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In a recent decision, the
North Carolina Business Court held that a health care worker’s
non-compete covenant in her employment agreement with a health care
provider was unenforceable because the covenant’s time, territory, and
scope of prohibited activities were overbroad and the covenant would
limit patient choice in health care.
The case involved a company
providing treatment for persons with mental health issues, developmental
disabilities, and substance abuse problems (“MH/DD/SA”). The health care
worker signed a contract with the company with a non-compete covenant
that prohibited her, for three years after leaving the company’s
employment, from competing with the company within the State of North
Carolina “directly or indirectly, individually or as an employee,
partner, officer, director or stockholder or in any other capacity
whatsoever of any person, firm, partnership or corporation.”
The employee left the
company’s employment and began working for another health care provider
in the same field. Some of the persons receiving services from the
company (referred to as the company’s “clients”) left the company and
switched to the employee’s new employer for their MH/DD/SA services. The
company sued the employee for breach of her non-compete covenant and the
case was assigned to the North Carolina Business Court.
In its decision, the Court
first noted that non-compete covenants between an employer and an
employee are “not viewed favorably in modern law,” and that under North
Carolina law such covenants must be reasonable as to time, territory and
scope of prohibited activities, and not contrary to public policy, in
order to be enforceable.
The Court also recognized
that a non-compete covenant’s time and territory are related, and must
be considered “in tandem,” when judging the covenant’s reasonableness
under North Carolina law. The Court observed further that a non-compete covenant’s
territory must be no broader than is necessary to protect an employer’s
present customer relationships and business goodwill in light of the
area in which the employee is assigned to work and actually works for
the employer, the nature of the employer’s business, and the employee’s
job duties and knowledge of the employer’s business operations.
Applying these principles,
the Court found that the time and territory of the employee’s
non-compete covenant were unreasonable. There was testimony in the case
that clients who stayed with the company for two years were considered
“long-term,” that employee turnover in the field of MH/DD/SA services
was very high, and that patients and caregivers cycled through the
system at a rapid pace. Further, though the employee was subject to
assignment anywhere in North Carolina by the company, testimony
indicated her actual contact with clients was limited to just four
counties in western North Carolina and she posed no threat to the
company’s client relationships in other parts of the state. When viewed
together with these facts, the Court found that the non-compete
covenant’s three year time period and statewide territory made it
overbroad and unreasonable.
The Court also viewed the
scope of activities prohibited by the non-compete covenant as overbroad
and unreasonable because it prohibited the employee from competing with
the company “directly or indirectly, individually or as an employee,
partner, officer, director or stockholder or in any other capacity
whatsoever of any person, firm, partnership or corporation.” The Court
reasoned that by prohibiting her from even indirect ownership of a
competing company, the covenant went further than was necessary to
prevent the employee from competing for the company’s clients.
Finally, the Court
recognized that patient choice in healthcare is an important public
policy in North Carolina and that clients of MD/DD/SA services have a
right to select their caregivers. The Court ruled that the employee’s
non-compete covenant unduly restricted those patient rights by
attempting to prohibit her from working in the field of MD/DD/SA
services for three years and across the entire State.
For these reasons, the Court
ruled that the non-compete covenant was invalid and unenforceable.
This case illustrates how
strictly North Carolina courts will scrutinize non-compete covenants
between an employer and an employee, especially in health care fields,
before enforcing them. Health care employers may wish to consult North
Carolina counsel to review their use of non-compete covenants for
employees in this state.
If you have any question
regarding this alert or other Health Care Law related issues, please
contact Louis Meyer at
919.783.2810 or
lmeyer@poynerspruill.com or
Wilson Hayman at
919.783.1140 or whayman@poynerspruill.com.
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