The Business Court closely examined a set of restrictive covenants last week in Sandhills Home Care,, LLC v. Companion Home Care-Unimed, Inc., 2016 NCBC 59. This decision collects a number of North Carolina Court of Appeals decisions assessing the validity of covenants not to compete (and non-solicitation and non-inducement covenants) and highlights language contained in many restrictions which is probably invalid.
Don”t Overreach In Describing The Activities That Will Be Restricted
The Plaintiff’s covenant against competition said that its former employee could not "work for, provide services for, consult with, or otherwise assist any individual or entity who is in the home health or personal care business competing with the Employer" in the North Carolina counties in which the Plaintiff was providing services at the time of the employee’s separation.
This restriction could be read to prohibit the employee from providing any type of service to or for a competitor, entirely different from the type of work the former employee had done for the Plaintiff. That was unreasonably broad, ruled Judge McGuire. He held that:
Covenants that restrict an employee from working for in any capacity or providing services of any type to competitors, and are not restricted to prohibiting the employee from performing the same type of work or services, are unreasonable.
Don’t Include "Advising" Or "Holding Any Ownership Interest" In A Similar Business In Your Definition Of "Compete"
Judge McGuire ruled that the Plaintiff’s prohibition of its employee from "advising" or "holding any ownership interest in" any home health care business was unreasonable and unenforceable. Op. ¶28.
The word "advising" was
broad enough to sweep within it all sorts of employment and other services that would not impinge on Plaintiff’s interests in any way.
Op. ¶28. Judge McGuire gave this example:
an employee might become employed by an interior design or decorating business that advises a home health care provider on decorating its corporate offices, or a technology company providing consulting services to a home health care provider regarding its computer network needs.
Op. ¶28. Restricting a former employee from employment with a competitor which is unrelated to the job performed for the former employer went beyond a protection of the Plaintiff’s legitimate interests.
As for the restriction on "holding any ownership interest in a competitor, Judge McGuire said that this language, "read literally, would prohibit the employee from owning shares of a mutual fund that had a tiny holding in a publicly-traded home health care company." Op. ¶28.
Judge McGuire found that there were no facts to support such a "broad prohibition." Op. ¶28.
Don’t Prohibit The Employee From Providing "Any Work Or Services" For Any Client Of Her Former Employer
Many covenants not to compete bar the former employee from doing any work at all for an existing client of the employer, even if the employee had no contact with that client. The Sandhills covenant said that the former employee would not do "any work or services for any customer or account" which the employer (not the employee) had serviced in the six months prior to termination of employment.
A covenant prohibiting the former employee for performing any type of service for a client of his employer, regardless of whether that employee had any contact with that client, is unreasonably broad. Op. ¶29.
So is a restriction prohibiting the former employee from providing "any work or services" for the clients with whom she did have contact valid? Probably not. See above.
There was so much worth writing about in this Opinion (39 pages!) that I’ve divided this post into two parts, today’s post dealing with non-competition provisions, and a second part (coming tomorrow) on non-solicitation and non-inducement provisions.
By the way, I have never drafted a covenant not to compete, though I have pursued the enforcement of many of them. You don’t want a covenant not to compete drafted by your partner to be ruled to be unreasonably broad. (I’ve dreaded having to tell a partner that, but never had to actually deliver that bad news). Tell them to avoid using language like that contained in the Sandhills covenant.