Non-Compete Covenant Held Enforceable Despite Broad Geographic Scope

In a recent decision, the North Carolina Court of Appeals ruled that a non-compete covenant prohibiting an employee from taking a similar job anywhere the employer operated could be enforceable, even though the employer’s operations reached throughout North and South America.

At issue in the case of Okuma America Corporation vs. Bowers was a non-compete covenant in an employment agreement signed by a senior executive (“the Executive”) who had worked for Okuma America Corporation for seventeen years. Okuma America Corporation (“the Company”) is engaged in the production and sales of machine tools. When he left the Company to work for a competitor, the Executive was a vice president for customer service, was overseeing twenty-five employees, and was maintaining relationships with the company’s more than thirty distributors in forty locations. In addition, the Executive was serving on the Company’s corporate planning committee, a small group of six senior executives responsible for the Company’s major strategic and operational decisions.

The non-compete covenant in the Executive’s employment agreement with the Company stated that, for the six months following the end of his employment with the Company, the Executive would not, “become employed by … a Competitor, unless [the Executive] accepts employment with a Competitor in an area of the Competitor’s business which does not compete with the Company.” The non-compete covenant also provided that, during the same six-month period, the Executive would not, “[s]olicit or attempt to solicit … the business of any of the Company’s clients or customers for which [the Executive] has rendered any services.” In addition, the non-compete covenant stated that the geographic scope of its restrictions on competition was limited to the “areas in which the Company does business.”

After leaving the Company’s employment, the Executive became employed with DMG America, Inc. (“DMG America”), a direct competitor of the Company in the machine tooling industry. The Executive took a job with DMG America as vice-president for customer service in its business unit that sells and services machine tools.

The Company sued the Executive for breaching the non-compete covenant, and the trial court dismissed the lawsuit on the grounds that the Company had not adequately stated a claim for breach of a valid and enforceable non-compete covenant. The geographic scope of the non-compete covenant (the “areas in which the Company does business”) was viewed as overly broad because the Company’s operations reached throughout North and South America.

On appeal, the Court of Appeals determined it could not conclude the non-compete covenant was overly broad and unenforceable as a matter of law. The Court of Appeals reversed the trial court’s decision and ruled that the non-compete covenant could be enforceable, despite its broad geographic scope, depending on how certain factual questions were answered. The Court of Appeals remanded the case to the trial court for further proceedings to answer those factual questions.

The Court of Appeals’ reasons for its ruling in Okuma America were as follows:

• A non-compete covenant’s time and geographic limitations must be considered “in tandem” when judging the covenant’s overall reasonableness. Because the covenant’s six-month time period was relatively short, its broad geographic scope could be tolerable.
• A non-compete covenant’s geographic scope must not be wider than necessary to protect the employer’s customer relationships and other legitimate business interests, considering the area in which the employer operates, the area where the employee worked or was assigned to work, and the nature and extent of the employee’s duties and knowledge of the employer’s business and operations. Because the Executive was a senior executive in charge of customer service for the Company who participated in its most critical and strategic decisions, the covenant’s geographic scope (which was limited to the “areas in which the Company does business”) could be reasonably necessary for protecting the Company’s customer relationships.
• The non-compete covenant did not prohibit the Executive from becoming employed with a competitor “in an area of the Competitor’s business which does not compete with the Company.” Because the Executive had become employed with a direct competitor in its business unit that sells and services machine tools, and his job with the competitor was identical to the job he had with the Company, the covenant could be enforceable against him.

These reasons gave the Court of Appeals a basis for distinguishing its ruling in Okuma America from other decisions in which the Court of Appeals voided non-compete covenants as overbroad because they prohibited an employee from becoming employed with a competitor even if the employee were to take a job with the competitor that posed no threat to his prior employer.

For final determination of the non-compete covenant’s enforceability, the factual questions to be answered on remand to the trial court, according to the Court of Appeals, were whether the covenant’s geographic scope is reasonable in light of the Executive’s actual contacts with customers, the exact nature of his duties, the real level of his responsibilities, the actual scope of his knowledge, and how the geographic scope fits with his work for the Company.

Non-compete covenants between an employer and an employee are strictly scrutinized by North Carolina courts before they are enforced, and the Court of Appeals’ ruling in Okuma America emphasizes that a court’s view of a non-compete covenant’s enforceability may depend on the specific facts of the employer’s business operations, the employee’s position and duties with the employer, and the employee’s contacts with the employer’s customers. Employers may wish to consult North Carolina counsel to review their use of non-compete covenants for employees in this State.