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Non-Compete Agreements Aren’t for Everyone: The Necessity of Proving a “Legitimate Business Interest”

It is a longstanding tenet of North Carolina law:  A company must have a legitimate business interest to justify using non-competes in its employment agreements.   

Employers often focus on specific language describing the scope of their non-competes – should it be six months, one year or two years?  Should it be citywide, statewide, or is a larger territory reasonable?  And although the scope of a non-compete is critical, two recent North Carolina court decisions emphasize that you can’t use a non-compete in just any situation.  There must be a legitimate business interest which merits its use.

What qualifies as a legitimate business interest?

In Pinehurst Surgical Clinic, P.A. v. DiMichele, the NC Court of Appeals enforced an employment agreement prohibiting the defendant physician from practicing medicine in competition with the plaintiff surgical clinic for two years within a 35-mile radius of its Pinehurst facility. 

In reversing the trial court’s finding of no irreparable harm, and remanding the case with instructions to grant the PI, the Court focused on several key findings which demonstrated the employer had strong, legitimate and protectable business interests to justify the use of non-competes:

  • In its more than 60 years of existence, the clinic had invested many resources “cultivating relationships with patients, employees, and various entities in the region in which it does business.”

  • The clinic annually spent significant sums “to develop and maintain a loyal patient base and goodwill in the community.”
  • The clinic provided the physician with “extensive confidential information regarding all aspects of plaintiff’s medical practice and business affairs.”

  • The clinic also provided the physician with an extensive patient base and the support necessary to maintain a successful medical practice, reputation and goodwill in the community.

In contrast – and reaching a different result – in Phelps Staffing, LLC v. C.T. Phelps, Inc., the Court of Appeals found that a staffing company failed to establish a legitimate business interest supporting its use of non-competes.   A number of factors undermined the staffing company’s case:

  • The employees at issue were “general laborers”;

  • The employees did not have access to trade secrets or proprietary information; and
  • The staffing company admitted that the primary purpose of the non-compete was to prevent competition from other temporary staffing companies. 

The Court had little trouble affirming the trial court’s finding that the non-compete was “merely an attempt to stifle lawful competition between businesses and that it unfairly hinders the ability of plaintiff’s former employees to earn a living.”

These North Carolina cases are in sync with the national trend.  For example, in Gastroenterology Consultants of the North Shore v. Mick S. Meiselman, an Illinois appellate court invalidated a physician’s non-compete because the former employer failed to show a legitimate protectable interest.  The evidence showed that the doctor had been practicing in the relevant territory for about 10 years before his employment with the practice, the practice did not introduce the doctor to his patients or his physician-referral sources, the practice did not advertise, promote or market the doctor’s practice, and the doctor maintained his own office and telephone number.  The practice merely provided some administrative support for the doctor.  As a result, the practice lacked a legitimate interest to justify the non-compete.  

Copyright © 2017 Womble Bond Dickinson (US) LLP All Rights Reserved.

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About this Author

Betsy Cook Lanzen, Trade Secrets attorney, Womble Carlyle, Unfair Competition Lawyer
Partner

Betsy has more than a decade of experience litigating complex business matters involving misappropriation of trade secrets, unfair and deceptive trade practices, unfair competition, fraud, complex contract and licensing disputes, non-competition agreements and other restrictive covenants, corporate raiding, the Computer Fraud & Abuse Act, and business torts between competitors.  Her cases frequently include demands for restraining orders and permanent injunctions and complex electronic discovery issues.

Betsy’s broad experience includes cases in federal, state, and business...