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North Carolina Court Again Narrows Scope of Post-Employment Restrictions

    Client Alerts
  • August 24, 2016

Last week’s EmployNews reported a Fourth Circuit Court of Appeals decision applying North Carolina law that invalidated an employment non-competition clause due to what it viewed as the overreaching scope of the restrictions. Earlier this month, the North Carolina Business Court issued a decision in Sandhills Home Care, LLC v. Companion Home Care- Unimed, Inc., that similarly rejected post-employment restrictions, in this case, limitations on solicitation of the former employer’s customers and employees.

In this lawsuit, the Business Court drew two important conclusions that could affect non-solicitation agreements throughout the state. First, the court decided that employee non-solicitation provisions should be interpreted under the same level of scrutiny applied to non-competes and customer non-solicitation restrictions. This means for example, that an employer asking a current employee to sign an employee non-solicitation agreement would need to provide some consideration for the promise beyond continuing employment. The restriction would need to be reasonable in terms of time and scope, and the agreement would have to explain the business reasons for the restriction.

Second, the court said that customer non-solicitation provisions cannot restrict solicitation of prospective customers. The court cited an earlier Court of Appeals decision that indicated this, but drew no distinction between prospective customers from whom there is a reasonable expectation of future business. The Business Court invalidated this provision while preserving the existing customer non-solicitation restriction, but this decision cautions employers against even attempting to include prospective customers in their employment agreements.

The Business Court is a special division of the North Carolina Superior Court designated to handle complex business disputes. Like the Fourth Circuit, its decisions on North Carolina law are not a binding precedent on North Carolina appellate courts. However, in the past the Business Court’s decisions have had significant impact on later opinions by the state’s higher courts.

These decisions along with recent Court of Appeals cases, have resulted in North Carolina becoming increasingly hostile to post-employment restrictive covenants. North Carolina courts will not rewrite overbroad provisions, usually resulting in invalidation of the entire covenant. Agreements entered into even a few years ago likely contain language that make them susceptible to attempts to invalidate their terms. If an employer’s business interests require maximally enforceable restrictive covenants with existing employees, the business should consider frequent reviews and revisions of such agreements to account for changes in North Carolina law, and re-execution of updated agreements with key employees.