North Carolina Business Court Holds Pleading Stage Too Early to Dismiss Broad Non-compete

By Don Tucker and Susan Hargrove

On May 7, 2015, Judge Gregory McGuire of the North Carolina Business Court denied defendants’ motion to dismiss a claim that a physician’s assistant breached non-competition and non-solicitation provisions in her employment agreement. The opinion in Kinston Medical Specialists, P.A. v. Bundle, et al. is significant for at least two reasons. First, the decision tells us that a non-compete claim may survive a 12(b)(6) motion even though its geographic territory includes six counties and the plaintiff only worked in one of them (holding “Plaintiff has alleged a legitimate business interest in protecting its patient base and the geographical restrictions are at least loosely tied to its alleged ‘Eastern North Carolina’ practice area”). Second, Judge McGuire held that a non-solicit is not invalid on its face even though it covers the entire universe of plaintiff’s patients, not just those treated by defendant (reasoning that plaintiff “ .  . . may be able to . . . prove that the level of defendant’s interaction with all of its patients would support such a broad covenant.”). 

At first blush, this opinion suggests a backing away from the logic of Hartman v. W.H. Odell & Assoc., 117 N.C. App 307 (1994), which is often cited for the proposition that a non-compete entered into to protect the employer’s relationships should be limited to the area where the employee made contacts during the period of employment.  Id. at 313. Ultimately though, the holding is consistent with the myriad of cases demonstrating the very low bar that a North Carolina plaintiff must surmount to survive a motion to dismiss. Since unpled facts possibly could be offered into evidence that could tend to support the claims, Judge McGuire allowed the plaintiff leave to go forward. 

Followers of the North Carolina Business Court may wonder how this case made its way to Judge McGuire’s desk at all. There are three claims in the complaint, breach of the non-competition clause, breach of the non-solicitation clause and tortious interference with those provisions by the subsequent employer of the individual defendant. On its face, the complaint does not appear to allege claims that fall into any of the categories for designation of a complex business case pursuant to NCGS § 7A-45.4. In fact, the Notice of Designation form submitted in this matter was outdated at the time it was filed on February 5, 2015, referencing the criteria for designation applicable prior to October 1, 2014.       

Would this case pass muster pursuant to the revised designation statute? That depends on how broadly one interprets the criterion in 7A-45.4(a)(8), a new subsection added by the Business Court Modernization Act, which allows disputes involving trade secrets, including disputes arising under North Carolina’s Trade Secret Protection Act, to be designated to the business court. In this case, the complaint alleged that defendant had divulged plaintiff’s confidential information, trade secrets and business secrets in violation of her employment agreement. In the designation, the defendant relied upon this allegation as demonstrating that the case “involved” trade secrets, even though no claim for misappropriation is advanced in the pleading. 

Under the broad language of the new statute, a matter “involving” trade secrets is enough – it is not required that the plaintiff actually allege a misappropriation claim. Instead, a plaintiff can remove a case to the business court based solely on the allegation that one legitimate business interest intended to be protected by a non-compete agreement is protection of a plaintiff’s unspecified trade secrets, which defendant has divulged or may divulge. That arguably may be pled as a concern in virtually every case where a covenant-not-to-compete is involved, suggesting that the court will see more and more of these cases as plaintiffs become familiar with the new statute.   

A number of practitioners raised concerns about the potential breadth of 7A-45.4(a)(8) while the Business Court Modernization Act was under consideration. It will be interesting to observe whether others follow the strategy of the defendant in Kinston Medical and, in the event there is a flood of new covenant-not-to-complete cases with only subsidiary trade secret allegations, whether we may see future tweaks by the legislature that seek to limit the reach of the new statute.