Protecting Corporate Assets: Courts Continue to Pick Apart Poorly Drafted Non-Compete Agreements

January 23, 2009

Employers routinely rely on restrictive covenants, including non-compete and non-solicitation agreements, as a primary means of protecting their investment in their employees, customers and confidential information. However, a recurring problem for employers who use such agreements is that courts around the country look with disfavor on such contractual restrictions and will refuse to enforce them if they are overbroad or not narrowly tailored to protect the employer’s legitimate business interest. The North Carolina Court of Appeals’ recent decision in Medical Staffing Network, Inc. v. Ridgway is a prime example of just such a case.

  • Facts of the Case: The plaintiff employer, a medical staffing company, sued its former manager who quit his job after five years to take a similar position with a competitor company. At the outset of his employment with the plaintiff, the employee signed an agreement that contained both non-compete and non-solicitation provisions. The agreement defined the employer – “MSN” – to include “any parent, division, subsidiary, affiliate, predecessor, successor, or assignee.” Accordingly, the non-compete restricted the employee from competing against both MSN and any related entities. The non-solicitation clause likewise prohibited the employee from soliciting business from MSN’s clients as well as clients of any of MSN’s related entities with whom the employee did not have had contact.
  • The Court’s Holding: The Court found that the language of both the non-competition and the non-solicitation provisions was overbroad and, therefore, refused to enforce it against the former employee. The Court specifically held that “as drafted, the covenant not to compete would prevent [the employee] from working in any business within a 60-mile radius of Raleigh that competes with MSN’s parent, or any of its divisions, subsidiaries, affiliates, predecessors, or assignees, even if [the employee’s] employment duties for MSN had nothing to do with that business.” Similarly, because of the expansive definition of “MSN,” the non-solicitation clause would prohibit the solicitation of clients of any of MSN’s affiliates or divisions outside of the medical staffing business with whom Ridgway would not have had contact. The Court found these provisions and the restrictions on the employee’s ability to work for or to solicit business from companies unrelated to the medical staffing business to be overbroad.

In light of the Medical Staffing decision and others like it in state courts around the county, any employer that uses non-competition or non-solicitation agreements as a means to protect their assets should review their agreements to make sure they are narrowly tailored and designed to protect legitimate business interests. Failing to do so may result in a finding that your agreement is unenforceable.

Factors to Consider When Reviewing Your Non-Compete Agreements

When reviewing a non-compete agreement to ensure that it is likely to be enforced by the courts and that it will protect a company’s business interests, companies should consider the following factors:

  • Is It Signed? – It is important to get the employee’s signature on the document at the outset of employment. In many states, the failure to have the employee sign the agreement when starting work will doom the agreement unless additional compensation or some other additional, significant “consideration” is given to the employee.
  • Is the Restriction Proper for the Employee? – The type of restriction utilized is one of the most important things to consider. The employer must decide what it is trying to protect, such as customer relationships or the goodwill of the company. The employer should then make sure the type of restriction used is necessary to protect such assets, which will vary depending on the type of employee. For example, one type of restriction may be needed for a salesperson, while a completely different type of restriction may be needed for a CEO or President.
  • Is the Scope Too Broad? – Scope is a term that applies to both time and territory. An employer should use a time period that is long enough to protect the employer but not so long as to be unreasonable. Many courts have found restrictions between 6 months and 24 months to be enforceable, provided the restricted territory is not too broad in scope. Employers should make certain that when defining the territory, they stay focused on the employee’s scope of work for the company. Going too far beyond that scope could create a problem.
  • Is a Legitimate Business Interest Being Protected? – Employers should look to protect legitimate business interests and not punish employees who leave. Courts generally will not enforce non-compete agreements without there being a legitimate business interest at stake. For example, if a company or employee is only doing business in the Northeast, restricting an employee from competing in every state would be overreaching.
  • Does It Comply With Current State Law? – One of the most challenging aspects of implementing non-competes is that: (a) the law varies from state to state, and (b) the law is continuously evolving. Each state has different rules and standards by which they judge the enforceability of non-competes and other restrictive covenants. Thus, “form” non-competes generally will not work in every state. Be sure to understand the legal nuances of state non-compete law before drafting. Also, be aware that agreements that were enforceable even a couple of years ago may not be enforceable today as a result of recent decisions.

For assistance in analyzing new or existing non-compete or non-solicitation agreements for compliance with current law, please contact any member of the McGuireWoods Labor & Employment or Employee Benefits teams.