Is Your Rival’s Janitor in Competition With You?


North Carolina is an “at will” employment state. This means, in general, that the state looks unfavorably on contracts that restrict the right of either employers or employees to terminate the employment. Employees are free to leave at any time and employers are free to let them go. Generally, the obligations of the parties end when the employment ends. Today’s case, Copypro, Inc. v. Musgrove, comes from the Court of Appeals and deals with one limited case where the employee has an obligation to the employer even after leaving. This is a covenant not to compete and as we will see it is pretty limited.

Background

 It is an inevitable part of having employees that employers must give them access to valuable information. Restaurants have to tell the cooks how to make their recipes. Manufacturers need to tell their employees the process for making their products. And sales firms need to give their salesmen a list of customers. When employees are free to leave their employment at any time, there is always a risk that the employees will take this valuable information with them to a competitor.

The solution to this problem is the covenant not to compete or noncompete agreement. This is an agreement, signed either when the employee is hired or later, under which the employee agrees not to compete with his former employer after leaving his job.

Noncompetes are generally disfavored by courts. Generally, we want people to be able to work. And we want them to be able to work in the job for which they are best trained and most suited. Noncompetes force the employee to choose between staying at a job in which they are no longer happy, moving into a different industry which doesn’t compete with their current job, or quitting and not working at all. Also, if employees are practically unable to leave their jobs, employers can unilaterally cut employee wages or benefits without the risk that the employees will leave.

Noncompetes are given particularly unfavorable treatment in North Carolina. The state’s promise of “at will” employment is meaningless if there are restrictions preventing employees from actually leaving.

Noncompetes are not generally enforceable. They will only be upheld in court if they are in writing and given in exchange for something (like a raise). They also need to be reasonably restricted in three ways: time, place, and description of the work. That is to say, the noncompete will not be upheld if it prevents an employee from competing for too long a period. Generally courts are ok with a year and not much more. Also it will be upheld if it restricts competition only in the geographical area where the employee worked in the job he is leaving. A nationwide restriction would not be acceptable. Finally, the noncompete can only restrict the employee from working in positions that would actually bring him into competition with his former employer. It is this last element that is at issue here.

The Case

Copypro sells and leases office equipment in eastern North Carolina. Musgrove was employed by Copypro as a salesperson in Pender and Onslow Counties. He resigned his position in 2012 and immediately went to work for a competitor, Coastal Document Systems. Coastal operates only in Brunswick, Columbus and New Hanover Counties. After leaving Copypro, Musgrove made no attempt to contact his former customers and indeed Coastal informed him that he would be terminated if he did so.

Copypro sued Musgrove, alleging he had violated a noncompete agreement that he signed when he began working there. The agreement forbid Musgrove from “directly or indirectly, owning, managing, operating, joining, controlling, being employed or participating in the ownership, management, operation or control of, or being connected in any manner with” a business that competes with Copypro. The restriction was for three years and applied to basically the whole of eastern North Carolina.

Although the Court expressed some concern with the time restriction and the geographical restriction, saying that they probably were both too broad, its primary issue was with the broad definition of what behavior was restricted. Remember, a noncompete is only valid if it protects the employer’s legitimate business interests. However, the noncompete as written would prohibit Musgrove from being involved in a competing business even in the most indirect way, such as buying one share of stock for investment purposes. Also, as the court repeatedly pointed out, it would prohibit Musgrove from working for Coastal as a janitor. Since Copypro had no legitimate business interest in stopping Musgrove from being a janitor, the restriction was too broad and could not be enforced.

Importantly, the court did not make any attempt to limit  the agreement in a way that would make it enforceable. Instead it just threw out the whole agreement. Copypro, in attempting to restrict too much competing activity, ended up being unable to restrict anything at all.

The Bottom Line

Noncompetes can be a valuable tool to prevent your employees from taking valuable skills to your competitors. But they must be carefully written in order to be any use. If you are an employer trying to draft a noncompete, or an employee looking to get out of one, you need to consult an attorney. If you don’t have an attorney, feel free to contact me.

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