Employment Law Daily Noncompete barring employment by ‘similar’ businesses in geographic area overbroad
Tuesday, August 2, 2016

Noncompete barring employment by ‘similar’ businesses in geographic area overbroad

By Dave Strausfeld, J.D. A noncompete agreement that barred an IT manager from working for "similar" businesses was overbroad and thus unenforceable, because the company had no legitimate business interest in restricting her future employment in this manner, held the Fourth Circuit, declining to "blue pencil" the agreement to narrow its scope. On a separate claim, the employee did not violate a North Carolina trade secrets law that—as the court discussed in some detail—contained an apparent drafting error that could lead to absurd results if interpreted literally (RLM Communications, Inc. v. Tuschen, July 28, 2016, Diaz, A.). Competitor just a few miles away. After working for an information technology company managing a government contract, the IT manager resigned and joined a smaller-size competitor that had offices just a few miles away. The company did not initially object to her move, and even gave her a "giant bouquet of roses" and some cash as a parting gift. Later, however, the company discovered that the competitor she joined was planning to bid against it on a government contract very similar to the one the employee had managed during her tenure at the company. The company also became concerned that the employee was soliciting her former colleagues to join her new employer in the event it won the contract. The company brought multiple claims against the competitor and the employee, including a claim for breach of her noncompete agreement. The district court dismissed all of the claims on summary judgment, and the company filed an appeal. What noncompete said. The employee’s noncompete agreement provided that, while working for the company and for one year afterwards, she would not "directly or indirectly participate in a business that is similar to a business now or later operated" by her employer in the same geographical area. This included participating as an "independent contractor, employee, or agent." "Largely unmoored." The Fourth Circuit held that the noncompete was overbroad. Under North Carolina law, restrictions on an employee’s future employment "must be no wider in scope than is necessary to protect the business of the employer." But here, the restriction on the employee’s future employment was "largely unmoored" from the company’s legitimate business interests. On its face, the noncompete prohibited her not merely from working for competitors in a position like the one she held at the company, but she also could not "mow their lawns, cater their business lunches, and serve as their realtor." Further, if the company were to take up software development as a new line of business, she would be forbidden to work as a sales representative for a nearby software developer, under the noncompete’s language about businesses "later operated" by the company. And the ban on indirect participation in a similar business had the most "startling consequences": If the employee had retirement accounts invested in mutual funds, she might have to "monitor their holdings" to be sure she was not investing in companies similar to her former employer. In sum, instead of focusing on employment that raised a risk she might use knowledge obtained from the company to its detriment, the noncompete targeted the similarity of a new employer to the company. "That is not a sufficient limiting factor for a covenant not to compete," the appeals court declared. Can’t rewrite it. The company urged the court to strike the offending language under North Carolina’s "blue-pencil" doctrine, under which a court may choose not to enforce "a distinctly separable part" of a covenant in order to render the provision reasonable. But even assuming blue-penciling were appropriate in this case, the court found it difficult to see how it would help the company. Even if the court struck the term "indirectly," as the company suggested, the noncompete would still be overbroad due to its ban on direct participation in similar businesses. Because the noncompete could not be mended, the district court properly dismissed the company’s claim for breach of the noncompete, the appeals court held. Drafting error in North Carolina trade secrets statute? Prior to departing for her new job, the employee copied several computer files onto a CD that she gave to her successor to help him with the transition, she said. Although the company suspected she had retained a copy of the CD for herself, there was admittedly no real evidence of this. Even so, the appeals court devoted numerous pages to addressing the company’s claim, and in particular, offering possible interpretations of language in North Carolina’s Trade Secrets Protection Act that seemed to say, if literally interpreted, that an employer could get to a jury "merely by showing that it gave the employee access to its trade secrets." In the Fourth Circuit’s words, "an absurd result would follow: Every employee in North Carolina who had access to her employer’s trade secrets but did not acquire them would have to go to trial to fend off the employer’s claim of misappropriation." The appeals court did not think the Supreme Court of North Carolina, which has yet to address the issue, would adopt such an interpretation, and went on to suggest some possible constructions of the statute that, while perhaps not the "most natural reading," would avoid this ridiculous result. It should be noted that the company did not make the literal statutory argument the appeals court was discussing. It contended instead that the employee in fact made a copy of the CD for herself and acquired the company’s trade secrets. As evidence, it pointed to its competitor’s "unexplained leap in technical capacity." But the appeals court found no evidence the competitor had made any such "unexplained leap," so it rejected this claim, and also affirmed summary judgment against the company’s other claims including conversion and tortious interference with contractual relations.

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