In a recent decision, the North Carolina Court
of Appeals ruled that a non-compete covenant prohibiting an employee
from taking a similar job anywhere the employer operated could be
enforceable, even though the employer’s operations reached
throughout North and South America.
At issue in the case of Okuma America
Corporation vs. Bowers was a non-compete covenant in an employment
agreement signed by a senior executive (“the Executive”) who had
worked for Okuma America Corporation for seventeen years. Okuma
America Corporation (“the Company”) is engaged in the production
and sales of machine tools. When he left the Company to work for a
competitor, the Executive was a vice president for customer service,
was overseeing twenty-five employees, and was maintaining
relationships with the company’s more than thirty distributors in
forty locations. In addition, the Executive was serving on the
Company’s corporate planning committee, a small group of six senior
executives responsible for the Company’s major strategic and
operational decisions.
The non-compete covenant in the Executive’s
employment agreement with the Company stated that, for the six
months following the end of his employment with the Company, the
Executive would not, “become employed by … a Competitor, unless [the
Executive] accepts employment with a Competitor in an area of the
Competitor’s business which does not compete with the Company.” The
non-compete covenant also provided that, during the same six-month
period, the Executive would not, “[s]olicit or attempt to solicit …
the business of any of the Company’s clients or customers for which
[the Executive] has rendered any services.” In addition, the
non-compete covenant stated that the geographic scope of its
restrictions on competition was limited to the “areas in which the
Company does business.”
After leaving the Company’s employment, the
Executive became employed with DMG America, Inc. (“DMG America”), a
direct competitor of the Company in the machine tooling industry.
The Executive took a job with DMG America as vice-president for
customer service in its business unit that sells and services
machine tools.
The Company sued the Executive for breaching
the non-compete covenant, and the trial court dismissed the lawsuit
on the grounds that the Company had not adequately stated a claim
for breach of a valid and enforceable non-compete covenant. The
geographic scope of the non-compete covenant (the “areas in which
the Company does business”) was viewed as overly broad because the
Company’s operations reached throughout North and South America.
On appeal, the Court of Appeals determined it
could not conclude the non-compete covenant was overly broad and
unenforceable as a matter of law. The Court of Appeals reversed the
trial court’s decision and ruled that the non-compete covenant could
be enforceable, despite its broad geographic scope, depending on how
certain factual questions were answered. The Court of Appeals
remanded the case to the trial court for further proceedings to
answer those factual questions.
The Court of Appeals’ reasons for its ruling
in Okuma America were as follows:
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A non-compete covenant’s time and
geographic limitations must be considered “in tandem” when
judging the covenant’s overall reasonableness. Because the
covenant’s six-month time period was relatively short, its broad
geographic scope could be tolerable.
-
A non-compete covenant’s geographic scope
must not be wider than necessary to protect the employer’s
customer relationships and other legitimate business interests,
considering the area in which the employer operates, the area
where the employee worked or was assigned to work, and the
nature and extent of the employee’s duties and knowledge of the
employer’s business and operations. Because the Executive was a
senior executive in charge of customer service for the Company
who participated in its most critical and strategic decisions,
the covenant’s geographic scope (which was limited to the “areas
in which the Company does business”) could be reasonably
necessary for protecting the Company’s customer relationships.
-
The non-compete covenant did not prohibit
the Executive from becoming employed with a competitor “in an
area of the Competitor’s business which does not compete with
the Company.” Because the Executive had become employed with a
direct competitor in its business unit that sells and services
machine tools, and his job with the competitor was identical to
the job he had with the Company, the covenant could be
enforceable against him.
These reasons gave the Court of Appeals a
basis for distinguishing its ruling in Okuma America from other
decisions in which the Court of Appeals voided non-compete covenants
as overbroad because they prohibited an employee from becoming
employed with a competitor even if the employee were to take a job
with the competitor that posed no threat to his prior employer.
For final determination of the non-compete
covenant’s enforceability, the factual questions to be answered on
remand to the trial court, according to the Court of Appeals, were
whether the covenant’s geographic scope is reasonable in light of
the Executive’s actual contacts with customers, the exact nature of
his duties, the real level of his responsibilities, the actual scope
of his knowledge, and how the geographic scope fits with his work
for the Company.
Non-compete covenants between an employer and
an employee are strictly scrutinized by North Carolina courts before
they are enforced, and the Court of Appeals’ ruling in Okuma America
emphasizes that a court’s view of a non-compete covenant’s
enforceability may depend on the specific facts of the employer’s
business operations, the
employee’s position and duties with the
employer, and the employee’s contacts with the employer’s customers.
Employers may wish to consult North Carolina counsel to review
their use of non-compete covenants for employees in this State.
For questions regarding this Alert or other
employment matters, or assistance with matters involving
non-competes, contact
Louis Meyer at 919.783.2810 or
lmeyer@poynerspruill.com,
