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North Carolina Business Court Dismisses Overbroad Noncompete

    Client Alerts
  • March 30, 2023

When we are asked by a client to review their form employee noncompetition agreement, we often see companies using documents found on the internet that were clearly written for use in states other than North Carolina. Last week, the North Carolina Business Court invalidated most of a noncompete based on its inclusion of restrictions that are common but, nevertheless, prohibited under state judicial interpretations.

In Prometheus Group Enterprises, LLC v. Gibson and Prospecta Software, one of the plaintiff’s employees left to join a competitor. The former employer sued, claiming violation of the employee’s noncompetition agreement as well as misappropriation of trade secrets. After reviewing the agreement, the Business Court denied the plaintiff’s motion for a preliminary injunction and dismissed most of the lawsuit.

In its opinion, the court based its decision on the inclusion in the noncompete of restrictions found to be overbroad and unenforceable in North Carolina. First, the agreement had a worldwide territorial restriction. North Carolina courts will not rewrite an overbroad territory restriction, and the failure to include smaller geographic areas tied to the company’s actual market doomed the agreement. Given that North Carolina courts cannot effectively prevent overseas competition, the use of territories outside the U.S. has limited practical use even if considered reasonable.

Second, the agreement prohibited the former employee from working “directly or indirectly” for a competitor. It did not limit the restriction to work that is the same or similar to that performed by the employee for his former employer. Form noncompete agreements frequently prohibit indirect competition, but use of this term threatens the enforceability of such restriction in North Carolina.

In order to stand a chance of holding up to judicial scrutiny, North Carolina noncompetition agreements must be narrowly written and tied to the specific competitive threat posed by the employee’s departure. The use of extraneous or overbroad language will likely result in an agreement that does not present much of a deterrent to a worker who decides to violate its terms.