Health Care Worker’s Non-Compete Covenant Held Unenforceable
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.
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