The Court of Appeals for the Fourth Circuit invalidated a covenant not to compete today, in Lampman v. DeWolff Boberg & Associates, Inc. Along the way, the Court made allusions to Ford Motor Company and Zimbabwe to illustrate the overly broad scope of the agreement.
A couple of caveats first. The opinion is unpublished, and it involves South Carolina law. That said, the analysis is interesting, and potentially applicable to a North Carolina case given the similarity of South Carolina’s law on the subject of non-competes.
The restriction, contained in a Shareholders’ Agreement, said that the Plaintiff would "not, directly or indirectly, engage in Competition" with the Plaintiff. The term "Competition" was defined as "serving in any capacity . . . for any Person that analyzes, designs, modifies and implements management systems to improve productivity, quality, service and capacity levels that generates quantifiable financial savings, and where such services are competitive with or similar to those that such Shareholder rendered during his or her employment with" the Defendant.
There was no geographic restriction in the covenant, which nevertheless had been upheld by the District Court. It did so based on Defendant’s argument that its business occupied a "unique, narrow niche" with "a very limited set of direct competitors."
The Fourth Circuit reversed, observing that the effect of the non-compete was to prohibit the Plaintiff from working for many entities that didn’t compete at all with the Defendant. It gave the example of Ford Motor Company, which it said was also engaged in "analyzing, designing, modifying and implementing management systems." There was no valid reason to prevent the Plaintiff from working for Ford and providing those services, given that Ford and the Defendant weren’t competitors.
Since South Carolina — like North Carolina — doesn’t blue pencil, that alone was enough of a basis to void this covenant. But the Court pointed out another flaw in the covenant as well, that it would prevent the Plaintiff from providing competitive services anywhere in the world, even though the Defendant didn’t do business throughout the world. It held that "the non-competition clause. . . would prohibit [Plaintiff] from working for a ‘competitor’ in Zimbabwe, even though [the Defendant] does not provide services in that country and has no legitimate interest in prohibiting [the Plaintiff] from working there."
The photograph is of Victoria Falls, from Dragonwoman’s photostream on Flickr.