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Court of Appeals Decides Non-Compete Covenant in Medical Staffing Case is Unenforceable, But Affirms Verdict for Misappropriation of Trade Secrets and Unfair Trade Practices

In a recent decision, the North Carolina Court of Appeals decided that a non-compete covenant in a branch manager’s employment agreement with a medical staffing company was unenforceable, but affirmed the trial court’s verdict that the manager and his new employer misappropriated the company’s trade secrets and that his new employer engaged in unfair trade practices.

The case involved two medical staffing companies competing against each other for placement of per diem nurses to fill specific shifts at hospitals and other health care providers in the Raleigh, North Carolina area. One of the competitors hired the other’s Raleigh branch manager, who had signed an employment agreement containing a non-compete covenant with his original employer. Shortly before leaving his original employer to become employed in the same position with the other competitor, the branch manager repeatedly accessed a number of confidential documents on his original employer’s computer system, including the company’s "market action plan," which was something he had done only occasionally in the past.

Soon after starting his new job, the branch manager began calling his former employer’s nurses to recruit them to join his new employer. During the 18 months following the manager’s job change, ten nurses resigned from his original employer and began working for his new employer. After his job change, the branch manager also solicited his prior employer’s clients, including a large hospital, to hire per diem nurses from his new employer. In the year following the manager’s departure from its employment, his original employer lost that large hospital client to his new employer and the original employer’s overall revenue declined while the new employer’s revenue increased substantially.

The branch manager’s original employer sued him for breach of his non-compete covenant. Based on allegations that the manager’s new employer knew he was under a non-compete covenant with his prior employer and still hired him to compete against it in the Raleigh area, the original employer sued the new employer in the same case for tortuous interference with contract. The original employer sued both defendants for misappropriation of its trade secrets and also sued the new employer for unfair trade practices.

A verdict was entered by the trial court in favor of the original employer against the defendants on all claims. The trial court awarded actual monetary damages of $283,300 which was trebled to a total amount of $849,900 in damages under North Carolina’s unfair trade practices statute. With the trial court’s additional award of attorney’s fees and costs in the amount of $254,595, the total monetary relief awarded to the original employer against the defendants exceeded $1,100,000.

On appeal, the Court of Appeals ruled the branch manager’s non-compete covenant was unenforceable and reversed the trial court’s verdict for breach of the non-compete covenant. The Court of Appeals did not criticize the time period or territory covered by the non-compete covenant. Rather, the Court found the scope of activities prohibited by the covenant was much broader than reasonably necessary for protection of the original employer’s business and customers.

The Court of Appeals held the branch manager’s non-compete covenant to be unenforceable because it went beyond just prohibiting him from competing against the original employer and soliciting business from its clients with whom he had dealings or contacts. Instead, as the Court noted, the non-compete covenant also prohibited the branch manager from working in any business in the territory that competes with "any parent, division, subsidiary, affiliate, predecessor, successor, or assignee" of the original employer, even if his duties for the Company had nothing to do with that business. The Court also pointed out that the non-compete covenant prohibited the manager from soliciting business from clients of any of the original employer’s affiliates or divisions outside the medical staffing business with whom the manager would not have had dealings or contacts.

The Court of Appeals determined that the original employer had no legitimate business interest in using a non-compete covenant to prevent competition with, or protect the customers of, an unrestricted and undefined set of its affiliates and divisions that engaged in business different from the medical staffing business in which the branch manager had been employed. Because the Court ruled the branch manager’s non-compete covenant was unenforceable and reversed the trial court’s verdict for breach of the covenant, the Court also reversed the trial court’s verdict against the new employer for tortuous interference with contract.

In contrast, the Court of Appeals upheld the trial court’s verdict for misappropriation of trade secrets and unfair trade practices. The defendants argued on appeal that there had been no direct evidence that the branch manager had actually copied or transmitted any information from the original employer’s database, which contained nurses’ phone numbers, pay rates, specializations, and preferences for certain shifts and facilities. However, the Court reasoned that circumstantial evidence was sufficient to prove a claim for misappropriation of trade secrets and decided that the original employer presented sufficient circumstantial evidence to uphold the trial court’s verdict for misappropriation of trade secrets and unfair trade practices.

Among the circumstantial evidence relied on by the Court of Appeals was evidence showing that the branch manager had accessed the original employer’s "market action plan" and other confidential documents on its computer system with unusual frequency right before he left its employment, and that soon after he left he began calling its nurses to recruit them to join his new employer. The Court also relied on the evidence that numerous nurses left the original employer to become employed with the new employer, that the original employer lost a large hospital client to the new employer, and that there was a substantial increase in the new employer’s revenue at the same time the original employer’s revenue decreased.

For health care providers and health care-related businesses using non-compete covenants and other contractual restrictions with key employees, this recent decision from the North Carolina Court of Appeals illustrates the importance of making sure that any such contractual restrictions are no broader than necessary to prevent actual competition with the organization for its business and customers.

In addition, non-compete covenants in employment agreements with physicians, nurses and other health care professionals must comply with special rules to make sure that enforcement of the covenant would not unduly impact the availability of needed medical services in a community.

This recent court decision also highlights the need for providers and businesses that are thinking of recruiting or hiring a key employee from a competitor to find out whether the employee is under a non-compete covenant or other contractual restriction with the competitor and, if so, give it careful consideration. Also, if the employee is hired, it is important to make sure he or she has not taken and will not use any of the competitor’s confidential information or trade secrets.

© 2019 Poyner Spruill LLP. All rights reserved.

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Poyner Spruill  is a 115 attorney multidisciplinary law firm, with offices in Raleigh, Charlotte, Rocky Mount, and Southern Pines, North Carolina, giving it a statewide presence. The firm’s size enables it to foster individual attorney excellence in such diverse practice areas as bankruptcy, workouts, creditors’ rights, employment law, commercial real estate, employee benefits, banking law, venture capital, public utilities, health care law, governmental relations, environmental law, securities law, municipal law, construction law, white collar criminal defense, as well as trials and...

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