Has the “Inevitable Disclosure” Doctrine Found a Foothold in North Carolina


Twenty years ago, the Seventh Circuit Court of Appeals in PepsiCo, Inc. v. Redmond, 54 F.3d 1262 (7th Cir. 1995) advanced the “inevitable disclosure” doctrine in trade secret misappropriation cases. The doctrine essentially provides that by virtue of the current employment responsibilities of an employee that possesses trade secrets of the prior employer, it is inevitable, unless enjoined, that such person will use or disclose the trade secrets in his or her current employment.  Since that time, courts around the country — state and federal — have had to consider the doctrine, some accepting it, others not.  Courts in North Carolina have touched on this issue in the past as well but have generally veered away from outright recognizing and adopting the doctrine.  North Carolina courts have either declined to apply the doctrine (see e.g. Analog Devices v. Michalski, 579 S.E.2d 449 (N.C.  Ct. App. 2003)) or have found some circumstantial evidence of actual misappropriation or some element of bad faith to justify the imposition of an injunction for threatened misappropriation.  See e.g. Armacell LLC v. Bostic, 205 N.C. App. 467, 698 S.E.2d 200 (2010).  Recently, though, two appellate decisions raise a question as to whether North Carolina now, at least implicitly, recognizes the “inevitable disclosure” doctrine.

In two of the most recent pronouncements by the North Carolina Court of Appeals on the topic — TSG Finishing, LLC v. Bollinger, 2014 WL 7463824 (Dec. 31, 2014) (”TSG“) and Horner International Co. v. McKoy, 754 S.E.2d 852 (N.C. Ct. App. 2014) (”Horner”), the bar for issuing an injunction for threatened misappropriation of trade secrets may have been lowered.  Now, it seems that all that is necessary for a preliminary injunction to issue is the establishment of the trade secret, the defendant’s prior access or knowledge of that trade secret and the mere “opportunity” to use it in a competitive situation against the trade secret’s owner, without further circumstantial evidence of actual misappropriation or act of bad faith.  While those opinions may not utter the words ”inevitable disclosure or cite to the PepsiCo decision, the conclusion seems almost inescapable that North Carolina tacitly embraces the doctrine.  But if this is the case, serious questions arise regarding the statute and its application in the absence of direct or circumstantial evidence of actual misappropriation or bad faith.   

In Horner, the Court of Appeals affirmed the grant of a preliminary injunction against a former plant manager of the Plaintiff  that had worked with equipment that produced flavor materials for use in tobacco and food products.  Horner International alleged that the Defendant, Bill McKoy, had access to certain of its trade secrets including techniques, methods and processes for production uses of the flavor materials.  In affirming the grant of the injunction, the Court dispatched the challenges to the specificity of the trade secrets, as well as to the evidence regarding misappropriation.  As to the latter, the Court found that under the North Carolina Trade Secrets Act, N.C. Gen. Stat. § 66-155, an injunction can issue for threatened misappropriation of a trade secret, and all that is needed to establish a prima facie case is that the defendant (1) knows or show have known of the trade secret and (2) “[h]as had a specific opportunity to acquire it for disclosure or use or has acquired, disclosed or used it without the express or implied consent or authority of the owner.”  N.C. Gen. Stat. § 66-154(a).  The Court then found that the “Defendant’s knowledge of trade secrets and opportunity to use those in his work for his new employer create[d] a threat of misappropriation …”  Interestingly enough, the Court affirmed the grant of the injunction merely on the establishment of the prima facie case.  Moreover, the Court rebuffed the Defendant’s “strenuous assertions on appeal that Plaintiff produced no direct or circumstantial evidence of his ’acquisition, use, or disclosure of [Plaintiff's] information’.”  For the Court of Appeals, no such showing was required as long as the Plaintiff met the prima facie standard, apparently even only through a verified pleading. 

More recently, the Court of Appeals in TSG found that an injunction was appropriate under the North Carolina Trade Secrets Protection Act for “threatened” misappropriation of trade secrets involving process refinements for fabric finishes.  As in Horner, the Court of Appeals here found the Plaintiff presented prima facie evidence of misappropriation based on the admissions of the Defendant that he had done research and experimentation for TSG on aspects of the fabric finishes for at least one specific customer, that there was some overlap in customers and that the Defendant performed “many of the same duties for [his current employer] for some of the same customers that he formerly served at TSG.”  Based on these facts, and relying heavily on the applicability of the trade secrets to both TSG and the new employer’s business, the Court readily found that TSG would likely prevail on the merits of its claim for trade secret misappropriation, principally if not entirely based on threatened misappropriation.  In reaching its decision, and reversing the denial of the injunction by the Business Court, the Court of Appeals in TSG apparently was not troubled by Judge Murphy’s recitation of the law in his Order that ”North Carolina courts are reluctant to grant injunctive relief solely on the basis of threatened misappropriation without proof of actual misappropriation.”  TSG Finishing, LLC v. Bollinger, 2014 NCBC __ (N.C. Super Ct. Feb. 20, 2014) (quoting Allegis Group, Inc. v. Zachary Piper LLC, 2013 NCBC 13 ¶ 52 (N.C. Super. Ct. Feb. 25, 2013).  Nor was the Court of Appeals troubled by the long-standing principle set out by North Carolina courts to ”refuse to enjoin an employee from working for its former employer’s competitor under the doctrine of ‘inevitable discovery’ absent some showing of bad faith, underhanded dealing, or employment by an entity so plainly lacking comparable technology that misappropriation can be inferred.”  FMC Corp. v. Cyprus Foote Mineral Co., 899 F. Supp. 1477, 1483 (W.D.N.C. 1995) (citing Travenol Laboratories, Inc. v. Turner, 30 N.C. App. 686, 228 S.E.2d 478 (1976) and Engineering Associates, Inc. v. Pankow, 268 N.C. 137, 150 S.E. 2d 56 (1966)).  No mention was made of this precept and the opinion was bereft of any allegation of bad faith or underhanded conduct by the Defendant.

In Horner and TSG, the Courts relied on the ”threatened” misappropriation and prima facie pleading language set forth in the statute to affirm or, in the case of TSG, order the granting of the injunction as to trade secret misappropriation.  However, one must ask how such a construct jells with the fact that the defendant in these and other similar situations would have ”acquired” the trade secret while employed by and with the consent of the owner.  Indeed, under a strict parsing of the statutory language, the “opportunity” referred to in Section 66-154 — and apparently relied on by these courts due to the absence of any showing of actual misappropriation — relates to the acquisition of the trade secret, not to the use or disclosure.  Would not then the statute require circumstantial evidence of acquisition, disclosure or use “without the express or implied consent or authority of the owner”?  Otherwise, would not an injunction automatically issue every time a trade secret is identified when the individual had access previously in his employment to that alleged secret and was subsequently employed in a similar position by a competitor? 

Trial courts in North Carolina continue to grapple with just what is required to show threatened misappropriation under North Carolina’s Trade Secrets Protection Act.  The North Carolina Business Court in late December addressed the issue in a case involving a claim of threatened misappropriation of alleged trade secrets in NASCAR racing.  RCR Enterprises, LLC v. McCall, 2014 WL 7591977 (N.C. Super Ct. Dec. 19, 2014).  In that case, Judge Bledsoe denied a request for entry of a TRO, in part, finding that the plaintiff had not shown a likelihood of success on the merits when much of the discussion was directed at the degree of overlap in the responsibilities of the Defendant in his current and previous positions.  In reaching its decision, the Court noted the lack of official embrace of the “inevitable disclosure” doctrine by the North Carolina courts and then found the degree of overlap insufficient.  Interestingly, though, the Court did make reference to the above principles, ignored in TSG and Horner, of demonstrating some actual misappropriation or bad faith to justify the imposition of an injunction for threatened misappropriation.  And in doing so, the Court seems to have tried to bring Horner in line with that long-established authority, by interpreting Horner as a case involving evidence of actual misappropriation.   Yet, in this regard, the court’s efforts seem a bit far afield.  A reading of the Horner decision, however, does not reflect that there was actual misappropriation.  Indeed, the Court of Appeals in Horner expressly rejected the protestations of  the defendant on appeal that the case lacked direct, indirect or circumstantial evidence of actual misappropriation. 

So, what is the final conclusion?  Until the North Carolina appellate courts expressly adopt  or reject the doctrine, litigants will continue to face this confusing landscape.  Whether TSG and Horner will ultimately be viewed as a full or partial embrace of the inevitable disclosure doctrine remains to be seen.  But TSG and Horner will support an argument that, in certain factual settings, the courts need not attend to allegations of bad faith or underhanded conduct of the defendant to issue an injunction.  Even RCR Enterprises leaves open the possibility that if the trade secrets are established well enough and the risk of future use is high enough, due to overlapping responsibilities, then an injunction might be entered even without evidence of bad faith or any actual misappropriation.  If such is the case, a defendant, no matter how sincere his or her conduct and intentions, may be out of a new job if employed in a position with the same duties having once been exposed to the trade secrets of the prior employer.

North Carolina Court of Appeals Prods Supreme Court to Update Analysis on Non-Competes


The executive and legislative branches in North Carolina have made efforts recently to encourage the relocation and expansion of businesses in the State in a continuing quest to make North Carolina more business friendly.  Now, it appears that it is the judiciary’s turn.  In a recent decision by the North Carolina Court of Appeals – Beverage Systems of the Carolinas, LLC v. Associated Beverage Repair, LLC, et al., No. COA14-185, August 5, 2014 – the court for the first time squarely focused on changing the law with respect to the enforcement of non-compete agreements, at least in the limited context of a purchase and sale of a business, to avoid the harsh application of the strict blue-pencil rule and to reflect the changing environment of business needs in the State today.

The facts of Beverage Systems are not extraordinary.  The Plaintiff was formed following the acquisition of assets of two existing businesses, Imperial Unlimited Services, Inc. (”Imperial”) and Elegant Beverage Products, LLC (”Elegant”), which supplied, installed and serviced beverage products and dispensing equipment.  The transaction was memorialized by an Asset Purchase Agreement.  The Agreement provided for the sale of Imperial’s and Elegant’s assets, trade names, customer lists, account receivables, customer contracts, equipment and real estate.  The Agreement included a non-compete agreement which applied to “the states of North Carolina or South Carolina” “until the earlier of (i) October 1, 2014 [five years out from the purchase] or (ii) such other period of time as may be the maximum permissible period of enforceability of this covenant (the ‘Termination Date’).”  The Agreement also contained the following provision:

“If, at the time of enforcement of any provisions of Sections 1, 3 or 4 hereof, a court holds that the restrictions stated herein are unreasonable under the circumstances then existing, the parties hereto agree that the maximum period, scope or geographical area that are reasonable under such circumstances shall be substituted for the stated period, scope or area, and that the court shall be allowed to revise the restrictions contained in Sections 1, 3 and 4 hereof to cover the maximum period, scope and area permitted by law.”

At the trial court level, the defendants moved for summary judgment, arguing, in part, that the non-compete was not enforceable as a matter of law and that under North Carolina’s strict blue-pencil rule, the provision could not be saved.  Moreover, the defendants argued that the saving clause was in direct conflict with North Carolina law and therefore, even with the admonition in the Agreement that it could be revised “to cover the maximum period, scope and area permitted by law,” the court’s hands were tied and the provision could not be re-written by the court.  The trial court agreed with defendants, granting summary judgment on the breach of the non-compete agreement, as well as other claims.  This appeal ensued.

In a split decision by the Court of Appeals, the Court reversed the trial court’s decision, finding that while the non-compete agreement was too broad as to its geographic scope, the trial court was specifically empowered by the parties’ Agreement to revise the term to make it more reasonable.  The Court of Appeals paid due deference to the long-standing ”blue pencil doctrine” in North Carolina which generally prohibits judges from re-writing non-compete agreements and only permits judges to strike severable provisions of the non-compete agreement.  But the Court noted that the law in North Carolina has long afforded non-compete agreements in the context of a sale or purchase of a business ”greater latitude” than in the traditional employer-employee relationship.    See Seaboard Indus., Inc. v. Blair, 10 N.C. App. 323, 333, 178 S.E.2d 781, 787 (1971).  Under this more liberal approach, the Court had no problem finding the time reasonable and further found that the trial court should have itself modified the geography to make it more reasonable:

“Given the fact that non-competes drafted based on the sale of a business are given more leniency than those drafted pursuant to an employment contract since the parties are in relatively equal bargaining positions, the trial court should not have held the trial court’s power to revise and enforce reasonable provisions of the non-compete be limited under the ‘blue pencil doctrine.’  Instead, the trial court should have invoked its power under paragraph six and revised the non-compete to make it reasonable based on the evidence before it.”

The Court of Appeal’s decision marks the first time a North Carolina appellate court has squarely and abruptly broken with the “blue pencil doctrine.”  There has been some prior rattling by the Appellate Court on the need to revise the strict “blue pencil doctrine” to take into account the changing business needs in the State.  Indeed, the Court of Appeals even referred to this early intonation of discontent.  Id. fn. 3, citing Judge Steelman in MJM Investigations, Inc. v. Sjostedt, 205 N.C. App. 468, 698 S.e.2d 202 (No. COA09-596) (July 20, 2010) noting “The law of restrictive covenants should be re-evaluated by our Supreme Court in the context of changing economic conditions.”  See also prior post:  QUESTION POSED: IS THE TRADITIONAL ANALYSIS USED FOR DETERMINING THE VALIDITY OF NON-COMPETES IN NORTH CAROLINA OUTDATED? Clearly for this Court, the Supreme Court was not taking up the baton quick enough.  Faced with the conflict between the strict blue pencil doctrine and the changing business environment, the Court of Appeals in Beverage Systems chose to act — as much and as far as it could — to perhaps force the Supreme Court to itself relieve the burdens it imposes through its unwavering treatment of restrictive covenants:

“Finally, in recognizing the importance of allowing parties who agree that provisions of a non-compete may be revised in an effort to enforce them, we believe that this practice makes good business sense and better protects both a seller’s and purchaser’s interests in the sale of a business. . . .  This is especially true in North Carolina where our Supreme Court has been unwilling to adopt a more flexible approach to the ‘blue pencil doctrine,’ leaving the courts with few options to try to enforce non-competes in a rapidly changing economy.”

Although clearly limited to the context of a purchase or sale of a business, the ruling, if upheld, is significant for businesses in the State.  Judge Elmore filed a dissent, arguing that there is no basis to save a non-compete, even in this context, as the “blue pencil doctrine” is universal and without exception.  If the decision is appealed, perhaps the Supreme Court will rule to relax the doctrine, at least in this context.  Time will tell.

Fourth Circuit Rules on Admissibility Standard in Trade Secrets Case


In a per curiam opinion that began and ended with the same expression of deep reluctance, the Fourth Circuit Court of Appeals vacated a key ruling by the District Court for the Eastern District of Virginia regarding the admissibility of evidence at trial in E.I. DuPont de Nemours & Co. v. Kolon Industries, Inc., No. 12-1260 (April 3, 2014) (unpublished).  Noting that the trade secrets trial had lasted seven weeks with the jury deliberating two days before finding for the plaintiff in an amount of $919 million, the Fourth Circuit was clearly pained in deciding to overturn the District Court’s decision and remand for a new trial.  But the issue on appeal rested on the fundamental question of whether the defendant in that trade secret misappropriation case had been prevented from offering evidence to the jury that would have tended to refute the fundamental precept of the very existence of the trade secret in the first place.  In this case, the Fourth Circuit found that the defendant had been denied that right.  And through this opinion, the Fourth Circuit provides some guidance, perhaps, as to the admissibility of evidence in trade secrets cases  in the future. 

 E.I. DuPont de Nemours & Co. (”DuPont”) sued Kolon Industries, Inc. (”Kolon”) under Virginia’s Uniform Trade Secrets Act, claiming that Kolon had willfully and maliciously misappropriated 149 DuPont trade secrets concerning DuPont’s Kevlar product, a high-strength, para-aramid fiber that is five times stronger than steel.  DuPont maintained that Kolon, a South Korean company that produces its own synthetic fibers and had pursued but suspended development of its own para-aramid product, sought out and hired five former DuPont employees to work on and improve Kolon’s para-aramid manufacturing technology and resolve quality issues with Kolon’s product.  DuPont further claimed, and the jury ultimately found, that Kolon, through the hiring of these former employees, knowingly acquired a myriad of DuPont trade secrets concerning Kevlar, involving both technical and business/marketing confidential information.” 

In a motion in limine filed before trial, DuPont argued that Kolon should be precluded from presenting any argument or evidence at trial that DuPont had disclosed its alleged trade secrets in a prior lawsuit — the Akzo Litigations.  DuPont argued that such evidence was not relevant to the proceedings, as the alleged prior disclosure in the Akzo Litigations did not reveal the totality of the trade secrets in the present lawsuit against Kolon.  DuPont argued that a trade secret remains a trade secret even if part of the information has been disclosed.  A partial disclosure simply does not mean that the totality of the secret has been revealed and therefore, evidence regarding some alleged partial disclosure is irrelevant.  The district court agreed, stating:  “Kolon ha[d] produced no evidence that any particular trade secret, much less a trade secret that is at issue in this litigation, was disclosed in the litigation between [DuPont] and Akzo, N.V.”   With this statement, the district court set a seemingly high standard for admissibility on an all or nothing approach.   The jury subsequently found for DuPont in the amount of $919 million. 

On appeal, Kolon argued that the district court abused its discretion in precluding the introduction of any evidence regarding the Akzo Litigations.  According to Kolon, the excluded evidence would have tended to demonstrate that “[a]t least 42 of the trade secrets DuPont has asserted … involve information that was wholly or partially disclosed during the [prior] litigation.”  By precluding the introduction of such evidence, the District Court, according to Kolon, limited Kolon’s ability to challenge a key element of being a protectable trade secret:  that the information is not generally known or readily ascertainable by proper means to the public.  DuPont, of course, took a different tact, and, mirroring the District Court’s language, argued that Kolon had failed to produce any evidence that “any particular trade secret, much less a trade secret that is at issue in this litigation, was disclosed.”   

After stating that it would only overturn the District Court’s evidentiary ruling if it were arbitrary and irrational, the Fourth Circuit reversed the District Court.  Apparently, the Court of Appeals simply could not affirm a ruling that would set the bar for admissibility at such a high level:

“The district court’s conclusion that ‘Kolon has produced no evidence that any particular trade secret, much less a trade secret that is at issue in this litigation, was disclosed in the litigation between the plaintiff and Akzo,’  … is simply too stringent for admissibility.  Under the circumstances of this case, we think a ’strikingly similar’ standard of relevance is enough.” 

But what exactly does “strikingly similar” mean in this context?  The Fourth Circuit added some guidance on this point:

“[T]o show the relevance of the evidence, Kolon simply needed to make a plausible showing that, either directly or circumstantially, one or more elements of DuPont’s misappropriation claims, e.g., the reasonableness of its efforts to maintain confidentiality, was less likely true.  Equivalently, Kolon simply needed to make a plausible showing that, either directly or circumstantially, one or more elements of its defenses, either to liability or to the quantum of damages, e.g., the reasonableness of its asserted belief that its consultants were not disclosing trade secrets, was more likely true than not true” (emphasis in original). 

The Fourth Circuit continued to caution that it was not saying that all evidence in the Akzo Litigations was admissible for purposes of the Kolon trial.  Rather, the Court was making it clear that its concerns were directed at the “blanket exclusion” of evidence on the topic by the District Court.  The judgment was vacated and remanded to the District Court with instructions to “determine in a more nuanced and particularized manner” what evidence was to be admitted or excluded. 

The interesting part of this opinion, although not expressly stated, is that the Court of Appeals was only addressing the issue of admissibility of evidence for the jury to consider, and not the ultimate standard that the jury would use to determine whether the trade secret existed.  Indeed, in seeking an en banc review, which was denied, DuPont argued that the elements of the claim are clear and the Fourth Circuit’s ruling only would only stand to confuse the jury by bringing ultimately irrelevant information before it.  DuPont’s argument though missed the mark for the Fourth Circuit.  The elements of a trade secret under Virginia’s Uniform Act remain the same after this opinion.  For example, the information must be the subject of “reasonable” efforts under the circumstances to maintain the secrecy of the information and must derive its value from “not being generally known” or “readily ascertainable by proper means” to be a trade secret.  Va. Code 59.1-336 (2013).  The Fourth Circuit opinion, of course, changes nothing here.  What the Fourth Circuit did, though, was to open the door a bit, to give some latitude to a defendant to convince the judge and jury that the information, whether related to secrecy or value, was actually disclosed either in whole, or in part, sufficiently, that someone could re-engineer the alleged secret.  Establishing the trade secret before the jury is not simply a black and white issue, but rather is a healthy shade of gray.  And while perhaps a bit challenging, this standard provides some balance between the interest of the defendant in challenging the existence of the trade secret itself and the right of the plaintiff to not have a jury confused with wholly irrelevant matters.

Trade Secrets Claim Dismissed for Failure to Plead “Reasonable Measures” Element


Recently, many of the battles in trade secret litigation in North Carolina have been fought over whether the trade secrets have been alleged with enough specificity to survive a motion to dismiss. (”Trade Secret Misappropriation Claims Under Attack in North Carolina?“). Rarely has the issue come up at the pleading stage as to whether the Plaintiff had pled that it took reasonable measures to protect the secrecy of its information, with defendants saving such arguments for summary judgment or trial. Yet, in late July, the North Carolina Business Court reminds us all that all elements of the trade secrets claim must be pled with facts — even the ”reasonable measures” allegation.

In McKee v. James, 2013 NCBC 38 (July 2013), the North Carolina Business Court dismissed a claim brought under the North Carolina Trade Secrets Protection Act on the basis that the plaintiffs, shareholders of Lanness K. McKee & Co., Inc. (”McKee”), a manufacturer of boats for government and recreational use, had not alleged that McKee had taken “reasonable measures” to protect the secrecy of the information that Plaintiffs claimed as a trade secret.  In that case, the Plaintiffs alleged that information regarding the manufacture of McKee boats, including manufacturing processes and techniques, designs, molds and business plans, were trade secrets of McKee which the Defendants misappropriated.  The Defendants denied the allegations but also moved to dismiss the claims on two grounds:  first, that the Plaintiffs had failed to allege the trade secrets with enough specificity and second, that the Plaintiffs had failed to allege that McKee took reasonable measures to protect the secrecy of the information.

Although finding that the Plaintiffs had identified the information for which it claimed protection with sufficient specificity, the Court agreed with Defendants that the Plaintiff had failed to allege that it had taken “reasonable measures” to protect this information.  Absent from the complaint, which had been amended several times, was even a conclusory allegation that McKee had taken “reasonable measures” under the statute to protect the secrecy of the information claimed in the lawsuit to be trade secret.  But even if the Plaintiffs had made such conclusory allegation, the Court’s opinion indicates that such an allegation would have still been deficient, as no facts were alleged to demonstrate the “measures” taken.  As the Court noted:

“[T]here are no allegations outlining the reasonable measures Plaintiffs relied on to maintain the secrecy of their construction methods.” (emphasis added).

While the Plaintiffs attempted to save their trade secrets claim by noting that they had alleged that McKee protected its financial information with a password (and arguing that a Defendant had signed a non-disclosure agreement with McKee, an allegation which was nowhere alleged in the complaint and correctly ignored by the Court), this allegation was simply not on point, as this measure of protection had no bearing on the information claimed to be trade secret — manufacturing techniques and methodologies, designs, molds and business plans.  Again, noting the need to allege such facts, the Court stated:

“At most, Plaintiffs have alleged that the financial records of McKee Craft may have been protected by a password.  However, Plaintiffs failed to allege any facts tending to demonstrate that Plaintiffs implemented reasonable efforts to protect the secrecy of the construction methods.” (emphasis added).

Relying in part on Thortex, Inc. v. Std. Dyes, Inc., No. COA05-1274, 2006 N.C.App. LEXIS 1171 a *9-*10 (N.C.App. 2006), the Court found the claim deficient as a matter of law and dismissed the claim, as the Plaintiffs failed to allege a vital element of the trade secrets claim.

The McKee case, in this regard, represents a further development of the law in North Carolina as to the pleading standards for trade secrets.  The North Carolina Court of Appeals had certainly commented on the issue in Thortex, supra. The Court of Appeals in that case affirmed the dismissal of the trade secrets claim, stating that the plaintiffs had failed to allege facts tending to show that they had taken reasonable efforts to maintain the secrecy of the alleged trade secret.  Id.  As the Thortex court stated, “Plaintiffs appear to find themselves in the unfortunate situation of failing to require the manufacturers and their employees to enter into a confidentiality agreement.”  The Thortex court’s statement in this regard, however, was arguably dicta.  Here, in McKee, the Business Court has expressly held that to properly state a trade secrets claim in North Carolina, the “reasonable measures” taken to protect the secrecy of the information must be pled with facts.

The “reasonable measures” taken to protect the secrecy of the information, long the focus of many trade secret litigations (see, e.g., Sunbelt Rentals, Inc. v. Head & Engquist Equip. LLC, No. 00-CVS-10358, 2002 WL 31002955 (N.C. Super. 2002); Med. Staff Network, Inc. v. Ridgeway, 194 N.C. App. 649, 670 S.E.2d 321 (2009)), is front and center even at the pleading stage in North Carolina.

Public Policy Trumps Non-Compete in North Carolina


In many states, non-compete agreements are viewed by the courts with some amount of forgiveness for overbreadth.  In those states, courts can in some circumstances re-write an otherwise offensive non-compete agreement to make it more narrowly drawn. In fact, some states, such as Georgia, even have statutes that expressly permit the courts to engage in such draftsmanship in certain circumstances. In contrast, North Carolina follows a more rigid rule. Under state statute, contracts in restraint of trade are illegal and this can include non-compete agreements.  See N.C. Gen. Stat. §75-1.  North Carolina courts, while sometimes noting that non-compete agreements are disfavored in the law, will nevertheless permit such agreements on a case by case basis, if justified.  Enforcement requires an adequate showing that the agreement is in writing, made part of the employment contract, based on valuable consideration, reasonable as to time and territory and not against public policy.  And, unlike in other states, the courts are not permitted to re-write the non-compete agreements to save them.   

When non-compete agreements become the subject of litigation, the court’s focus is usually on the absence of consideration, or the reasonableness of the restriction.  In a recent case, Phelps Staffing, LLC v. C.T. Phelps, Inc., No. COA12-886 (N.C. App. April 16, 2013), the North Carolina Court of Appeals reminds us all that a naked non-compete agreement, no matter how reasonable the geography or time restriction, will not be upheld on pure public policy grounds. 

Phelps Staffing involved a protracted litigation between two companies in the business of providing temporary labor to clients.  The defendant corporation, C.T. Phelps, Inc., began competing with the plaintiff and was successful in acquiring some of Phelps Staffing’s clients.  However, in the process of doing so, according to Phelps Staffing, C.T. Phelps tortiously interfered with contracts that Phelps Staffing had entered into with its employees which included non-compete agreements.  Those non-compete agreements prohibited Phelps Staffing employees, for a period of one year after the termination of their employment, from working for a competitor or a former client of Phelps Staffing.  Phelps Staffing sued C.T. Phelps for tortious interference with its contracts, unfair competition under North Carolina’s statute, N.C. Gen. Stat. §75-1.1 and conversion.  The trial court granted summary judgment to the defendants, and in the process found the non-compete agreements unenforceable as a matter of law.  Phelps Staffing appealed. 

The Court of Appeals, in affirming the trial court’s decision on summary judgment, noted that North Carolina law will not enforce non-compete agreements that are intended to “merely stifle normal competition.”  Id.  North Carolina law supports an individual’s right to earn a livelihood “unless the restriction protects a sufficient countervailing interest of the employer.”  Id., quoting Starkings Court Reporting Services v. Collins, 67 N.C. App. 540, 541-42, 313 S.E.2d 614, 615 (1984).   Here, as the Court of Appeals noted, the plaintiff admitted that its primary purpose in requiring employees to sign the non-compete agreements was to impede competition by other companies in the market, including the defendant.  Moreover, the Court of Appeals noted that in oral argument the plaintiff conceded that its employees did not have access to its trade secrets or proprietary information, a rationale that could have been used to justify the non-compete agreement.  The Court of Appeals found such an agreement, without proper justification, a naked restraint and unenforceable as a matter of public policy:

The record supports the trial court’s conclusion that the agreement is 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.”

While North Carolina public policy will uphold non-compete agreements that protect legitimate business interests, it will not uphold those that impose unreasonable restrictions.  Id.  As the non-compete agreements were unenforceable, the tortious interference claim fell. 

Phelps Staffing marks the second time in recent months that the Court of Appeals has emphasized North Carolina’s public policy of protecting the right of employees to obtain new employment, and to even compete with their former employers, provided that no legitimate interests of the former employer are implicated.  Late last year, in Austin Maintenance & Construction Inc. v. Crowder Construction Co., No. COA 12-201 (N.C. App. Feb. 18, 2012), the Court of Appeals, affirmed the trial court’s grant of summary judgment to the defendants in a case which, although not  involving non-compete agreements, was grounded on accusations of a unfair competition and breach of fiduciary duty in the hiring of employees from Austin Maintenance.  In an attempt to support its fiduciary duty claim, Austin Maintenance argued that the individual defendant, employed previously as a foreman by Austin Maintenance, breached a fiduciary duty by not disclosing to Austin Maintenance his “secret plan” to leave it for employment at Crowder.  The Court of Appeals rejected this argument, finding no governing law imposing such a notice requirement and concluding that to impose such a requirement would place a restriction on the movement of employees which was contrary to North Carolina public policy: 

“As the Supreme Court has recognized, ‘[t]o restrict and employer’s right to entice employees, bound only by terminable at will contracts, from their positions with a competitor or to restrict where those employees may be put to work once they accept new employment  savors strongly of oppression.”  Id.  

Phelps Staffing and Austin Maintenance, different cases in many respects, drive home the point that while North Carolina law will protect valid restraints on employment movement, those restraints have their limits:  they must be narrowly drawn and protect legitimate interests of the former employer.  Otherwise, such efforts will fail as a matter of public policy.



Earlier this month, the Obama Administration issued its strategic report on mitigating the theft of U.S. trade secrets. A copy of the report is attached. The issuance of this report coincides with the release of a report by Mandiant regarding the targeted hacking of US based computers by those allegedly associated with the Chinese government. (See “Chinese Army Unit is Seen as Tied to Hacking Against U.S.,” February 18, 2013, The New York Times.)  Trade secret theft has certainly been in the news lately.

The Administration’s strategic report raises several interesting points while noting that cyber intrusion of US companies and their electronic repositories is becoming a more frequent and difficult problem.

First, the Administration notes that while it intends to continue to work closely with foreign governments to combat trade secret theft from nationals in those countries, much work can and should be done closer to home.  For example, the Administration intends to work with industries to promote voluntary best practices by private industry to protect their trade secrets in a holistic approach. The U.S. Intellectual Property Enforcement Coordinator, working with the DOJ and Department of State, along with other U.S. government agencies, will help facilitate the development of such best practices by U.S. industry. This work will be an aid to the steps already undertaken by many companies to protect their trade secrets, including compartmentalizing research and development projects and information, implementating information and physical security policies, and developing and utilizing human resources policies.

Another interesting point is raised by the U.S. Patent and Trademark Office in its Overview of U.S. Law and Changed Landscape, attached to the report. In that statement, the PTO notes that the landscape has changed in terms of protecting trade secret information. As the PTO states:

“The nature, protection, and enforcement of a trade secret are distinct from other forms of intellectual property. Unlike other forms of intellectual property, once disclosed publicly, the property right itself ceases to exist. Protection is provided to trade secrets only when steps are taken by the owner to maintain the secrecy of the information. Liability is not imposed for mere theft absent a showing of reasonable efforts to maintain secrecy; continual vigilance is required. What constitutes reasonable efforts is often a pivotal issue in trade secret litigation and particularly important in the digital environment.”

The PTO’s observation is worth highlighting for several reasons.  One, courts will not protect companies from themselves.  If companies fail to take reasonable measures to protect their information, the courts (or the US government for that matter) can do little about it.  Two, as the PTO notes, continual vigilance is required.  Technological advancements are a double-edged sword.  While hosting data in repositories can provide employees and partners greater access to advance the business’ interests, for instance, it can also be exploited by criminals and others engaged with malicious intent.

“Advancements in technology, increased mobility, globalization, and the anonymous/pseudonymous nature of the internet are all working together to create growing challenges in protecting trade secrets.  This technology has resulted in companies needing to re-evaluate what constitutes adequate protection of trade secrets in digital format and has impacted the manner in which the trade secrets are stolen.”

Technological advancements always have unforeseen consequences.  Continual vigilance is needed to keep pace with these developments so that vulnerabilities do not arise that put a company’s trade secrets in jeopardy.   And continual vigilance is needed so that rapid action can be taken to protect a trade secret from disclosure or use should a vulnerability go undetected and a trade secret be misappropriated.

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