Wednesday, January 07, 2009, 10:23 AM

COA Invalidates A Non-Compete And Non-Solicitation Agreement, While Limiting Trade-Secrets Damages

Yesterday the NC Court of Appeals (COA) invalidated a noncompete and nonsolicitaiton agreement as facially overbroad. The case is Medical Staffing Network, Inc. v. Ridgway. The decision required the COA to vacate a seven-figure judgment that the former employer obtained against the former employee and his new employer. The Court also gave direction (and limiting principles) for damages in trade secrets cases.

Plaintiff (MSN) is a medical staffing company (e.g., providing per diem nurses to hospitals and healthcare providers). The employee was hired to be manager of the MSN's Raleigh branch, with accounts including WakeMed. Five years later, he resigned to join a Raleigh competitor, and WakeMed went with him.

Although he had signed a noncompete with MSN, he contended it was unenforceable. The noncompete defined MSN (and thus the scope of his noncompetition duty) to include not only MSN but also "any parent, division, subsidiary, affiliate, predecessor, successor, or assignee" of MSN. "As drafted," the COA therefore observed, "the covenant not to compete would prevent Ridgway from working in any business within a 60-mile radius of Raleigh that competes with MSN's parent, or any of its divisions, subsidiaries, affiliates, predecessors, or assignees, even if Ridgway's employment duties for MSN had nothing to do with that business." The COA indicated that this ran afoul of the rule that a company has no legitimate interest in preventing an employee from competing with affiliated companies. The COA also held that it ran afoul of the rule that a noncompete is unenforceable if it prohibits the employee from work that is distinct from the duties he actually performed as an employee.

Likewise, the COA held that the nonsolicitation clause in his agreement was invalid because it prevented Ridgway not only from engaging in business with current and former clients of of MSN with whom he had developed a relationship, but also prohibited him from soliciting the business of any "MSN client," which the agreement defined to include clients of any MSN affiliates or divisions, which would include those outside the medical staffing business with whom he wouldn't have had any contact.

In sum, the COA held that MSN didn't show it had "any legitimate business interest in preventing competition with, or foreclosing the solicitation of clients and employees of, unrestricted and undefined affiliated companies that engage in a business distinct from the medical staffing business in which Ridgway had been employed."

Thus, as a result of overbroad drafting, the noncompete couldn't be enforced even though Ridgway was competing directly with MSN (not its affiliates) in the medical staffing business (not some unrelated business) and was soliciting clients of MSN with whom he had contact at MSN (not clients of an affiliate with whom he hadn't had contact). No blue penciling.

But the COA did uphold plaintiff's judgment for misappropriation of trade secrets. The COA, however, agreed with defendants that damages on that claim were based on an improper measure and remanded with instructions on how to calculate damages on that claim. This aspect of the opinion is an important cautionary decision limiting damages in trade secrets claims, underscoring that damages (or unjust enrichment) must be traced with reasonable certainty to the misappropriation itself.

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