13 Mar Overview of Non-Competes and Other Restrictive Covenants
Written employment agreements for executives and other key employees often contain one or more restrictive covenants that can, if enforced, severely limit the employee’s ability to move to another position in the same or similar industry. Examples include covenants not to compete, covenants not to solicit the employer’s customers or other employees and restrictions on the use and disclosure of broadly defined “confidential” information.
These types of provisions are frequently litigated when an employee leaves his or her employment to accept a new position with a competitor. If not resolved by agreement within days of the employee’s departure, the resulting disputes can be complex and costly to litigate. Often, the former employer first seeks emergency injunctive relief, asking the court to enter an order that temporarily prevents the employee from accepting the new position or performing certain functions that the former employer contends are violations of the employment agreement. These injunction proceedings can be accompanied by an order allowing expedited discovery, including forensic investigations of computers and other devices used by the employee, as well as depositions of the departing employee and others. Even if an injunction is not sought or granted, the former employer may seek damages allegedly caused by the employee’s claimed violations. Such suits frequently include the new employer as a party, based on allegations that the new employer intentionally and maliciously facilitated the allegedly improper activities. Given the stakes for all involved, these disputes are often very contentious, and may turn on the court’s ruling on the legal enforceability of the contractual restrictions at issue.
The broadest type of restriction is a covenant not to compete, which limits the employee’s ability to do certain types of work in a specified area for a specified period of time after leaving his or her employment. North Carolina courts considering challenges to a non-compete focus on determining whether the restrictive covenant is no greater than is reasonably necessary to protect the former employer’s “legitimate business interests,” such as its customer relationships. On this basis, courts will strike down any non-compete that is unreasonable in duration and/or in the geographic area that it covers. So, for example, a non-compete that applies to the entire State of North Carolina is not likely to be enforced against an employee whose sales territory and contacts were limited to a single city or county. A covenant may also be found to be unenforceable if its terms would limit the employee from being involved in any capacity in the business of a competitor, as opposed to just prohibiting the employee from performing the same type of work or services that he or she provided for the former employer. In addition, a covenant may be struck down as unenforceable if the employee received no consideration for signing it. Typically, this means that if the covenant was not signed at the outset of employment, the court will look at whether the employee received “new” consideration, such as a salary bump or bonus, in exchange for agreeing to these types of restrictions. The mere promise of continued employment on the same terms is not sufficient.
So-called “non-solicitation” provisions are typically narrower in scope than a non-compete, but can still have significant practical impact by limiting the employee’s ability to solicit certain customers and/or other employees for a specified period of time after termination of employment. The specific language of these provisions is critical, as disputes often arise regarding what constitutes “solicitation” or other improper contact. For example, is it a violation if the departing employee is contacted by a former client or co-worker, who reaches out to inquire about moving to the new company? The answer likely depends on the language of the restrictive covenant at issue. In terms of assessing reasonableness, courts generally apply the same factors in determining the enforceability of non-solicitation provisions as for non-compete provisions. Again, the focus is whether the restriction is more broad than necessary to protect the employer’s legitimate business interests.
Another frequently disputed issue is whether and to what extent the departing employee has improperly retained, used or disclosed information that the former employer deems to be its confidential and/or proprietary information. Some types of highly sensitive competitive information may rise to the level of “trade secrets” protected under the North Carolina Trade Secrets Protection Act, whether or not there is a written employment agreement. But even information that does not merit protection under the trade secrets statute may still be disputed where the employment agreement contains a restriction on the use and disclosure of specified types of information. As with the other restrictive covenants, the enforceability of such provisions turns on the interpretation of the particular contract language at issue. For example, the employer’s definition of the types of information that are “confidential” is often very broad, and may be subject to dispute depending on the actual nature, use and disclosure of the information that the employee is claimed to have taken.
Depending on the circumstances, there can also be claims in these types of cases that arise outside of the written employment agreement. One example is the statutory claim for misappropriation of trade secrets, referenced above. Other types of claims frequently raised in these types of disputes include civil conspiracy, unfair or deceptive trade practices, tortious interference with contract and breach of fiduciary duty. Certain of these claims include statutory and/or punitive damages, as well as potential recovery of attorneys’ fees, so the damages sought can be significant, particularly when the departing employee was an executive or had a significant book of business.
At Parry Tyndall White, we have substantial experience handling disputes involving the departure of executives and other key employees. We regularly represent departing employees, former employers seeking to enforce their agreements and new employers trying to avoid entanglement in protracted litigation. Often, a resolution can be negotiated to avert a costly lawsuit, but when a satisfactory amicable resolution cannot be reached, we aggressively represent our clients through injunction proceedings and trial where necessary. We also advise both employers and employees before a dispute has arisen regarding the likely enforceability of restrictive covenants and the viability of other potential claims. If you are involved in such a dispute or have questions about your rights and obligations in the event of a potential future transition of employment, please give us a call at 919.246.4676 for a free initial consultation.