Federal Court Cautions Employers on Scope of Non-Compete Agreements

    Client Alerts
  • October 04, 2013

Employers seeking to enforce older non-competition agreements against employees are often surprised to learn that restrictions that may have been common ten years ago are now disfavored by courts reviewing the agreements. Even more recent agreements can sometimes contain prohibitions on competition now deemed overbroad by courts. This reality was expressed in a decision last month from a federal court reviewing the terms of a North Carolina non-competition agreement.

In Moonracer, Inc. v. Collard, the defendant was a sales manager for a technology company who left and began work for a competitor. His former employer sought a temporary restraining order and preliminary injunction to stop the plaintiff from working for his new employer. The action was removed to federal court on diversity grounds, and the U.S. District Court for the Eastern District of North Carolina refused to enforce the non-compete.

The court found the agreement to be reasonable in terms of duration, but said that its scope was too broad. The definition of prohibited activity included his engaging in "similar actions" for his new employer, but this term was not defined in the agreement. The court determined that the job did not require specialized skill or knowledge, and that the defendant essentially cold called potential customers. Prohibiting him from engaging in similar actions was therefore overbroad when applied to this particular job.

In addition, the court said that the customer non-solicitation provision of the non-compete was unenforceable. It was not limited to customers with whom the defendant had a specific relationship, but extended to any contacts developed while working for the plaintiff. Finally, given the breadth of the restrictions, the court concluded that a nationwide prohibition against performing similar activities for any other technology company was unreasonable.
Based on these conclusions, the district court refused to issue an injunction, functionally rendering the non-compete unenforceable. The terms of this agreement used language common a number of years ago. In the intervening time period, North Carolina state and federal courts have continually restricted the use of non-competes. In order to be enforceable, the restrictions must be directly tied to the work performed by the employee, and target a real competitive threat. Non-competes should be written to apply to the specific job. They should directly address what kind of work the employee performs, and those customers with whom he or she has a reasonable chance of diverting.

If an employer has older non-competes in place that do not appear to meet these current requirements, it should consider revising the agreements. This may require that the employer provide additional consideration to current employees to support the new restrictions, but this change will greatly increase the chances of later enforcing the agreement if necessary.