There are two words that have been in virtually every covenant not to compete that I have looked at. They are “directly or indirectly.” Banish those words from your covenant drafting! The covenant not to compete considered by the NC Business Court in Prometheus Group Enterprises, LLC v. Gibson, 2023 NCBC 23, and found unenforceable contained the following language:
I will not directly or indirectly engage in (whether as an employee, consultant, proprietor, partner, director or otherwise), or have any ownership interest in, or participate in the financing, operation, management or control of, any person, firm, corporation or business that engages in a Restricted Business in a Restricted Territory. Op. ¶7.
But as Judge Earp pointed out in the case, “North Carolina courts have repeatedly warned the drafters of restrictive covenants about the dangers of using the phrase “directly or indirectly” when defining the scope of a non-compete.” Op. ¶35. Opinions from the Court of Appeals and the Business Court have been “routinely refus[ing]” to enforce covenants with that language, calling it “particularly problematic” and “unreasonably broad” for the last few years.Op. ¶35.
Those words were only a part of the basis for the Business Court’s refusal to enforce the covenant not to compete signed by Defendant Gibson. It suffered from a number of other defects. The non-compete was pegged to competition with a “Restricted Business.” That was a problem, as was the definition of the “Restricted Territory.”
The language used in the covenant not to compete defining “Restricted Business” would have “”prohibit[ed] [the Defendant] from taking a wholly unrelated position with a company that produces and services IT products if one of its products falls within the definition of Restricted Business. Consequently, even working as a line cook in the cafeteria at IBM, Oracle, or SAP would be forbidden.” Judge Earp said “[t]his is unquestionably overbroad.” Op. ¶¶36-37.
Another criticism of the covenant lay in its definition of the territory in which Defendant Gibson could compete. It sought to cover the “entire world.” Worldwide restrictions are “not per se invalid,” Op. ¶39, but there must be facts showing that such a restriction is “reasonable and necessary.” Plaintiff presented no facts supporting the breadth 0f the restriction.
The Plaintiff argued that the Court could “blue pencil” the language of the geographic restriction, but the wording did not permit that. Here’s how the territory was defined as:
(i) the entire world; (ii) North America; (iii) the United States of
America; (iv) each state in which the Company does business or did
business at any time within two (2) years prior to the termination of my
employment with the Company; (v) the States of Maryland, Virginia,
North Carolina, South Carolina and Georgia; (vi) the State of North
Carolina; and (vii) Wake County.Op. ¶9 /
The Court refused to “blue pencil” the covenant because ” North Carolina’s strict blue pencil doctrine allows the court to “avoid scrapping an entire covenant” by “enforc[ing] the divisible parts of [the] covenant that are reasonable.” Op. ¶42This language was not “distinctly separable” because the “geographical restrictions are presented as a list, but they are joined by the conjunctive “and”—preventing them from being “distinctly separable.” Op. ¶45.