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Contract – Non-Compete Clause – Non-Solicitation Clause – Reasonableness

 

 MJM Investigations, Inc. v. Sjostedt. (Lawyers Weekly No. 10-16-0715, 12 pp.) (Linda M. McGee, J.). (Sanford L. Steelman Jr., J., concurring in the result) Appealed from Wake County Superior Court (Paul C. Ridgeway, J.). N.C. App. Unpub.

Holding: Where the plaintiff’s non-solicitation clause was vague as to whom it covered, it was unenforceable. Furthermore, when the trial court “blue penciled” the agreement to remove the covenant not to compete, it removed the only time restriction. A non-solicitation clause without any time restriction is clearly too broad and, therefore, unenforceable, no matter the scope of the territorial limitation.

We reverse the preliminary injunction.

Facts

Sjostedt founded Vetted. Vetted’s business included assisting insurance carriers in investigating and processing claims under acts involving insurance coverage for employees contracted by the U.S. government for work overseas.

Vetted had a consulting agreement with the plaintiff. Vetted was hired as an independent consultant for investigations that the plaintiff was conducting in the Middle East.

Pursuant to the agreement, Vetted agreed to provide consulting services for the plaintiff’s insurance-related work in the Middle East. The agreement included non-compete and non-solicitation clauses.

The plaintiff alleged that the defendants violated the terms of the agreement, and thereby caused the plaintiff to lose clients and prospective clients, as well as business market share.

The plaintiff filed a verified complaint and motions for a temporary restraining order and preliminary injunction.

The trial court denied the plaintiff’s motion for a temporary restraining order but granted its motion for a preliminary injunction.

The trial court ruled that the non-compete clause in the agreement was overly broad and therefore unenforceable. The trial court struck the non-compete portion of the agreement and ruled that the remaining non-solicitation clause in the agreement was enforceable. It granted the plaintiff a preliminary injunction on that basis.

The defendants appealed.

Analysis

The defendants argue that the trial court erred in ruling that the plaintiff could succeed on the merits, which caused it to grant a preliminary injunction. We agree.

Covenants not to compete between an employer and employee are not viewed favorably. To be enforceable, a covenant must meet five requirements, including reasonableness as to time and territory and design so as to protect a legitimate business interest of the employer. The reasonableness of a non-compete agreement is a matter of law for the court to decide.

The parties’ agreement does not define “current or prospect client of [the plaintiff].” It is unclear whether a “current client” would be a client current at the time the agreement was executed or current at the time the defendants left the plaintiff’s employ.

Further, because “client” is not defined, it can be read to cover all branches, divisions, and affiliates of a “client.” This would likely cover many entities with which the plaintiff has never had any contact.

Even more nebulous is the meaning of “prospect client.”

We hold that the plaintiff’s failure to provide any definition for “current or prospect client” renders the non-solicitation clause vague and unenforceable.

Furthermore, when the trial court “blue-penciled” the agreement, it struck the entire first sentence, which constituted the non-compete clause of the agreement. This sentence included the only time restriction in the agreement. The remaining non-solicitation clause includes no time restriction.

A plain reading of the non-solicitation agreement would permit the plaintiff to prohibit the defendants from soliciting “current or prospect clients” indefinitely. A non-solicitation clause without any time restriction is clearly too broad and, therefore, unenforceable, no matter the scope of the territorial limitation.

Reversed and remanded.

Concurrence

(Steelman, J.) I write separately to express concern over the present state of the law in the context of an increasingly integrated global economy.

The law of restrictive covenants should be re-evaluated by our Supreme Court in the context of changing economic conditions to allow restrictions upon competing business activity for a specific period of time, limited to a specific, narrow type of business, but with fewer geographic limitations.

I would further construe the agreement so that the two-year time limitation was applicable to all provisions.

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