Fourth Circuit Decision Reminds Employers That Overbroad Noncompete Agreements May Not Be Enforceable
If your company operates in a territory covered by the 4th circuit (Maryland, Virginia, West Virginia, North Carolina, and South Carolina) and requires employees to sign a noncompete agreement with language similar to the following, it may be time to consider revising the agreement:
While I, the Employee, am employed by Employer, and for 1 year afterward, I will not directly or indirectly participate in a business that is similar to a business now or later operated by Employer in the same geographical area. This includes participating in my own business or as a co-owner, director, officer, consultant, independent contractor, employee, or agent of another business.
In RLM Communications, Inc. v. Tuschen, the Fourth Circuit Court of Appeals invalidated such a provision.
RLM, a cybersecurity and information technology government contractor, sought to enforce a former employee's noncompete agreement after she went to work for a competitor located nearby. The former employee had worked as the Director of Information Assurance. She would work as the Director of Cyber and IT Solutions at her new employer.
RLM argued that “with everything [the former employee] knew . . . in her leadership positions, she could singlehandedly affect RLM’s future in terms of its ability to bid on and secure upcoming contracts.”
Applying North Carolina law, which disfavors covenants not to compete, the Fourth Circuit rejected RLM’s argument and held that the noncompete was unenforceable against the former employee. The Court found that the RLM noncompete agreement’s restriction on direct participation in similar businesses was overly broad.
As worded, it not only prohibited her from working in her current position at the competitor, but it also prohibited her from “mow[ing] their lawns, cater[ing] their business lunches, and serv[ing] as their realtor.” Further, if RLM were to enter a new line of business, the former employee would be prohibited from working for a competing company, even though she never worked in that line of business when she was employed by RLM.
The Court also took issue with the noncompete agreement’s prohibition on indirect participation in similar businesses, noting that if the former employee "has retirement accounts invested in mutual funds, she may have to monitor their holdings to be sure she is not investing in companies similar to RLM.” What the noncompete agreement should have done was focus on restricting her from obtaining “employment that raises the risk that [she] will use knowledge obtained from RLM to RLM’s detriment[.]” But, since the agreement targeted “the similarity of a new employer to RLM," the Fourth Circuit could not enforce its restrictions and affirmed the lower court’s dismissal of RLM’s breach of contract claim against the former employee.
Takeaways
While the RLM Communications case arose under North Carolina law, and different results might be reached in other jurisdictions, employers concerned about competition should not wait for a court to decide whether its noncompete agreement is enforceable after a key employee departs for a competitor.
To protect its competitive advantage, employers should act now by reviewing their noncompete agreement language. Specifically, look at whether the restrictions on postemployment focus on the specific skills and information the employee gained during his or her employment. If, instead, the restrictions focus broadly on whether the business of the new employer is similar to your business, without reference to the kind of work performed by the employee, consider whether to revise your noncompete agreements to restrict employees from working in a related capacity for a competing business company – with the focus on the actual duties that the employee performs for your company.
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