NC Court of Appeals voids as overbroad a non-compete and non-solicitation agreement

In a recent unpublished opinion, MGM Investigations Inc. v. Sjostedt, the North Carolina Court of Appeals declared a particular non-compete and non-solicitation agreement to be unenforceable because it was overly broad and too vague. In the opinion, the Court reviewed many of the core principles in determining whether non-compete agreements are enforceable.

To be enforceable, a non-compete or non-solicitation agreement must meet five requirements: it must be (1) in writing; (2) made a part of the employment contract; (3) based on valuable consideration; (4) reasonable as to time and territory; and (5) designed to protect a legitimate business interest of the employer. Restrictions on time and territory are considered together. “Although either the time or the territory restriction, standing alone, may be reasonable, the combined effect of the two may be unreasonable. A longer period of time is acceptable where the geographic restriction is relatively small, and vice versa. … The protection of customer relations against misappropriation by a departing employee is well recognized as a legitimate interest of an employer.”

In this case, MGM Investigations had hired the defendants to perform insurance-related investigations regarding federal contracting work overseas. The non-compete agreement that had been signed restricted defendants from competing “either directly or indirectly, with MJM in its present line(s) of business or in future line(s) of business” for a period of two years. The trial court held that this provision was unreasonable because it contained no geographic restriction. The employer did not appeal this conclusion.

The non-solicitation provision stated that defendants could not “solicit any current or prospect client of MJM for the purposes of providing” insurance-investigation-related services. The trial court had approved this provision specifically with regard to a list of 800 purported “clients” that had been provided by the employer during the case. The Court of Appeals reversed this conclusion.

The Court found that the terms “current client” and “prospect client” were both too vague without further definition. No time period or other restriction determined when a company was a current or prospective client. Especially problematic was that the restriction would cover clients or prospects that defendants never had any contact with. Nor could the trial court save the agreement by specifically listing 800 particular “clients” when it had not verified that these companies were indeed clients and the provision did not have a time limit. Accordingly, the Court declared the non-solicitation agreement to be invalid.

Judge Steelman concurred in the result, but was more sympathetic to the employer’s position, and would have upheld the non-solicitation provision if the trial court had interpreted it more narrowly.