The Purpose of Non-Compete Agreements
Non-Compete Agreements are contracts where employees agree not to compete against their former employers after their employment has ended. These agreements restrict an employee’s ability to join a competitor, solicit customers or partners of the employer, or use confidential information to an unfair advantage on behalf of a new employer.
Non-compete agreements often seek to accomplish two primary goals on the part of the employer: They seek to protect the company’s trade secrets and confidential information, and they are used as a tool to restrict competition in a way that can harm the company’s business .
North Carolina courts will generally enforce a reasonable non-compete agreement – one that does not impose greater restrictions than necessary, including in time, geographical area, and activities – but will strike down a non compete that is unreasonably restrictive.
North Carolina follows a rule-of-reason test when analyzing a non-compete agreement, which means that a court will presume that the agreement is lawful unless its showing or effect is substantially to lessen competition or tend to create a monopoly, or it reasonably appears to do so. The party challenging the agreement (often the employee) bears the burden of proving that the agreement is in some way unreasonable.
State Law Requirements
Non-compete agreements must meet several requirements to be enforceable in North Carolina, and failing to adhere to these requirements can render an agreement void or voidable.
First, non-competes must be supported by consideration – typically employment. This consideration can either be the opportunity to work for an employer (for example, the first time an employee is hired and subject to the terms of a non-compete) or a benefit, like a substantial bonus. A company should only need to pay for a non-compete once – either when the employee is hired or each time a new, material non-compete is signed. Otherwise, the employee has been given full value for the consideration, and requiring additional compensation is unnecessary.
Second, the non-compete must be reasonable in scope. The scope of a non-compete is typically measured by its geographic reach. Meaning, the non-compete must specify the geographic areas targeted by the agreement. For example, if the non-compete bans Miller from working in Missouri, then the non-compete’s reach is clear.
A non-compete is also reasonable if it does not last longer than necessary. The typical duration of a non-compete is less than three years. For instance, if neither Miller nor his employer had any specific connections to the state of Washington, then a two-year non-compete prohibiting him from working for a software company in Washington would likely be ruled unreasonable.
Third, a non-compete must be related to a business interest of the employer. If a business interest can be isolated and not used by the employer, then that interest would not be entitled to protection under a non-compete agreement.
Finally, the non-compete must restrict the employee. A stockholder or board member cannot have an enforceable non-compete unless he or she can be separately restricted.
Industries Commonly Using Non-Competes
Employers across a variety of sectors routinely use non-compete agreements in North Carolina. These industries use non-compete agreements to protect their investment in their employees or intellectual property, and sometimes out of simple habit. Companies have used non-competes for decades, and as such, almost every industry has adopted their use to one degree or another.
The healthcare and medical field, financial institutions, technology, software, manufacturing, engineering, and customer service industries commonly use non-compete agreements in North Carolina. Some industries rely on them to prevent unfair competition, protect confidential information, and ensure that employees cannot disrupt or harm their business when they leave employment. For example, technology companies often include non-compete agreements in employee agreements because it is difficult to monitor an employee’s actions following separation from that company. Healthcare and medical companies often believe that their trade secrets are vulnerable to misappropriation by competitors, so they restrict employees’ post-employment activities with competitors. Manufacturers and industrial companies may use non-compete agreements with employees that receive access to a special customer base, sensitive news about price lists, or specialized products sold and produced.
Plausibility Concerns
There are a number of theories — i.e., actions — on which an employee may try to contest a non-compete agreement. The following is a non-exclusive list of the most common ones, along with a brief discussion of how courts, sitting in North Carolina, have ruled on them.
A non-compete that lacks any geographic limit is per se invalid in North Carolina because it lacks the requisite scope. The reasoning, and case law support, for this rule is that an employer cannot have a protectable interest in all markets in which it might compete. Thus, a non-compete that purports to restrict an employee from working anywhere in the world after termination is invalid on its face.
A non-compete that lacks any time limit, however, is not per se invalid in North Carolina. The question, rather, becomes one of whether or not the absence of a time limit makes the restriction unreasonable. Nevertheless, absent some sort of indication that a reasonable time period would be insufficient to protect an employer’s legally-protectable interest, courts will usually not invalidate a non-compete that is infinite in duration.
In order to have standing to sue to invalidate a non-compete as overbroad, an individual must demonstrate that he or she is subject to the restrictive covenant at the time suit is filed. As such, a current employee may not have standing to sue for a prospective defense of unenforceability because such an employee may not actually be subject to the provision at issue at any given moment in time. More specifically, the individual would need to show that the former agreement between the employer and the individual is continuing to restrict them in a manner that is unreasonable. Courts may not extend the remedy of invalidating non-compete agreements to individuals who are not parties to the original contract.
If a court concludes that the covenant is overbroad as written, it will then consider whether there is any way to revise the language of the covenant in such a way as to make it enforceable. If the answer is no, then it must be voided altogether. If the answer is yes, then the court will "blue pencil" or rewrite the agreement to make it reasonable and enforceable. Courts are loath to do this, however, because rewriting the agreement takes a decision the parties negotiated for themselves away from them. In addition, rewriting a non-compete usually requires a great deal of judicial power to be exercised. While courts are willing to do so in some cases, especially those involving advanced technology or trade secret issues, a court is not bound by equitable notions of fairness or common sense in revising a non-compete.
The bottom line is that, while a court that regards a non-compete as fundamentally flawed may rewrite it in order to make it legally enforceable, the court should be at least wary of doing so. As a result, a party seeking the blue pencil remedy may need to make a demonstration of some sort that the interests of justice and the law are better served by doing so, especially in economically-disparate situations.
Legislative Updates
The landscape surrounding non-compete agreements continues to shift in North Carolina as Court’s address the enforceability of these restrictive covenants. The legislature is also weighing in, and with mixed results. In 2016, the legislature passed two bills relating to non-compete agreements. The first exempted physicians from complying with Chapter 75’s 6-month notice requirement for non-compete agreements provided that the physician serves a location in a "rural health shortage area" or "medically underserved area." N.C. Gen. Stat. § 75-4.1(b). The second bill, directed at physicians and other health care providers, legislatively overruled North Carolina’s 2014 Supreme Court’s ruling in American Home Assurance Co. v. Contractors, Inc. 367 N.C. 407, 758 S.E.2d 420 (2014), which had held that restrictive covenants in contracts entered into by entities in a supervised jointly-owned or controlled medical practice are subject to judicial scrutiny under strict standards. The new law held that "[r]estrictions on the delivery of health care service entered into by an entity under common ownership or control with one or more health care providers…are not void, and are enforceable, absent a showing of actual prejudice to the patient." N.C. Gen. Stat. § 75-4.2(a). There was some suggestion that the 2016 N.C. General Assembly might consider narrowing the enforceability of physician non-competes, but such legislation did not materialize in 2017.
In 2017, the North Carolina Supreme Court found a non-compete agreement between two private schools to be unenforceable. In that case, the court indicated that the non-compete agreement could not provide adequate protection to the first school, since its student population was only 115. The Court focused closely on the geographic restrictions of the non-compete, finding the non-compete prohibited the defendant’s employment working as a private tutor to students of the plaintiff school, but those nationwide, and customers in the defendant’s geographic territory, which was defined as four nearby states, Maryland, Virginia, Pennsylvania, and Delaware. It is not clear to what extent the Court’s concern that the non-compete agreement forbade defendant from tutoring plaintiff’s students helped limit the defendant’s work as a private tutor . The Court pointed out that the non-compete agreement literally prevented defendant from working as a private tutor to any students in the states defined in the agreement. In reality, the defendant likely tutors many students within those states who are not affiliated with plaintiff’s schools.
Additionally, in April 2017, the N.C. Court of Appeals, in Syscon Inc. v. Kablelink Comm., LLC (unpublished), affirmed an injunction enforcing a narrow non-compete provision, finding that customer lists generated by Syscon Inc. (Syscon) were legitimate protectable business interests, and proffered evidence to support Syscon’s claim that its customer lists had a value to Syscon as a separate and distinct marketable commodity within the parent company’s organization. Syscon, originally a part of TDS Telecom, required her to sign a confidentiality agreement. Syscon’s parent company acquired the company that employed defendant Kablelink Comms, LLC (Kablelink). Syscon then began offering products and services to customers who had, at the time of the purchase, already contracted with Kablelink. Defendant Kablelink sued Syscom, maintaining that the non-compete agreement was too broad. Syscom sought a preliminary and permanent injunction against defendant Kablelink. The trial court granted the motion for a preliminary injunction and the Court of Appeals affirmed finding the information Syscon claimed to protect from disclosure to its competitors constituted a protectable business interest. Syscon presented evidence that the customer lists gave it a competitive advantage in the market by providing Syscon with a unique understanding of its customers’ business needs. The Court also found that the limitation on defendant’s ability to compete with plaintiff due to the existence of the non-compete agreement did not provide the defendant an undue hardship due to the defendant’s continued work in a related industry as a consultant to a competitor of plaintiff.
While non-compete agreements remain enforceable to some extent in North Carolina, the scope of such agreements must be justified by legitimate protectable business interests and narrowly tailored to achieve the purpose. Non-compete agreements that do not meet this standard will be deemed overbroad and may be found not to be legally enforceable.
Alternatives to Non-Competes
If your business is in North Carolina and you’re worried about unlawful competition from a former employee, there are legally enforceable tools other than the non-compete agreement that can protect your interest without sacrificing the free flow of labor. They are written with an eye towards the areas that create the most concern among employers, and aimed at resolving the most pressing issues.
Confidentiality and Non-Disclosure Agreements
Also referred to as confidentiality or "non-disclosure" agreements, these prohibit your employees from using or disclosing your proprietary, confidential information for a set period of time after separation. They are typically signed at the beginning of employment. Confidentiality and non-disclosure agreements are appropriate for businesses with:
Such agreements can also protect your client lists, trade secrets, and even your non-patented products or services.
Non-Solicitation Agreements
Some states have very limited or no legal authority for non-compete agreements, but do allow for non-solicitation agreements. A non-solicitation agreement prohibits an employee from soliciting business from your customers or clients, prospective customers or clients, or other employees for a defined time period after separation. Non-solicitation agreements are often included as provisions in confidentiality and non-disclosure agreements, but they only apply to solicitation—not the use of confidential, proprietary information.
Non-Piracy Agreements
These agreements are used when you are concerned about former employees soliciting your other employees, such as a customer service representative or call center worker. Non-piracy agreements, also known as non-piracy and non-interference agreements, prohibit a customer service representative, accounts manager, HR manager, or any other employee from using your trade secrets or confidential information to start a competing business, theme park, or restaurant.
Non-Hire Agreements
Similar in effect to a non-compete agreement, a non-hire agreement prohibits an employee from hiring your current employees for a defined period of time after separation. These types of agreements are not enforced uniformly across all states; currently, the legality of these agreements is being challenged in various courts.
Innovative Contracts
There are several innovative contract designs that have evolved to deal with new competiton-related issues in today’s workplace. These address the unique concerns faced by modern companies, allowing you to limit your risk while keeping pace with a turbulent marketplace.
Tips for Employers & Employees
Any company in North Carolina that is considering using or enforcing a non-compete agreement should consult with experienced counsel well in advance of doing so. Legal advice can ensure that the non-compete is drafted in a way that is "reasonable" and therefore enforceable. Mistakes in drafting can render a non-compete provision completely useless. Given the high stakes, and the amount of money that non-competes can be worth, companies should not rely on anything less than experienced counsel.
Employers should always make sure they adequately explain to employees exactly what the non-compete is, and the harm they may suffer if the employee violates it. Many companies approach their employees at the time they are signing the non-compete and barely discuss it. While not all states subject non-compete agreements to that requirement, that is not the case in North Carolina . When discussing a non-compete agreement, employers should strongly consider doing the following: Employees should exercise caution in signing a non-compete agreement. In particular, employees should consider whether the company is offering something of value in exchange for their promise not to compete. If the consideration is insufficient, the employee should not agree. An employee should also consider whether other employment options are available (for example, whether the employee could continue working for the company in some other capacity). An employee should carefully consider the following points: David Ruby has substantial experience in representing both sides in disputes involving restrictive covenants. As those cases develop, we learn important lessons about how to guide clients through the restrictions imposed by a non-compete contract.