Previously, we have examined what a covenant not to compete (non-compete) is and what the top level restrictions are regarding their validity, but there is a significant amount of deeper analysis that goes into each and every one of these restrictive covenants. We’re exploring the location and time requirements in an employment non-compete.
One of the elements of a valid covenant not to compete in the employment context is that it is reasonable as to both time and territory. As discussed before, these two criteria are interconnected meaning that a longer time frame should be met with a narrower territory restriction and a larger territory is met with a shorter time frame.
Where are Customers Located
In order to prove a geographic restriction in an employment non-compete is reasonable, an employer must first show where its customers are located and that the geographic scope is necessary to maintain those customer relationships. It is only reasonable to the extent it protects the legitimate interests of the employer in maintaining its customers.
For example, if an employer has customers in Wake County only, that employer may not restrict an employee from working in Durham County.
In determining what territory is reasonable in these employment non-compete clauses, the court has listed six factors relevant: (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 knowledge of the employer’s business operations. Clyde Rudd & Associates, Inc. v. Taylor.
Where the alleged primary concern is the employee’s knowledge of the customers, the territory should only be limited to areas in which the employee made contacts during the period of employment. Manpower of Guilford County, Inc. v. Hedgecock. Therefore, where the concern is operations details, the territory can expand further, encompassing as far as the area where the employer operated, but the employer would have to demonstrate actual access and knowledge of these critical trade secrets.
Once territory is established, the courts look at whether the time restriction is reasonable when compared to the territory restriction. Courts are reluctant to force an employee to put her career on hold to protect an employer’s interest unless there is a compelling reason to do so. The time restriction must be narrowly tailored to appropriately reflect the legitimate interest of the employer.
For example, if the employer is only protecting trade secrets, but those will only be secret for 3 months, there’s no legitimate business interest in preventing the employee from working for a competitor after those 3 months.
Only in extreme circumstances have the courts upheld 5 year non-competes for employees, and those may only be in limited territories as well. This is the clearest rule we’ve received from the courts as far as the time standard is concerned. Engineering Associates, Inc. v. Pankow.