Strict Non-Compete Agreement Standards Upheld

By:  Chad J. Cochran

Non-compete agreements can have huge ramifications.  Sometimes, they serve to protect a company’s vital clients.  At other times, they prohibit an employee from finding gainful employment to support his family.  As a result, judges generally look very carefully at these agreements.  Historically, North Carolina courts have generally disfavored non-compete agreements in favor of a competitive marketplace.  A recent North Carolina Court of Appeals case demonstrates the strict regime by which non-compete agreements must abide in our state.

In Phelps Staffing v. C.T. Phillips, two competing staffing agencies found themselves in expensive litigation after C.T. Phillips successfully acquired several of Phelps Staffing’s clients.  Specifically, the Defendant convinced several temporary employees to switch staffing agencies while keeping the same daily responsibilities with the same client companies.  After losing several clients due to these switches, the Plaintiff required its temporary employees to execute non-compete agreements.  Several temporary employees signed the non-compete agreements, the terms of which prohibited the employees from working for any of Plaintiff’s clients for one year.  Despite signing the agreement, several more employees “flipped” staffing agencies and cost Plaintiff further clients.

Despite facts which plainly violated the contract’s terms, the Court of Appeals sided with the employees’ right to earn a livelihood.  Once again, the court held non-compete agreements to a very high standard.  In North Carolina, courts will only uphold a restrictive covenant if it is: (1) in writing; (2) made as part of a contract of employment; (3) based on valuable consideration; (4) reasonable as to time and territory; and (5) not against public policy.  In this case, the court seemed satisfied that the agreement met the first three requirements.  As to the fourth requirement, the court seemed satisfied at the one year employment prohibition but raised concern that the agreement forbid temporary employees from working for the same company at a different location than originally contracted.  This is a very narrow interpretation of the geographic restriction as the agreement allowed the temporary employees to work the same job in the same city for a non-client company.

The majority of the court’s analysis turned on the final, public policy requirement. Even where an agreement is otherwise allowable and follows settled drafting requirements, “the restraint is unreasonable and void if it is greater than is required for the protection of the promisee or it if imposes and undue hardship upon the person who is restricted.”

The court noted that the temporary employees were referred to as “general laborers” who did not have access to trade secrets or proprietary information.  Reading between the lines, it appears that the court determined that the temporary employees were simply too low on the totem pole to become subject to these prohibitions.

Once again, the North Carolina courts upheld the harsh, unforgiving, yet well-established non-compete requirements.