Harder Line on Enforcing Covenant Not to Compete and Non-solicitation Agreements

Enforcing non-compete and non-solicitation agreements

On November 5, 2019, the North Carolina Court of Appeals issued a unanimous decision in the case of Andy-Oxy Co., Inc. v. Harris, COA 19-10, Buncombe County No. 18 CVS 3120.  The trial court had issued a preliminary injunction enforcing an employment agreement that contained a covenant not to compete and a non-solicitation agreement, which prevented the former employee from taking a new position with a competitor.  The Court of Appeals held that the non-compete and non-solicitation covenants were overbroad and unenforceable, and accordingly reversed the trial court and eliminated the preliminary injunction, thereby freeing the former employee to work for the competitor.  The case contains important lessons for both employers and employees.

Facts

The employer/plaintiff, Andy-Oxy, is a distributor of welding supplies and gases in Buncombe County.  The employee/defendant, Harris, was hired as a cylinder filler/handler in 2014.  When he began employment with Andy-Oxy, Harris signed an employment agreement that had both a non-compete covenant and a non-solicitation covenant.

After two years of employment, Harris moved into an outside sales position; he received training in selling and distributing welding supplies and gases, and learned Andy-Oxy’s pricing formulas and methodologies.  He had approximately 88 active client accounts.    

Harris resigned in 2018 to take a position as an account manager with Air Gas USA, a competitor of Andy-Oxy.  Andy-Oxy sued Harris in Buncombe County Superior Court and obtained a preliminary injunction prohibiting Harris from going to work for the competitor.  Harris appealed, and the Court of Appeals reversed the trial court, leaving Harris free to go to work for the competitor. 

Rules on Covenants Not to Compete in North Carolina

The rules on covenants not to compete in North Carolina are simple to state, but harder to apply.  In North Carolina, a covenant not to compete is valid and enforceable if it is:  (1) in writing; (2) part of an employment contract; (3) based on valuable consideration; (4) reasonable as to time and territory; and (5) designed to protect a legitimate business interest.  A Court is to examine the reasonableness of the time and geographic restrictions, balancing the right of the employee to work against the right of the employer to protect its legitimate business interests.  The reasonableness of a covenant not to compete is a matter of law for the Court to decide, and covenants to compete are disfavored in the law. 

While protection of customer relationships and good will against misappropriation by a departing employee are recognized as legitimate protectable interests of the employer, a covenant not to compete restricting the employee’s future employability by others must be no wider in scope than is necessary to protect the business of the employer.  A non-compete covenant that is too broad to be a reasonable protection of the employer’s legitimate business interests will not be enforced, and the Courts cannot re-write such a covenant to appropriately narrow its scope.

The Covenant in Andy-Oxy Was Overly Broad

In Andy-Oxy, the first three elements set forth above were not in dispute.  The agreement was in writing; it was part of an employment contract; and it was based on valuable consideration.  The last two elements - - reasonable as to time and territory, and designed to protect the employer’s legitimate business interests     - -  were disputed by the parties, and are the focus of the Court of Appeals opinion.

Reasonable as to Time and Territory, Protect Legitimate Business Interests 

Restrictions barring an employee from working in an identical position for a direct competitor are valid and enforceable.  However, when a covenant restricts a departing employee from having any association with a business providing similar services, including performing unrelated work, it is overly broad and will not be enforced.  For example, a non-competition provision that attempts to prohibit an employee from having any association at all with a business providing similar services is unenforceable.

In Andy-Oxy, the covenant not to compete stated that the employee:  

shall not, directly or indirectly, on his account or in the service of others, be employed or otherwise participate in the field or area of supplying, retailing, wholesaling, or distributing compressed gases, welding products, or any other product sold by the Company, within the restricted area, for a period of two years following termination.

According to the Court of Appeals, by preventing the former employee from directly or indirectly being employed or otherwise participating in the field of services that Andy-Oxy provided, the covenant effectively precluded Harris from having any association with a business in the same field, even work that was distinct from what he did for Andy-Oxy. 

For example, under the language of the non-compete covenant as written, if Harris accepted a position as custodian at a competing business, he would be precluded by the covenant’s provision that he not indirectly be employed or participate in that field of service.  By preventing Harris from having any association with a business conducting services similar to Andy-Oxy, the scope of the non-compete covenant was impermissibly broad and went beyond what was necessary to protect the legitimate business interests of Andy-Oxy.

Moreover, North Carolina’s “blue pencil” rule severely limits what a Court may do to alter an overbroad covenant.  At most, a Court may choose to not enforce a part of the covenant that is distinctly severable, in order to render the provision reasonable.  However, a Court may not otherwise revise or rewrite the covenant.  In Andy-Oxy, the overly broad language of the non-compete covenant was not a distinctly severable part of the covenant, and accordingly, the entire covenant was unenforceable. 

Non-Solicitation Covenant

The non-solicitation portion of Harris’ employment agreement prohibited him from:

directly or … indirectly, on his account or in service of others, solicit[ing] any customers of the Company who were customers of the Company during the one year immediately proceeding [sic] the termination of [Harris’] employment with the Company and which customers are located within the restricted area . . .  .

By using such broad language, the non-solicitation covenant prohibited Harris’ use of Andy-Oxy’s entire client base.  The Court of Appeals has previously held that client-based limitations may not extend beyond contacts made during the period of the employee’s employment.  The non-solicitation covenant at issue in Andy-Oxy extended well beyond contacts that Harris made during his employment with Andy-Oxy.  It did not define “customer,” and did not tie that term to Harris and the contacts that he made in his positions with the company. 

By broadly referring to “customers of the Company,” the non-solicitation covenant prohibited Harris from soliciting any customer within the restricted territory, regardless of whether Harris had contact with that customer during his employment or whether he even knew the customer.  The record did not show that Harris served all of Andy-Oxy’s customers within the restricted area, and there was no evidence that he would have been privy to proprietary information for customers that he did not service. 

The Court of Appeals concluded that by vaguely referring to all customers of Andy-Oxy within the restricted area, without any limitation in scope to customers with whom Harris had material contact, the non-solicitation covenant was overly broad and did not protect a legitimate business interest, rendering it unenforceable. 

Lessons for Employers and Employees

The lesson for employers here is clear:  be very careful when drafting non-compete covenants and non-solicitation covenants.  Do not overreach.  Do not draft them so broadly that they would prohibit the employee from having any association at all with a business that provides similar services or products, and do not attempt to prohibit the employee from contacting customers with whom he or she never had any contact.  The temptation to draft these provisions broadly is extreme, as a business wants to protect itself to the extent possible, but the penalty for drafting an overbroad non-compete or non-solicitation covenant is that it simply will not be enforced, and the employee will be free to go to work for a competitor. 

The lesson for employees is similarly clear:  when you are considering going to work for a competitor, examine your employment agreement, or anything else that you signed, very carefully.  If you signed something containing a non-compete covenant and/or a non-solicitation covenant, that covenant will be enforced if it is drafted properly. 

Both employers and employees should consult counsel when dealing with a covenant not to compete or solicit.  There are many published decisions on this issue, and they are not always consistent, but the Andy-Oxy case is the latest decision from the Court of Appeals, and it suggests that the Court of Appeals is taking a harder line on the enforceability of non-competition and non-solicitation agreements. 

About the Author

Alan M. Ruley

Alan Ruley is a seasoned civil trial and appellate lawyer. He represents clients in a wide variety of disputes in federal and state court, focusing primarily on business litigation, intellectual property, insurance, banking and employment.
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