Federal District Court Rejects Challenges to Employee Non-Solicitation Agreement
- May 30, 2014
As reported in EmployNews, in recent years North Carolina courts have increased the degree of scrutiny used when reviewing employee non-compete agreements, rejecting as overbroad agreements that would have been upheld in the past. Last month, a federal district court applying North Carolina law declined to hold an employee non-solicitation agreement to the same strict standard used with non-competes.
In Superior Performers, Inc. v. Meaike, the plaintiff was an independent marketing organization that recruited and earned commissions from life insurance agents. The defendants were independent contractor agents who worked for the plaintiff. As a condition of accessing a database of insurance sales leads, the defendants were required to agree not to solicit the plaintiff’s employees or independent contractors for a two-year period following the end of their business relationship. Upon departure from the plaintiff’s business, the defendants started their own marketing organization and recruited almost 200 of the plaintiff’s agents. The plaintiff sued in the Middle District, seeking enforcement of the non-solicitation provision.
The defendants raised multiple objections to the non-solicitation provision, including claims that it cannot legally apply to independent contractors, was not supported by adequate consideration, was overbroad because it prohibited “direct or indirect” solicitation and that it applies to the plaintiff’s affiliates. The district court rejected all of these challenges, upholding the non-solicitation provision in its entirely.
First, the court held that access to the prospect database was adequate consideration for the non-solicitation agreement. The leads were of potential financial value to the agents. Second, the district court noted that similar covenants have been upheld against contractors using the same principles applied to employment restrictions. Third, the court distinguished North Carolina cases that have rejected the “directly or indirectly” language when used in an employment non-compete. In the employee non-solicitation context, this restriction is reasonable because it only applies to the employees who could be solicited. Finally, unlike some North Carolina state court decisions, the federal court was willing to “blue pencil” the affiliates language, concluding that it could be removed from the agreement without harming its overall intent.
This decision demonstrates that courts are willing to provide employers with more leeway with regard to employee or customer non-solicitation agreements as opposed to traditional non-competes. For many businesses, non-solicitation agreements provide them with comparable protections against unfair competition without risking the strict interpretation applied by courts to non-competes. Although this federal decision is not binding precedent on North Carolina state courts, it indicates how they may approach similar challenges to non-solicitation agreements.