There is more discussion of non-solicitation clauses and non-inducement clauses in Judge McGuire’s opinion last week in Sandhills Home Care, LLC v. Companion Home Care-Unimed, Inc., 2016 NCBC 59, than I think that I’ve ever seen before in a North Carolina court decision. Non-solicitation clauses prohibit a former employee from trying to get business from his former employer’s clients. Non-inducement clauses prevent a former employee from encouraging other employees of the former employer from leaving to join him in his new employment.
Yesterday’s post covered the non-competition restrictions in the Sandhills agreement.
Let’s start with the non-inducement provisions of the Sandhills agreement:
Non-Inducement Provisions Are Enforceable
Non-inducement provisions are enforceable in North Carolina and they receive the same analysis as non-solicitation provisions (Op. ¶42). More about that standard for analysis is below.
The Defendants in the Sandhills case raised a novel (and completely unsupported) argument about why the non-inducement provisions before the Court were invalid. They said that the restrictions violated their right to engage in concerted activity under the National Labor Relations Act, and that they suppressed competition in "North Carolina’s home healthcare market."
Judge McGuire shot down that argument, stating that "North Carolina’s appellate courts have held that such restrictions on inducing a former employer’s employees can be enforceable" and that the Defendants had "cited to no source for the contention that there is a North Carolina public policy in favor of protecting employee concerted activity." Op. ¶47
Non-Solicitation And Non-Inducement Provisions Are Subject To The Same Analysis As Non-Competition Provisions
I think that I had been successful in the past in persuading a North Carolina Judge that a provision preventing a former employee from soliciting his former employer’s customers did not have to satisfy the same standard as a non-compete.
That argument won’t work any longer, if it ever did. A valid non-solicitation provision, like a provision restricting competition, must be:
(1) in writing, (2) entered into at the time and as part of the contract of employment, (3) based on valuable consideration, (4) reasonable both as to the time and territory embraced in the restrictions, (5) fair to the parties, and (6) not against public policy.
But the standard for reviewing the validity of a non-solicitation provision is more liberal than the standard applied to a covenant not to compete. Judge McGuire said that:
North Carolina courts are more willing to enforce non-solicitation provisions targeted to the former employer’s customers or prospective customers than provisions prohibiting entirely the former employee from working for certain employers or in certain regions.
A Non-Solicitation Agreement Doesn’t Need To Be Tied To A Specific Territory
The Sandhills non–solicitation provision was not limited to a specific territory. It was limited instead to the "book of business" of the Plaintiff.
Judge McGuire said that an argument made by the Defendants — that a non-solicitation restriction could not be enforced if it was not tied to a specific geographical description — had been rejected by the NC Court of Appeals. Op. ¶33 (citing Farr Associates, Inc. v. Baskin, 138 N.C.App. 276, 281, 530 S.E.2d 878, 882 (2000)). So, he held that:
North Carolina’s courts will enforce a covenant prohibiting a former employee from soliciting his former employer’s customers even when not tied to a specific geographic region where ‘the terms and conditions of this contract clause were reasonably necessary to protect the employer’s legitimate business interests.’
You are more likely to have a customer based restriction enforced if the time period of the restriction is not long. Time and territory restrictions are evaluated "in tandem." Op. ¶18. In the case before Judge McGuire, it was limited to one year, short enough that a geographic restriction was not necessary.
Can A Non-Solicitation Provision Extend To Clients With Which The Employee Had No Contact?
It seems to be an open question whether a non-solicitation covenant can prohibit contact with all of a former employer’s customers, or just those customers or prospective customers with whom the employee had personal contact." Op. ¶34
Judge McGuire avoided having to resolve that issue saying that he could not rule the restriction covering all of the former employer’s clients to be unreasonable at "this very early stage of the case." Op. ¶35.
A Non-Solicitation Provision Cannot Cover Prospective Customers Of The Former Employer
Judge McGuire didn’t need to break new ground in ruling that language in the restriction prohibiting the solicitation of prospective customers was "unreasonably broad." Op. ¶37.
The NC Court of Appeals reached that conclusion several years ago, in Hejl v. Hood, Hargett & Assocs., 196 N.C. App. 299, 674 S.E.2d 425 (2009). It held there that:
Defendant’s attempt to prevent Plaintiff from obtaining clients where Defendant had failed to do so, is an impermissible restraint on Plaintiff.
Id. at 307, 674 S.E.2d at 430.
Don’t include prospective clients in your non-solicitation agreements. This Plaintiff was lucky that the inclusion of prospective customers didn’t invalidate its entire non-solicitation provision. Since that "provision [was] a separate and divisible obligation contained in a separate sentence of the covenant, the Court was able to "blue pencil" it out and leave the remaining restriction on solicitation standing. Op. ¶37.