Non-Competition Agreements: Court of Appeals Finds Non-Competition Agreements Are Too Restrictive to be Enforced

Hejl v. Hood, Hargett & Associates, Inc., __ N.C. App. __, 674 S.E.2d 425 (2009) – The North Carolina Court of Appeals has held that when parties to a non-competition agreement deal at arms length and in good faith on settling on the amount or type of consideration to form a valid agreement, the agreement is not necessarily void due to lack of consideration. However, an agreement that attempts to prevent a former employee from servicing potential clients of the employer with whom the employee had no contacts or knowledge can be too broad and unenforceable.

The plaintiff, Phillip Hejl, was an account executive at the defendant insurance company. After 14 years of employment, the company paid Hejl $500 to sign a non-compete agreement that stated that for a period of two years after his separation from the company, he would not seek to do business with “any person, firm or entity to whom [the company] had sold any product or service, or quoted any product or service.” The agreement applied, not only to Charlotte where Hejl worked, but also to any North Carolina or South Carolina area in which the company engaged in providing services or products.

After leaving the company, Hejl sued for declaratory judgment on the validity of the non-compete. The trial court held that the consideration for the agreement, $500, was not sufficient to bind Hejl, and that the non-compete agreement could not be enforced.

The Court of Appeals held that Hejl had not been fraudulently induced to enter into the agreement and the consideration was not illusory because Hejl accepted the money when he signed the agreement. Because the parties dealt at arms length and Hejl received that for which he had bargained, the court held, the agreement was not void because of lack of consideration. However, the court found that the geographic territory was unreasonable since it extended to areas where Hejl had no knowledge of the former employer’s customers. Moreover, the agreement prohibited Hejl from soliciting not only his former employer’s clients but also its potential clients. As such, the agreement was invalid and unenforceable, despite the adequacy of the consideration.

Medical Staffing Network, Inc. v. Ridgway & Trinity Healthcare Staffing Group, Inc., __ N.C. App. __, 670 S.E.2d 321 (2009) – The North Carolina Court of Appeals has found that a non-competition agreement that seeks to prevent an employee from working in any business that competes with a company’s parent, or any division, subsidiary, or affiliate companies is overbroad and unenforceable where the employee’s duties for the company had nothing to do with the business of the related companies.

Medical Staffing Network (MSN) and Trinity Healthcare Staffing Group are competitors in the Raleigh area in providing placement of nurses for specific shifts at health care facilities. MSN hired Thomas Dean Ridgway in May 2000 as the manager of its Raleigh branch. The two parties entered into a nondisclosure, non-competition, and non-solicitation agreement that prohibited Ridgway from taking certain actions that could be injurious not only to MSN but also its parents, divisions, subsidiaries, and affiliates. Prior to June 2005, a Trinity employee began to solicit Ridgway to join Trinity. In June 2005, Ridgway accessed certain confidential materials of MSN that he had been authorized to access but only had done so infrequently in the past. He also met with Trinity management to discuss his interest in joining the company. On July 1, 2005, Ridgway notified MSN that he was resigning. According to evidence presented at trial, after his resignation, Ridgway allegedly attempted to recruit certain MSN employees to join Trinity and he allegedly began to solicit certain clients of MSN.  

MSN brought suit, alleging, among other things, that Ridgway had breached the terms of the 2000 agreement. The trial court found against Ridgway and Trinity, and they appealed, arguing that the terms of the agreement were overbroad and unenforceable because they applied not only to the interests of MSN but also those of its “parent, division, subsidiary, affiliate, predecessor, successor, or assignee,” even if Ridgway’s employment had nothing to do with the business of those entities. The Court of Appeals agreed, holding that the agreement was unenforceable because it extended beyond any legitimate interest of MSN to include “preventing competition with, foreclosing the solicitation of clients and employees of, and protecting confidential interests of an unrestricted and undefined set of MSN’s affiliated companies that engage in business distinct from the medical staffing business in which Ridgway had been employed.”

Note: This article was published in the October 2009 issue of the North Carolina eAuthority.