What is a no-compete?
A non-compete agreement is a contract that prohibits an employee from engaging in certain competitive actions against the employer and that generally remains in effect after the employment relationship has ended. These agreements can prohibit departed employees from soliciting current customers, disclosing proprietary information or working for a competitor within a specific geographic territory or for a certain period of time .
Generally, a non-compete agreement is unenforceable unless it is reasonably limited in scope with regard to location and duration.
Non-compete agreements are often included with non-solicitation and confidentiality (also known as non-disclosure) agreements, which together are commonly referred to as a "non-compete agreement." These agreements are often enforced by employers after employees leave, when they view employees as moving to a competitor.
Legally Enforceable in North Carolina
Generally, Non-Compete agreements aimed at the protection of business interests are enforceable in North Carolina if drafted in compliance and within the boundaries of the statutory requirements of N.C.G.S. § 75-4. For a Non-Compete agreement to be enforceable in North Carolina it must be reasonable as to the following: (1) restrictive period; (2) geographic scope; and (3) activity scope & (4) its overall impact on public policy. The document must be drafted narrowly to fit only the purpose for which it was intended.
There are no "bright-line" rules in determining the reasonableness of a non-compete agreement, but at the end of the day, the primary inquiry is: Is the restraint reasonable in the sense that it does not impose on the employee any greater restraint than necessary to protect the employer’s legitimate business interest?" What this means is that the agreement should be no broader than necessary to fulfill its stated purpose. If the limitation is excessive, then the agreement is both overbroad and unreasonable, and therefore unenforceable in North Carolina. Employees seeking to void non-compete agreements often rely on North Carolina non-compete jurisprudence to assist them with that effort. Employees also rely on the North Carolina State Constitution, Article I, Section 19, "General and indefeasible right of acquiring, possessing, and protecting property", as a basis for voiding non-compete agreements. The North Carolina Court of Appeals stated in Imperial Building Products, Inc. v. Kemperle and Co., 16 N.C.App. 438, 439, 192 S.E.2d 586, 587 (1972) that "[t]he purpose of [N.C.G.S. § 75-4] is to ‘protect the right of an employee to work for another person or corporation, including a former employer’…" The rationale behind the law is that an employee should not be deprived of his right to earn a livelihood except in the case of protection to a legitimate business interest of the former employer. Generally, if the restraints are greater than necessary to protect the employer’s business interests, the restraints are overbroad and the covenant is unenforceable. However, if the restraints are tailored to the circumstances of the industry and the employee in question, the courts are likely to uphold the restrictions on competition. North Carolina has a policy against restraints on alienation. In addition, a straightforward interpretation of Article I, Section 19 of the North Carolina State Constitution would suggest that restrictions on trade or employment would fall within the prohibition on restraints on alienation.
Hallmarks of a No Compete
An enforceable non-compete will always have at least the following common elements:
Time Duration. A non-compete will set forth how long employees are prohibited, for example, from working for a competitor after leaving employment. The length of time is arguably the most important element in determining whether a non-compete is enforceable because North Carolina courts compare the duration of a non-compete with the period of time used by the employer to develop its customer relationships. In North Carolina, a time period lasting one or two years is the most common duration found in an enforceable non-compete, although under specific circumstances, courts have been willing to enforce non-competes lasting as long as three years.
Geographic Scope. The area where employees are prohibited, after termination, from competing with their former employers. While there is no hard and fast rule for what is an acceptable geographic scope, at the maximum, the area may not exceed the area in which the employer is doing business. So a non-compete covering a large area, such as multi-state or nationwide, is not likely to be enforceable. However, if that same employer is actually doing business throughout a large area, a large geographic scope may be enforceable.
Types of Activities Prohibited. In order for a non-compete agreement to be enforceable, the types of jobs or activities that the non-compete prohibits must be carefully examined. For example, if the non-compete prohibits the employee from performing any work for a competitor, even if the work is frequently performed for "an employer" via dual employment, such a restriction could be deemed overbroad so as to be unenforceable. Similarly, a non-compete that restricts the employee from selling for or raising funds for a competing entity may be too broad. Rather than prohibiting specific activities, the non-compete should prohibit working for a competitor or serving the competitor in any role regardless of the employee’s duties. A non-compete that only restricts specific activities could be challenged if the employer grants consent to do the work in question.
Narrowly Tailored. It is important to note that for a non-compete to be enforced, it must be narrowly tailored. This means that the scope of the restrictions, in terms of time duration, geographic scope, and types of employee activity, are well defined. If a court cannot determine the scope of a restriction, then the court is likely to strike the entire restriction.
Employers and Employees
The perspectives of employers and employees are not always the same when it comes to non-compete restrictions. From the employee’s standpoint, he or she often feels that the non-compete agreement improperly restricts his or her career and future employment opportunities. The employee may be very skilled and talented—but the non-compete limits his or her ability to find a suitable position in the marketplace after the employment relationship ends.
Indeed, advances in technology and corporate management practices have changed the landscape of every profession. As a result, many business owners worry that employees regularly move from one company to another within a short period, taking with them the "secrets" of their former employer and using them to build up their new employer. Many employers believe that by having non-compete restrictions in place, they will deter this practice and limit the ability of the former employee to jeopardize the interests of the former employer.
On the other hand, many employees believe that they have no choice but to sign whatever an employer asks—as long as they want the job. Employees are regularly asked to sign restrictive covenants as a condition of employment and are often given little time to review the document before they start working. Naturally, the employee wants the job, so they have little inclination to upset the negotiating balance. The employee may ignore the non-compete at the time of signing, thinking that he or she will either get a better job later on or that the non-compete is not enforceable.
But when the employment relationship ends, the former employer will likely enforce the covenant and the employee will then attempt to convince the judge not to enforce it. These battles are often fought at the same time the former employee is trying to earn a living in a new job. The costs of enforcement—including attorney fees and lost wages—often add up to the equivalent of many years of compensation.
Regardless of whether the non-compete restriction is enforced under North Carolina law, it still causes tension between the former employer and former employee.
Recent Case Law and Trends
North Carolina courts have continued to grapple with the enforceability of non-compete agreements between North Carolina resident-employees and out-of-state employers. A non-resident employer seeking to enforce an agreement with a non-resident employee must be able to demonstrate that the agreement was made in North Carolina or that the employee had a place of business in North Carolina. Otherwise, the non-resident employer is out of luck even if the agreement was supported by valid North Carolina consideration. New York non-resident employer (and non-resident employee) Chooseco LLC unsuccessfully tried to rely on North Carolina’s long-arm statute to enforce its non-compete agreement with North Carolina resident-employees who work at offices in Arizona, Connecticut, Massachusetts, New York, Pennsylvania, and Washington state . The court rejected Chooseco’s argument that North Carolina had sufficient contacts with the agreement to give the court personal jurisdiction over the company. Chooseco, LLC v. Burch, 709 F. App’x 712, 717 (4th Cir. 2018).
North Carolina case law remains clear that "to be enforceable, a covenant not to compete must be supported by the iteration of consideration which would be required for a similar contract not to compete and that the consideration must relate to the same transaction as that to which the covenant relates." Family Dollar Stores of North Carolina, Inc. v. Bickford, 439 S.E.2d 474, 475 (N.C. 1994) (internal quotation marks and citation omitted). The consideration must be provided after the employee received the offer of employment: either continued employment or a raise in pay. See Computer Design & Sales Co. v. McNutt, 495 S.E.2d 405, 408 (N.C. Ct. App. 1998); Building Graphics, Inc. v. Smith, 475 S.E.2d 221, 224 (N.C. Ct. App. 1996).
Alternatives to Non-Competes
Some attorneys will say you do not need non-compete agreements with your employees, that the entire scope of the law is to prevent employers from having sufficient leverage to force an employee to sign a non-compete agreement. While this certainly sets a minimum bar for what this retributive form of restraint of trade might mean in North Carolina, employers have valid reasons to want protection for trade secrets and customer information. If there are truly legitimate business interests that you have and want to protect, then there are other, less punitive ways to protect your information.
Non-compete agreements are a blunt weapon, much like statutes that allow for civil penalties and criminal law. But the law already has rules that permit injunctions to be ordered in cases where a former employee may be misusing trade secrets or customer information. In many instances, an action on those grounds – adaptation of a work-rule – can get the employer a temporary restraining order or preliminary injunction significant enough to stop the former employee’s misbehavior, if any is happening. Temporary restraining orders can be entered without even giving your former employee the opportunity to be heard at all. If they ultimately lose, the North Carolina law that permits temporary restraining orders in cases of misappropriation of trade secrets or customer information is designed to permit recovery of the employer’s attorney fees. For many employers, employer-protection statutes are often enough to provide substantial protection. And those protections are more palatable to employees – who see the non-compete agreement as a Mortal Blow, a Club.
In the absence of trade secrets or customer information, however, non-solicitation agreements are a good alternative to a North Carolina non-compete agreement. Non-solicitation agreements do not prohibit the former employee from going to work anywhere besides the competitor; and they simply require the former employee from soliciting the employer’s customers, or soliciting employees of the employer. Unlike a non-compete agreement, the customer list is not even a part of the trade-secret definition under North Carolina law.
For clients who absolutely need a non-compete agreement, I see no reason not to have those non-compete agreements as an alternative to outright termination of an employee.
How to Draft a Compliant Agreement
In North Carolina, the process for deciding what could be included in a non-compete agreement is simple, but that also means a lot of attorney-client negotiation must occur before a valid agreement can be reached. Courts will no longer consider a restrictive covenant unless it applies to parties who have actually formed a valid contract with mutual obligations. Therefore, an employer must first decide if its business is one for which enforcing such a covenant would be beneficial. An employer with numerous employees and the ability to change compensation offers, like a hotel franchisee or used car dealership, can probably benefit from employee non-competes more than a small, one-location contractor or a farmer.
Once an employer decides on the policy that will apply to the entire company, it should consider how much of an explanation of the non-compete the company will provide to potential or current employees. The desire of a corporation to keep its procedures secret cannot outweigh the rights of potential and current employees to understand the terms of their submission of their labor to that corporation. In Firewatch (a case discussed previously on this blog) , a sculptor whose talents were not needed in the new product line Firewatch adopted still had to sign a non-compete, which the court considered an "undue surprise" because it was unexpected and did not provide even a hint of the restrictions ahead. A company seeking to restrict its employees should offer sufficient details of the substance of the restrictions before any employees are hired or regular work has begun.
Next, the company’s counsel should review the various pro-employee provisions and restraints set out above and decide on a strategy for implementing the non-compete throughout the company. In Firewatch, the company provided a clause to each employee that offered period of time to negotiate a special exemption from the non-compete (the time period that Firewatch called a "grace period" varied depending on the position of the employee). While some courts have struck down provisions for convenience as a tool to aid employees in bargaining over restrictive covenants, North Carolina courts are inclined to hold such a grace period in high regard because of the deep-rooted public policy of protecting employee rights.