DRAFTING ENFORCEABLE NON-COMPETES

Danielle Barbour Wilson Danielle Wilson, Employment Law, Employment Relations Analysis and Advice, Labor and Employment


Non-competition agreements (also referred to as “covenants not to compete” or “non-competes”) are restrictive covenants used to limit the employment and business activities of former employees. They are used to prevent former employees from directly competing with employers after the employment relationship ends. Any agreement limiting the rights of any person to do business in North Carolina must be in writing and signed by the party to whom the restriction applies. N.C. Gen. Stat. § 75-4. Therefore, non-competes must be in writing and signed by the employee. Non-competes are disfavored in North Carolina. In the event that a non-compete is overly broad and unenforceable, courts adhere to the “strict blue pencil” doctrine, which allows courts to strike through (but not rewrite) unenforceable language in the agreement. Beverage Sys. of the Carolinas, LLC v. Associated Beverage Repair, LLC, 784 S.E.2d 457 (2016).

Elements of Enforceable Non-Competes

A non-compete contained in an employment contract is enforceable so long as the agreement is:

  1. in writing;
  2. reasonable as to time and territory;
  3. made a part of the employment contract;
  4. based on valuable consideration; and
  5. designed to protect a legitimate business interest of the employer.

Young v. Mastrom, Inc., 99 N.C. App. 120, 392 S.E.2d 446 (1990).

In addition to the elements outlined above, North Carolina courts will not enforce a non-compete that is contrary to public policy. This issue most often arises in the healthcare context when medical providers seek to restrict the employment of physicians and other health professionals in medically underserved areas.

In Writing

Typically, a non-compete is a stand-alone contract attached as an exhibit or addendum to a contract for employment. In other cases, the non-compete consists of a few paragraphs within the employment contract. No matter the form, the employee must sign the non-compete agreement. Employers should ensure that the executed agreement is retained throughout the employment relationship and the period of noncompetition.

Reasonable as to Time and Territory

The time and territory restrictions of North Carolina non-competes are each considered when determining the reasonableness of the other. Accordingly, a longer period of time is acceptable where the geographic restriction is relatively limited, and vice versa. See Farr Associates, Inc. v. Baskin, 138 N.C. App. 276, 530 S.E.2d 878 (1990). When determining the reasonableness of the geographic limitations contained in a non-compete, North Carolina courts look to six overlapping factors: (1) the area, or scope, of the restriction; (2) the area assigned to the employee; (3) the area where the employee actually worked or was subject to work; (4) the area in which the employer operated; (5) the nature of the business involved; and (6) the nature of the employee’s duty and his or her knowledge of the employer’s business operation. Id.

 

In most cases, North Carolina courts will uphold geographic restrictions that restrict former employees from working in the territory where the former employer did business or where the employee serviced clients or customers on the former employer’s behalf. In no event will a North Carolina court enforce a non-compete that includes a territory restriction that is greater than reasonably necessary to secure the protection of the business or good will of the employer. See Clyde Rudd & Associates, Inc. v. Taylor, 29 N.C. App. 679, 225 S.E.2d 602 (1976). With respect to time, North Carolina courts routinely uphold restrictions up to two years and decline to enforce time restrictions of five years or more.

Made a Part of the Employment Contract

Both independent contractors and employees may be subject to enforceable non-competes. Furthermore, the “contract for employment” required for a non-compete need not provide employment for a definite term. At-will employment relationships are sufficient “employment contracts” to support a non-compete.

Based on Valuable Consideration

An initial offer of employment is sufficient consideration to support a non-compete agreement. However, additional consideration must be offered to enter a non-compete with an existing employee. Such additional consideration can be a raise, bonus, or other increase in compensation, or a change in job duties, such as a promotion. North Carolina courts generally do not evaluate the adequacy of the consideration for a non-competition agreement entered into after the employment relationship already exists, considering the parties to be the judges of the adequacy of the consideration.

 Designed to Protect a Legitimate Interest of the Employer

A non-compete must be no wider in scope than is necessary to protect the business of the employer.” Hartman v. W.H. Odell & Associates, Inc., 117 N.C. App. 307, 450 S.E.2d 912 (1994). Two interests have been recognized as supporting a non-compete: good will (customer contacts and relationships) and business information (trade secrets and other confidential information).

Practice Tips

Do not attempt to limit both direct and indirect competition. Several North Carolina court decisions have invalidated non-competes that restricted “indirect” competition by the former employee. Non-competes that preclude former employees from working for a competitor in a capacity unrelated to the employer’s competitive position generally do not protect a legitimate business interest. See Hartman, 117 N.C. App. at 317, 450 S.E.2d at 920 and VisionAIR v. James, 167 N.C. App. 504, 606 S.E.2d 359 (2004).

Include alternative territorial limits. If the parties have agreed upon territorial limits of competition, courts will enforce the limits “as written or not at all.” Accordingly, non-compete drafters should use “step-down provisions” that clearly provide alternative geographic restrictions. For example the non-compete should restrict competition in all of the following areas: (1) within a certain number of miles of the employer’s business, (2) within the city, (3) within the county, (4) within the state, and so on.

Reference the non-compete in the offer letter. When a new offer of employment will be used as the consideration to support of a non-compete, employers must take special care in drafting offer letters. If the offer is given to the prospective employee in writing and a response is required, the offer letter should mention that the employee will be subject to a non-compete. See RLM Communications, Inc. v. Tuschen, 66 F.Supp.3d 681 (E.D.N.C. 2014).