In a recently decided case by the North Carolina Court of Appeals (MJM Investigations, Inc. v. Sjostedt, 698 S.E.2d 202 (N.C. App. 2010)), the Court of Appeals, in an unpublished opinion, found a non-solicitation clause to be unenforceable under North Carolina law due to the clause’s use of vague terminology.  While the opinion provides a useful summary of the state of the law in North Carolina regarding the enforceability of non-compete agreements, the more interesting part of the case can be found in Judge Steelman’s concurring opinion.  In that concurrence, Judge Steelman raises an important issue of whether the law in North Carolina is outdated in reviewing the validity of non-compete agreements in our “increasingly integrated global economy.”  

MJM Investigations is an otherwise pedestrian case, involving the determination of the validity of a non-solicitation provision.  In that case, MJM Investigations sought to enforce two restrictive provisions — a non-compete and a non-solicitation provision — against Vetted International Ltd. (”Vetted”) and its founder Brian Sjostedt, who had provided services to MJM Investigations in the Middle East.  MJM brought a motion for a preliminary injunction against Vetted and Sjostedt, which the trial court granted in part.  The trial court found the non-solicitation provision to be valid, but struck the non-compete provision on the grounds that it failed “to confine itself to any geographic territory.”  On appeal, neither party challenged the court’s determination on the non-compete provision, but Sjostedt and Vetted challenged the trial court’s decision on the non-solicitation provision.  The Court of Appeals found the non-solicitation provision in that case to be lacking in specificity and invalid.  The Court of Appeals also illuminated the limitations posed on courts in connection with the blue-penciling of portions of restrictive covenants that are unenforceable. 

But for Judge Steelman, who agreed that the non-solicitation provision was vague and invalid, the case brought to light a different and more important issue regarding the proper approach to be taken in considering non-competes in a global economy. 

In interpreting a non-solicitation provision, North Carolina courts traditionally consider the time and geographic restrictions to determine whether the provision protects a legitimate business interest.  See Farr Assocs., Inc. v. Gaskin, 138 N.C. App. 276, 279, 530 S.E.2d 878 (2000).  If the time and geographic restrictions are too generous, then the provision can fail.  But, as Judge Steelman questions, in today’s global economy, does a rigid application of a geographic restriction still make sense?  North Carolina law on restrictive covenants was intended historically to protect specific local interests.  For example, if the employer’s business was limited to Gastonia, then the restrictive covenant would be similarly be limited to Gastonia.  Yet, today, commerce has changed and businesses in North Carolina are not limited to a single geographic area, especially with the use of the internet and e-commerce.  North Carolina based companies outsource work to operations located abroad.  North Carolina businesses have a reach well beyond the state line, and even beyond our country’s borders.  With this realization, should not the law be updated to keep pace with the globalization trend?  Judge Steelman apparently believes the time has come for the North Carolinas Supreme Court to consider this issue:

“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 restrictions.”

Of course, North Carolina precedent does acknowledge the validity of covenants that restrict conduct beyond city or state boundaries.  Nationwide restrictions have been upheld by courts in North Carolina to protect legitimate interests of businesses.  See e.g. Philips Elecs. North America Corp. v. Hope, 09 CV 363, 2009 WL 1883921 (M.D.N.C. June 30, 2009); Harwell Enterprises Inc. v. Heim, 276 N.C. 475, 173 S.E.2d 316 (1970).  With this precedent in mind, is more needed by the Supreme Court in considering the effects of globalization on the question of the validity of restrictive covenants?   Should the Supreme Court answer Judge Steelman’s call in MJM Investigations?  In the context of the narrow question raised by Judge Steelman, the Supreme Court should avail itself of the next opportunity to consider this valid issue and determine whether the analysis of enforceability of restrictive covenants should be altered to recognize valid business interests in restricting business activity over a broader geographic territory, even globally.