Noncompetition agreements (“non-competes”) present thorny issues. In most cases, you have a former employee who has signed a black-and-white contract prohibiting him or her from engaging in certain employment, and the employee goes and does the one thing that the contract specifically prohibits. Not that long ago, most judges would view the matter purely as a contract issue, and once an employee’s attorney admitted that yes, that was the client’s signature on the agreement, they did not want to hear much else, with visible disinterest giving way to agitation the longer the argument proceeded.
On rare occasions, if the employee could present special circumstances, the trial courts would do more than pay lip service to the maxims like “noncompetes are strongly disfavored in North Carolina.” Was the territory much more expansive than where the employee actually operated? Was this really a lower-level employee, with the noncompete designed to keep the employee hostage rather than protecting legitimate employer interests?
For the most part, however, it seemed that trial courts would not scrutinize too closely the many hurdles that can arise in noncompete cases. The N.C. Business Court played a significant in role in changing the noncompete litigation landscape. In balanced, thoughtful opinions, the Business Court developed the law of noncompetes in an evenhanded fashion in several areas; for example, it issued opinions addressing the implications of mergers and acquisitions on the enforcement of noncompetes. See, e.g., Covenant Equip. Corp. v. Forklift Pro, Inc., 2008 NCBC 10, 2008 NCBC LEXIS 12 (Mecklenburg County Super. Ct. May 1, 2008) (asset-purchaser could enforce non-compete upon date of sale but not upon employee’s subsequent termination); Artistic S., Inc. v. Lund, 2015 NCBC 109, 2015 NCBC LEXIS 113 (Wake County Super. Ct. Dec. 9, 2015) (noncompetition obligation began to run on date of asset sale, not employee’s subsequent termination).
Fourth Circuit Enters Noncompetition Fray
Although federal courts are often utilized to enforce noncompetition agreements, they are hesitant to expound or expand the law in this area because it is grounded in state law. In RLM Communications, Inc. v. Tuschen, ___ F.3d ___, 2016 U.S. App LEXIS 13726 (4th Cir. July 28, 2016), however, the 4th Circuit Court of Appeals significantly elaborated on North Carolina noncompetition and trade secrets law.
RLM Communications was in the cyber security/information technology business. In 2007, it hired Amy Tuschen. On her first day of work, Tuschen signed a noncompetition agreement stating that for one year after her employment she would 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.” Id. at *8.
Tuschen rose in the ranks to director of information assurance, with responsibilities that included oversight of large government contracts. In 2013, she quit and began working for eScience, a nearby competing federal contractor. Although initially it appeared the two would part amicably – with RLM providing gift cards and a “giant bouquet of roses” as parting gifts – RLM soon changed its tune.
It learned that Tuschen and eScience were attempting to land a large government contract serviced by RLM that was up for re-bidding. Not only that, Tuschen was contacting RLM employees to line them up in the event eScience successfully won the contract bid. RLM filed suit and quickly secured an injunction. The district court later, however, granted summary judgment in Tuschen’s favor, finding the agreement lacked adequate consideration. RLM Communications, Inc. v. Tuschen, 66 F. Supp.3d 681 (E.D.N.C. 2014).
On appeal, the 4th Circuit focused on the overbroad nature of the restrictions. The court cited North Carolina cases holding that restrictions “must be no wider in scope than is necessary to protect the business of the employer.” Id. (citing Manpower, Inc. v. Hedgecock, 42 N.C. App. 515, 257 S.E.2d 109, 114 (1979). That means covenants cannot restrict employees from working in capacities unrelated to their previous jobs. Here, the restrictions were too broad:
“Even ignoring for a moment the bar on indirect participation in similar businesses, the noncompete is overly broad by preventing direct participation in similar businesses. Tuschen is not merely prohibited from working for RLM competitors in a position like the one she held at RLM. She may also not mow their lawns, cater their lunch businesses, and serve as their realtor. ” Id. at *9 (emphasis in original).
The court goes on to outline various arrangements that would be prohibited by the noncompete, such as selling computer software for a business or investing her retirement accounts in mutual funds that owned a competing company.
The court also concluded that any attempt to “blue-pencil” the covenant would be futile. Citing the N.C. Supreme Court’s recent decision, Beverage Sys., LLC v. Associated Beverage Repair, LLC, 784 S.E.2d 457, 461 (N.C. 2016), the court noted that North Carolina adheres to the “strict blue pencil doctrine,” which while allowing the striking of distinct overly broad terms, prohibits re-writing covenants to make them enforceable.
Thus, the court found the noncompete overly broad and therefore unenforceable, affirming the district court’s grant of summary judgment in Tuschen’s favor.
Trade Secrets: Access and Suspicion Not Enough to Force Trial
The RLM decision is also remarkable for its holding on trade secret misappropriation. RLM alleged – and Tuschen admitted – that she had access to trade secrets while she was employed by RLM. Tuschen denied, however, that she used any of the information in her subsequent employment.
The court noted misappropriation requires that the user “[h]as a specific opportunity to acquire it for disclosure or use or has acquired, disclosed or used it without the express or implied consent or authority of the owner.” Id. at *15 (citing N.C. Gen. Stat. § 66-155). The court reasoned that the language was open to alternative interpretations. Applying one interpretation in a summary judgment context would allow an employer to survive summary judgment just by showing it had given the employee access to trade secrets during the regular course of employment.
The court reasoned that such a literal interpretation would lead to absurd results. It also cited North Carolina cases indicating that something more is required before an employer can require an employee to stand trial for misappropriation. After analyzing various interpretations, it crafted a rule sufficient for the case before it: “When an employer brings a misappropriation claim against an employee, admitting that the employee had authorized access to its trade secrets at all relevant times, the employer must raise an inference of actual acquisition or use of trade secrets to survive summary judgment.” Id. at *23 (emphasis added).
Wholesale copying of files shortly before exiting the company or evidence of use of the trade secrets by a competing company might suffice to avoid summary judgment. But here, RLM had presented no “fishy circumstances” surrounding Tuschen’s departure, and no evidence of the trade secrets’ use in her new employer’s work. Thus, the court concluded, summary judgment had been properly granted to the former employee.
Jonathan Wall is a partner with Higgins Benjamin, PLLC, in Greensboro and a former chair of the NCBA Labor & Employment Law Section.