Hiring a Former Executive of a Competitor May Result in Liability for Tortiously Interfering with the Non-Compete Provisions of that Executive’s Employment Contract

Abstract

A security services company hired a former executive of a competitor. The competitor sued for tortious interference with the non-compete provisions of its former executive’s employment contract.  The non-compete provision would likely be valid under Georgia law but invalid under North Carolina law. Because the record did not contain enough information to resolve the question of which law applied, a North Carolina court permitted the case to go forward and denied the motion to dismiss.

Background

Robert G. Steffman II worked as the Vice President of Business Development at EKG Security. EKG provided security services to customers in Georgia and North Carolina. While with EKG, Steffman worked from his home in North Carolina. At the start of his employment, he signed a “Commission Plan” (“Agreement”), which included several non‑compete and non‑solicitation covenants. These covenants lasted for one year after the conclusion of his employment and applied to the territory within a fifty-mile radius from Steffman’s home office. The Agreement did not contain a choice-of-law provision.

After only four months of employment, EKG fired Steffman. Not long before he left, Steffman allegedly accessed and downloaded large quantities of RKG’s confidential and proprietary information. Soon after, Steffman tried to solicit several EKG employees to leave and altered EKG’s social media accounts. EKG sent Steffman a cease-and-desist letter, demanding that he comply with the restrictive covenants in the Agreement. Steffman then joined Tailormade Protective Services, an EKG competitor, in a role like his position at EKG. Tailormade was located 35 miles away from Steffman’s North Carolina residence.

EKG notified Tailormade of the Agreement and Steffman’s breach and asked Tailormade to remedy the breach. Neither Tailormade nor Steffman responded, and Tailormade continued to employ Steffman. Shortly after, one of EKG’s clients terminated its contract with EKG and switched to Tailormade. EKG alleged that Steffman used its confidential information and trade secrets to steal the client.

EKG sued both Steffman and Tailormade. EKG ultimately dismissed its claims against Steffman but maintained a tortious interference with contract claim against Tailormade. Tailormade moved to dismiss, arguing that (1) North Carolina law governed the Agreement, and (2) EKG did not sufficiently plead its claim for tortious interference, which requires a valid contract, because the Agreement’s restrictive covenants were unenforceable under North Carolina law. This order followed.

The EKG Security Order

The court recognized that North Carolina law governed the tortious interference claim and identified five elements of a valid claim, including “a valid contract between the plaintiff and a third person.” To judge the validity of the Agreement, the court had to determine what law governed it. Tailormade argued that the Agreement’s restrictive covenants were unenforceable under North Carolina law. EKG contended that Georgia law should apply and that the Agreement’s restrictive covenants were enforceable under Georgia law.

The court noted that North Carolina courts usually give effect to contractual choice of law provisions, but the Agreement had none. In North Carolina, when the contract does not specify choice of law, it is governed by the law of the state where the last necessary act for formation was completed. For written contracts, the last act necessary for formation is the affixation of the final signature. The court therefore considered where the last act necessary to form the Agreement occurred.

Tailormade argued that the last act of formation occurred when Steffman signed the Agreement after it was delivered to his home in North Carolina. In support, it asserted that the agreement was addressed to Steffman’s home and submitted an affidavit stating that Steffman indicated the Agreement was pre-signed by EKG. However, the court declined to consider the affidavit as it was not part of the current record. Indeed, when considering a motion to dismiss, a court must accept as true all factual allegations in the plaintiff’s complaint and typically does not consider facts outside the complaint. Here, EKG did not agree with the contents of the affidavit, and the court noted that, at most, the affidavit created a question of fact preventing it to rule on the motion to dismiss.

Therefore, the court concluded that the record did not contain sufficient information to conclusively establish where the last act necessary for formation of the Agreement took place. Thus, the court was unable to determine what law governed the Agreement and stated that it would wait for a more fully developed record before making that determination. Since the Agreement could be enforceable under Georgia and/or North Carolina law, the court held that EKG sufficiently pled facts to support the existence of a valid contract for purposes of its tortious interference claim.

Tailormade also argued that EKG failed to plead facts supporting breach of the Agreement’s non‑solicitation covenant because the poached client resided in Georgia—not within the covenant’s geographical scope. However, the court was unpersuaded as EKG’s claim focused on the Agreement’s non-compete provision. The court held that EKG sufficiently pled that (1) Steffman breached his non‑compete provision by working at Tailormade, a competitor of EKG located within fifty miles of Steffman’s home office; (2) Tailormade intentionally induced Steffman’s employment; and (3) Tailormade continued to employ Steffman despite knowledge of the non‑compete provision. As Tailormade did not contest any other elements of EKG’s claim, the court denied its motion to dismiss the case.

Strategy and Conclusion

In this age of remote work where a company and its employees may reside in different states, choice of law provisions can be critical to ensure the enforceability of restrictive covenants in an employment agreement.

Further Information

The EKG Security decision can be found here.