North Carolina Supreme Court Issues Important Ruling on Trade Secrets and Non-Competes

In a recent employment decision entitled Rel. Ins., Inc. v. Pilot Risk Mgmt. Consulting, LLC, the North Carolina Supreme Court offered helpful guidance for employers wishing to protect their trade secrets and ensure the enforceability of their non-compete and non-solicitation agreements. Employers should take note of the Supreme Court’s decision and review their agreements and procedures to ensure they are taking all measures necessary to protect their customer relationships and confidential information.

Background

This case is not unlike many other trade secrets and non-solicitation lawsuits. The plaintiffs—Relation Insurance Services of North Carolina, Inc. and Relation Insurance, Inc. (collectively, “Relation”)—were an insurance agency and its parental affiliate, respectively.  Relation employed various individuals in a variety of sales roles in its Greensboro, North Carolina office. These sales employees had non-solicitation agreements prohibiting them from soliciting Relation’s customers and employees following the termination of their employment.

In 2020, one sales employee left Relation and opened a competitive insurance agency. The following year, seven additional employees joined the competitor. During their transitions, each of the seven employees sent messages to their Relation clients and forwarded Relation documents from their Relation email accounts to their personal email accounts. Relation filed a lawsuit in North Carolina’s Business Court against the competitor and the employees alleging they violated their employment agreements and misappropriated Relation’s trade secrets.  

Prior to trial, the Business Court ruled that Relation had not made a sufficient showing that several client lists constituted trade secrets. The Business Court also ruled that the employees’ non-solicitation agreements were overbroad and unenforceable. Relation then appealed to the Supreme Court.

Determining Whether Something is a “Trade Secret”

The Supreme Court reversed the Business Court on the issue of trade secrets, concluding that the jury should have determined whether the client lists constituted trade secrets. In doing so, the Supreme Court highlighted the following:

• Lack of evidence that a client list—a compilation of client information—was publicly available.
• Lack of evidence that other employees had access to a client list or knew of a client list.
• A client list was sent from a Relation email to an employee’s personal email shortly after accepting a new role with the competitor.
• The client lists were password protected.
• Many of the employees’ new clients with the competitor could be found on a client list.
• The client lists were valuable, and it took significant time and money to compile them.

When is a Trade Secret “Misappropriated” by an Employee?

The Supreme Court also provided helpful guidance concerning whether and when a trade secret is “misappropriated” under the North Carolina Trade Secrets Act. Indeed, the Court explained that “mere access to a trade secret alone is insufficient. There must also be an absence of express or implied consent or authority at the time that the employee had a specific opportunity to acquire the trade secret.” Put differently, for an employer to show an employee misappropriated its trade secrets under North Carolina law, it must establish that the employee accessed the trade secret without the employer’s consent or authority. This could include, as the Supreme Court explained, “an identifiable instance of [an employee] downloading or accessing a trade secret beyond the scope of that [employee’s] tasks and duties or without express consent.”

Restrictive Covenants and the “Blue-Pencil” Doctrine

Relation requested that the Supreme Court use the “blue-pencil” doctrine—an employer-friendly tool available to North Carolina courts to strike overbroad portions from a non-solicitation or non-compete agreement and enforce the remainder of the agreement—to save the employees’ overbroad non-solicitation agreements. However, the Supreme Court refused to do so. As it explained, the blue-pencil doctrine is not used to re-write a contract, but rather, to strike “separable” or “divisible” terms from an otherwise enforceable contract. Here, however, Relation sought to strike nearly fifty provisions from each employee’s non-solicitation agreement. The Supreme Court found that this went far beyond striking a separable or divisible provision from a contract and chose not to invoke the blue-pencil doctrine.

What does this mean for employers?

Employers can take plenty from the Supreme Court’s decision. Accordingly, employers should review their procedures and agreements, as follows, to ensure they are properly protecting their interests. 

With respect to trade secrets, employers should be sure that they have sufficient documentation showing that their trade secrets are not publicly available, and access to the trade secrets is limited to employees who require the information to perform their job duties. Employers should also ensure that they take proper precautions to safeguard their trade secrets, including, at minimum, that the trade secrets are password protected. Finally, employers should document their efforts to prepare, compile, and maintain their trade secrets, including clear policies and guidance as to the permissible scope of access and use of such items by employees.

With respect to non-solicitation and non-compete agreements, employers should ensure that, in addition to narrowly drafting such agreements, the agreements are drafted in a manner that would allow for a court to easily strike isolated terms to render the remainder of the agreement enforceable, and temper the urge to assume that robust provisions can necessarily be blue-penciled. Doing so may offer an extra layer of security in the event a court take issue with key provisions of the agreements.

Please contact a member of the Brooks Pierce Labor and Employment team for assistance on any of these issues.