Tuesday, February 24, 2009
Unclear Territorial Restriction Renders Non-Compete Invalid (Asheboro Paper and Packaging v. Dickinson)
In virtually all states, non-compete agreements are subject to the rule of reasonableness. Reduced to its essentials, the rule requires that post-employment covenants be reasonable as to time, geography, and scope of activity. It is the last two elements that are frequently the subject of reasonableness challenges by departing employees.
Such was the case in Asheboro Paper and Packaging v. Dickinson. Asheboro Paper is a distributor of packaging products and hired Dickinson as a sales representative. His post-employment non-compete prevented him from working for one year in any capacity for a competing organization within 150 miles of Asheboro Paper's "branch offices in North Carolina and Virginia."
It was undisputed the parties intended for Dickinson - who previously worked at Unisource Worldwide - to establish and grow a branch office in Richmond, Virginia. However, at the time of hiring, Asheboro Paper had no office or physical presence of any kind in Virginia. In fact, Asheboro Paper contracted with a logistics company to rent a distribution and warehouse center for the purpose of storing inventory. Dickinson did not have unfettered access to the facility.
About two years after he started, Dickinson quit and went back to Unisource in Richmond. Asheboro Paper sued to enforce the non-compete and prevent Dickinson from working for Unisource within 150 miles of Richmond.
The court denied Asheboro Paper's motion for preliminary injunction on the grounds the non-compete was overbroad (both in terms of geography and scope of activity), and that Asheboro Paper was unlikely to succeed on the merits. The most interesting part of the opinion dealt with the territorial restriction in the non-compete.
Asheboro Paper failed to demonstrate the existence of a "branch office" in Virginia. Though it was clearly the parties' intent for Dickinson to help establish one, it never materialized. Further, the court held that Dickinson's home - where he worked and made sales calles - did not constitute a branch office. The court also remarked that Asheboro Paper failed to introduce in evidence any customer lists to justify the 150-mile radius. That radius would nominally prevent Dickinson from working in parts of Delaware, Maryland, the District of Columbia and West Virginia. Yet, Asheboro Paper conceded it had no clients in those locations.
The case presents an example of why employers should be wary of requiring salespersons to sign general non-compete agreements with bright-line territorial restrictions. A good defense attorney will generally be able to demonstrate the overbreadth of such a restriction. The better practice is to include a separate, narrowly tailored customer non-solicitation provision (either as a substitute for the non-compete or a back-up), so that questions about where an employer does or does not conduct business become moot. In Asheboro Paper, the agreement did not contain a severable non-solicitation provision, so the entire covenant failed.
Court: United States District Court for the Middle District of North Carolina
Opinion Date: 2/19/09
Cite: Asheboro Paper and Packaging, Inc. v. Dickinson, 599 F. Supp. 2d 664 (M.D.N.C. 2009)
Law: North Carolina