United States: Federal Court's Practical Approach To Enforcement Of A Restrictive Covenant Provides Business-Friendly Decision

On April 11th, a North Carolina federal court granted an insurance business's motion for preliminary injunction against six of its former independent insurance agents and enjoined further violations of a restrictive covenant.  In Superior Performers, Inc. v. Meaike, 2014 U.S. Dist. LEXIS 50302 (M.D.N.C. Apr. 11, 2014), the court took on a number of discreet legal issues related to the drafting of employee restrictive covenants in North Carolina and, in a refreshingly practical manner that prioritized substance over form, reached several employer-friendly conclusions. 

The Case

The plaintiff, National Agents Alliance (the trade name for Superior Performers, Inc.) ("NAA"), is a marketing organization for various life insurance companies.  NAA sells "leads" (contact information of potential policy buyers) to independent insurance agents and earns a portion of the agents' commissions from the issuing insurance companies.  NAA's agents also recruit new agents and earn an extra commission on any agents they recruit (called "Downline Agents").  Both the recruiting agents and Downline Agents are independent contractors and are required to sign NAA's "Agent Agreement."  The Agent Agreements contain restrictive covenants prohibiting the agents' soliciting of NAA's employees and independent contractors.

The defendants were each independent contractors with NAA.  Upon being hired, each signed Agent Agreements and, during the course of their agency, were ordered to electronically sign subsequent Agent Agreements before accessing the website where they retrieved their leads. 

The legal dispute arose when the defendants terminated their independent contractor relationship with NAA and joined Family First Life ("FFL"), an insurance company formed by one of the defendants.  NAA alleged that of its 186 agents, 121 began working for FFL.  This, NAA alleged, was a violation of their employee/independent contractor non-solicitation restrictive covenant. 

NAA filed suit.  The court first granted NAA's motion for a temporary restraining order, and then its motion for a preliminary injunction.  In so doing, the court rejected the defendants' arguments and set forth an opinion laced with valuable precedent for employers on a number of issues:

1.  Providing Contact Information for Potential Customers Constituted Sufficient Consideration for the Restrictive Covenant

Each agent executed an Agent Agreement at the inception of their employment, and when they accessed their leads, they also "clicked through" new agreements.  Defendants argued that each time they did so, the agreement they entered was a replacement, or "novation" to the original agreement, requiring new consideration.  NAA countered that the electronic agreements were identical to the original agreements the defendants entered when they began working as independent contractors, so they did not qualify as superseding contracts.  Alternatively, they argued that even if the subsequent agreements were novations, access to the leads constituted new consideration.

With insufficient proof to confirm NAA's first argument about the original agreements, the court assumed that the contracts were novations but found that access to the leads was sufficient consideration.  Importantly, the court was persuaded by the fact that access to the NAA's Lead Program was not required for the defendants to maintain their independent contractor relationship, thus suggesting that if the leads were a necessity to perform the work, they would not constitute sufficient consideration. 

2.  The Court Rejected an Illogical Approach to the Look-Back Rule Adopted by the North Carolina Court of Appeals In Prof. Liab. Consultants, Inc. v. Todd      

NAA Agents were forbidden from soliciting NAA employees and independent contractors during their tenure with NAA and for two years after.  Defendants argued that the language constituted a "look-back period" which, under North Carolina precedent, extended the restricted period to an unreasonable length.

The "look-back" principle originates from the Supreme Court of North Carolina's per curiam opinion in Prof. Liab. Consultants, Inc. v. Todd.  In Todd, the court held that a five-year restriction against soliciting any of the employer's customers from the three years prior to the defendant employee's resignation "transform[ed] what purports to be a five-year covenant into an eight-year restriction.  345 N.C. 176, 478 S.E.2d 201 (1996) (per curiam), adopting 122 N.C. App. 212, 468 S.E.2d 578 (1996) (Smith, J. dissenting)).  Citing Todd, North Carolina courts addressing the reasonableness of non-solicitation clauses added the years of the post-termination restriction to any years for which the drafter "looks back" into the employment period to define the restriction's scope, often ignoring the legitimate common sense business interests behind the covenant during an employee's tenure.  See Farr Assocs., Inc. v. Baskin, 138 N.C. App. 276, 280 (2000); Hejl v. Hood, Hargett & Assocs., 196 N.C. App. 299, 306 (N.C. Ct. App. 2009).    

The Agent Agreement did not define the restricted customers as those within a specific time period preceding an agent's resignation, but simply forbade solicitations during an agent's period of service to NAA and for two years following termination.  The agents apparently construed this to mean that the restricted period comprised the two year post-termination restriction plus the length of their employment.  But the court rejected the agents' argument, determining that the Agent Agreement did not apply to any former employees of NAA, unlike agreements in cases cited by the agents.  The court found that the restriction therefore lasted for just two years, a reasonable period under North Carolina law.1

3.  The Court "Blue-Penciled" Words, Mid-sentence, to Render the Restriction Enforceable

Along with assailing the consideration exchanged for and the temporal period of the restrictive covenant, the defendants further argued that the prohibited activity was overbroad in that it prohibited them from soliciting the employees and independent contractors of NAA "or its Affiliates," which the agreement defined as including two companies that were "deemed to be third-party beneficiaries" to the terms of  the agreement.  The agents argued that extending such restrictions to sister corporations may impermissibly broaden a restriction.  See Med. Staffing Network, Inc. v. Ridgway, 194 N.C. App. 649, 657 (2009).  NAA responded that it had no ambitions to enforce the "and its affiliates" language, but the court rejected this, stating that "North Carolina courts do not simply ignore an unreasonable part of a restrictive covenant that a plaintiff is not trying to enforce – rather, they still apply the blue pencil approach in those cases." 

The question then became whether the court could apply the "blue-pencil" rule to save the restrictive covenant from being overbroad.  In North Carolina, when a covenant is overbroad, a court may choose not to enforce a distinctly separable part of the covenant in order to render the provision reasonable, but it may not otherwise revise or rewrite the covenant.  See Technology Prater, Inc. v. Hart, 298, 243 (4th Cir. 2008).  Use of blue-penciling typically occurs in situations where the restrictive covenant has several separately numbered sections or subsections. See, e.g., Philips Elects. N. Am. Corp. v. Hope, 631 F. Supp. 2d 705, 715 (M.D.N.C. 2009) (reasoning that the court may use its 'blue pencil' to excise separately numbered subsections where the overbroad provision was separated by the term "or").  In evaluating the Agent Agreement, the court had to decide whether to strike the problematic words from the middle of a sentence.  In determining the covenant was subject to being blue-penciled, the court reasoned  "[a]lthough ['or its affiliates'] is not separated off by number or in a different clause, the language can readily be struck through and the rest of the restrictive covenant still makes sense and stands on its own."  

Drafters should, however, bear in mind that simply striking words will still be considered an impermissible re-writing if it fundamentally alters what the drafter intended.  In a recent case in which a restrictive covenant impermissibly prevented an employee from working for a competitor "in any manner," the Court of Appeals of North Carolina refused to strike the words "in any manner" because doing so "would amount to an effort to rewrite the noncompetition agreement rather than a refusal to enforce a severable provision.  See CopyPro, Inc. v. Musgrove, 754 S.E.2d 188, 193 n. 3 (N.C. Ct. App. 2014).

4.  The Court Considered the Scope of the Defendants' New Restrictive Covenants in its "Balance of the Equities"

Finally, in finding that the "balance of the equities" favored the plaintiffs in its preliminary injunction inquiry, the court cited as support that the FFL contracts contained a very similar restrictive covenant to the one found in NAA's contracts.  The holding serves as a reminder to companies that use restrictive covenants to be mindful of their potential hire's restrictive covenant with his or her last employer.  Similar provisions would make it more difficult for the hiring employer to argue that the agreement is not enforceable in a litigation scenario.     

Take-Aways from the Decision

The Superior Performers decision is a helpful addition to the arsenal of cases for companies seeking to enforce contracts against covenantee employees or independent contractors.  The number of defenses raised by the agents, however, only highlights the attention that must be paid to the myriad nuances of North Carolina law when drafting restrictive covenants.


1 The court could have more simply held that the defendants misapplied the look-back rule:  the Agent Agreement did not "look-back" into the agents' tenure with NAA to define the scope of the restriction, but simply forbade solicitations during the period the agents worked for NAA.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement

    Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of www.mondaq.com

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at enquiries@mondaq.com.

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions