North Carolina Court Upholds 10-Year Restrictive Covenant Between Employer And Former Employee

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When one thinks of a “reasonable” temporal scope for a restrictive covenant between employer and employee, usually that period is measured in months or years, not decades. But as a recent North Carolina decision reminds us, context is everything, and a 10-year restriction can be enforceable in the right circumstances.

In KNC Techs., LLC v. Tutton, 2021 NCBC LEXIS 38 (N.C. Super. Ct. Apr. 8, 2021), Eric Tutton (“Tutton”) entered into a Non-Compete Agreement during his employment with KNC Technologies, LLC (“KNC”). Around his resignation from KNC in 2013, Tutton allegedly violated the Non-Compete Agreement and misappropriated KNC’s confidential information, leading KNC to sue Tutton (“Tutton I”).

KNC and Tutton entered into a negotiated Settlement Agreement resolving Tutton I that prohibited Tutton from “solicit[ing], contact[ing], and/or mak[ing] sales” for 10 years to “[KNC] customers” and nine specifically named KNC suppliers. The trial court approved and entered a consent order reflecting the terms of the Settlement Agreement, thus ending the lawsuit.

Roughly a year after entry of the Settlement Agreement and consent order, Tutton allegedly formed a competing company and later violated the restrictive covenants in the Settlement Agreement. KNC sued Tutton again, this time in the North Carolina Business Court[1] (“Tutton II”), and Tutton challenged the Settlement Agreement as being unreasonable and unenforceable under the well-developed North Carolina case law on restrictive covenants between employers and employees. Indeed, North Carolina courts usually view five years as the outer limit of enforceable restrictive covenants between employer and employee, and even that period is enforceable only in “extreme conditions.” Hartman v. W.H. Odell & Assocs., 117 N.C. App. 307, 315, 450 S.E.2d 912, 918 (1994).

The Business Court rejected Tutton’s challenge and denied his early motion to dismiss KNC’s claim for breach of the Settlement Agreement. See KNC Techs., LLC v. Tutton, 2019 NCBC LEXIS 72 (N.C. Super. Ct. Oct. 9, 2019). Even though KNC and Tutton did have an employment relationship at one point, the Court declined to analyze the Settlement Agreement as a restrictive covenant between employer and employee. The Court noted there are other contexts in which restrictive covenants are routinely upheld (such as with the sale of a business, or between franchisors and franchisees), and the facts alleged “did not fit squarely under the analysis applied to restrictive covenants between employer and employee or buyer and seller, but instead call for a more situation-specific approach.” Id. at ¶ 29.

Under this “situation-specific approach,” the Court concluded the 10-year restriction in the Settlement Agreement was reasonable and enforceable. The facts supporting the Court’s conclusion were: (1) Tutton admittedly violated the original Non-Compete Agreement; (2) Tutton, while represented by counsel, settled Tutton I by freely agreeing to less onerous restrictions than a true covenant not to compete; and (3) the Settlement Agreement did “nothing more than protect KNC’s business interests, which Tutton [had] already demonstrated a propensity to ignore.” Id. at ¶ 31.

On April 8, 2021, on summary judgment after the parties conducted discovery, the Court continued to hold enforceable the 10-year restriction, at least for KNC’s suppliers. Tutton II, 2021 NCBC LEXIS 38, at ¶¶ 56-62. Although the 10-year supplier restriction was held enforceable, the language imposing the restriction itself was deemed ambiguous, and trial will be necessary to establish potential breach. Id. at ¶¶ 63-66. The Court did grant summary judgment to Tutton on the customer-focused restriction, because it prohibited Tutton from contacting too broad a universe of individuals and entities. Notably, the Court reiterated that the 10-year temporal scope of the customer restriction was reasonable under the specific facts before it. Id. at ¶ 47.

This case raises important considerations for employers when negotiating restrictive covenants outside the traditional employment context. Particularly where the employee is represented by counsel and the parties are negotiating settlement, courts may be more willing to enforce broader restrictions. This is also an important reminder that, even in the age of increased regulation and scrutiny, lengthy restrictive covenants may still be enforced.

[1] The North Carolina Business Court is a special forum of the state trial division that only hears cases involving complex business disputes.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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