In many states, non-compete agreements are viewed by the courts with some amount of forgiveness for overbreadth. In those states, courts can in some circumstances re-write an otherwise offensive non-compete agreement to make it more narrowly drawn. In fact, some states, such as Georgia, even have statutes that expressly permit the courts to engage in such draftsmanship in certain circumstances. In contrast, North Carolina follows a more rigid rule. Under state statute, contracts in restraint of trade are illegal and this can include non-compete agreements. See N.C. Gen. Stat. §75-1. North Carolina courts, while sometimes noting that non-compete agreements are disfavored in the law, will nevertheless permit such agreements on a case by case basis, if justified. Enforcement requires an adequate showing that the agreement is in writing, made part of the employment contract, based on valuable consideration, reasonable as to time and territory and not against public policy. And, unlike in other states, the courts are not permitted to re-write the non-compete agreements to save them.
When non-compete agreements become the subject of litigation, the court’s focus is usually on the absence of consideration, or the reasonableness of the restriction. In a recent case, Phelps Staffing, LLC v. C.T. Phelps, Inc., No. COA12-886 (N.C. App. April 16, 2013), the North Carolina Court of Appeals reminds us all that a naked non-compete agreement, no matter how reasonable the geography or time restriction, will not be upheld on pure public policy grounds.
Phelps Staffing involved a protracted litigation between two companies in the business of providing temporary labor to clients. The defendant corporation, C.T. Phelps, Inc., began competing with the plaintiff and was successful in acquiring some of Phelps Staffing’s clients. However, in the process of doing so, according to Phelps Staffing, C.T. Phelps tortiously interfered with contracts that Phelps Staffing had entered into with its employees which included non-compete agreements. Those non-compete agreements prohibited Phelps Staffing employees, for a period of one year after the termination of their employment, from working for a competitor or a former client of Phelps Staffing. Phelps Staffing sued C.T. Phelps for tortious interference with its contracts, unfair competition under North Carolina’s statute, N.C. Gen. Stat. §75-1.1 and conversion. The trial court granted summary judgment to the defendants, and in the process found the non-compete agreements unenforceable as a matter of law. Phelps Staffing appealed.
The Court of Appeals, in affirming the trial court’s decision on summary judgment, noted that North Carolina law will not enforce non-compete agreements that are intended to “merely stifle normal competition.” Id. North Carolina law supports an individual’s right to earn a livelihood “unless the restriction protects a sufficient countervailing interest of the employer.” Id., quoting Starkings Court Reporting Services v. Collins, 67 N.C. App. 540, 541-42, 313 S.E.2d 614, 615 (1984). Here, as the Court of Appeals noted, the plaintiff admitted that its primary purpose in requiring employees to sign the non-compete agreements was to impede competition by other companies in the market, including the defendant. Moreover, the Court of Appeals noted that in oral argument the plaintiff conceded that its employees did not have access to its trade secrets or proprietary information, a rationale that could have been used to justify the non-compete agreement. The Court of Appeals found such an agreement, without proper justification, a naked restraint and unenforceable as a matter of public policy:
“The record supports the trial court’s conclusion that the agreement is merely an attempt to stifle lawful competition between businesses and that it unfairly hinders the ability of plaintiff’s former employees to earn a living.”
While North Carolina public policy will uphold non-compete agreements that protect legitimate business interests, it will not uphold those that impose unreasonable restrictions. Id. As the non-compete agreements were unenforceable, the tortious interference claim fell.
Phelps Staffing marks the second time in recent months that the Court of Appeals has emphasized North Carolina’s public policy of protecting the right of employees to obtain new employment, and to even compete with their former employers, provided that no legitimate interests of the former employer are implicated. Late last year, in Austin Maintenance & Construction Inc. v. Crowder Construction Co., No. COA 12-201 (N.C. App. Feb. 18, 2012), the Court of Appeals, affirmed the trial court’s grant of summary judgment to the defendants in a case which, although not involving non-compete agreements, was grounded on accusations of a unfair competition and breach of fiduciary duty in the hiring of employees from Austin Maintenance. In an attempt to support its fiduciary duty claim, Austin Maintenance argued that the individual defendant, employed previously as a foreman by Austin Maintenance, breached a fiduciary duty by not disclosing to Austin Maintenance his “secret plan” to leave it for employment at Crowder. The Court of Appeals rejected this argument, finding no governing law imposing such a notice requirement and concluding that to impose such a requirement would place a restriction on the movement of employees which was contrary to North Carolina public policy:
“As the Supreme Court has recognized, ‘[t]o restrict and employer’s right to entice employees, bound only by terminable at will contracts, from their positions with a competitor or to restrict where those employees may be put to work once they accept new employment savors strongly of oppression.” Id.
Phelps Staffing and Austin Maintenance, different cases in many respects, drive home the point that while North Carolina law will protect valid restraints on employment movement, those restraints have their limits: they must be narrowly drawn and protect legitimate interests of the former employer. Otherwise, such efforts will fail as a matter of public policy.