To Compete or Non-Compete, That is the Question.

At the end of July, the Fourth Circuit Court of Appeals rendered a decision about non-compete agreements that creates further confusion about restrictive covenants in our state.*  Since many employers (and readers) face the “Compete or Non-Compete” question, this case is worthy of review.

In KLM Communications, Inc. v. Tuschen, the employee at issue (Tuschen) signed a non-compete agreement upon being hired by KLM.   In part, this non-compete states:

While I, the Employee, am employed by Employer, and for 1 years/months afterward, I will not directly or indirectly participate in a business that is similar to a business now or later operated by Employer in the same geographical area. This includes participating in my own business or as a co-owner, director, officer, consultant, independent contractor, employee, or agent of another business. “ 

Sound familiar? Of course it does.

Tuschen worked at KLM Communications for about 6 years until she tendered her resignation and accepted a new position with a competitor.   Naturally, KLM Communication was not happy with this development and sought to enforce its non-compete agreement, particularly the provision cited above.  The Fourth Circuit Court of Appeals said “nice try” and decided the non-compete was overly-broad and therefore unenforceable.  But…. why?

If the above excerpt from KLM Communication’s non-compete agreement looks familiar, you are probably in good company considering that same exact language pops up in a lot of templates I’ve seen.  The Fourth Circuit’s opinion stresses that this clause is too broad since it prohibits the former employee from working at any competitor in any position.   Since Tuschen can’t mow lawns, cater business lunches, or serve as a realtor fora competing company, the Fourth Circuit said it could not be enforced (yes, these are actual examples given in the opinion).   The Fourth Circuit also states that even the “indirect” language is too broad using the following example to illustrate:  “[I]f Tuschen has retirement accounts invested in mutual funds, she may have to monitor their holdings to be sure she is not investing in companies similar to RLM.”  Because there was no legitimate business interest related to this provision of the non-compete, the court said the entire document was unenforceable.  In other words:  you cannot prevent an employee from engaging in work that is distinct from the duties actually performed by the employee. 

Another curious part of this decision is that the Fourth Circuit denied the opportunity to “blue-pencil” the agreement by simply striking the bad provision.  Instead, the Fourth Circuit claimed (1) even if they could revise the provision, they wouldn’t (thanks to a 2016 North Carolina Supreme Court case that stated non-compete agreements found to be unreasonable cannot be unilaterally amended by a court); and (2) there is no way to really revise this provision without completely re-writing the agreement. 

Another interesting observation?  The Fourth Circuit states right away that non-competes are disfavored in North Carolina, a statement (and general tone) that has been left out of a lot of recent North Carolina state cases like Employment Staffing Group, Inc. v. Little in 2015. 

If you were not already struggling to draft a non-compete agreement, I’m positive you are now. YOU'RE WELCOME. 

 

The [*]:  The Fourth Circuit Court of Appeals is the federal appeals court for North Carolina so their decisions often matter to North Carolina employers. However, since they are a federal court interpreting state laws, state cases often take higher precedence.