Q&A: What is a Non-Compete
Non-competes are a type of restrictive covenant that prevents one person from competing with another. They are typically used in business to prevent the usage of confidential information or close connections with clients to unfairly compete against the person who made the covenant. Many times, a non-compete is used along side nondisclosures, non-solicitation clauses, and other restrictions to make competition hard to do.

 

By Many Names

“What’s in a name? That which we call a rose
by any other name would smell as sweet”
-William Shakespeare, Romeo and Juliet

These non-competes go by many names, but ultimately, each name is referring to the same restriction against competitive employment. Some of the other names include covenant not to compete, restrictive covenant not to compete, promise not to compete, prohibition on competition, and probably many more. No matter what they’re called, if a court finds a restrictive covenant that fits the description, that court will interpret it like it would any non-compete.

Types of Non-Compete

Once a court has determined they are dealing with a restrictive covenant, that court must then decide which type of noncompete they are dealing with. Each different type has its own standard the court must apply along with many years of cases interpreting their validity. Although there are other hybrid scenarios, there are primarily five standards for these restrictive covenants.

  1. Sale of Business,
  2. Employer/Employee,
  3. Independent Contractor,
  4. Franchisee/Franchisor, and
  5. Partnership.

 

Strict Interpretation

North Carolina courts have held, for over a century, that these restrictive covenants are not favored under the law. As such, courts will strictly construe their interpretation. If the non-compete is overly broad, for any reason, the court will simply refuse to enforce it and will not take any attempt to fix the validity on behalf of the parties. The fun part of this is that courts are allowed to employ a creative hypothetical reasoning to determine if the non-compete can cover anything that would make them overly broad.

 

Enforcement

Non-competes, when valid, can be enforced through injunctive relief and monetary damages, the amount of which is determined based on type and circumstances. Injunctive relief is when a court orders a particular person to do, or stop doing, something. In this case, the court would be telling the covenantor to stop competing against the covenantee in violation of the non-compete.

The injunction can be preliminary or permanent. The difference between these two types of injunctions is when they occur. A preliminary injunction occurs before a trial and is based on the fact that there is a reasonable likelihood that the covenant would be enforceable at trial. A preliminary injunction automatically is removed at the end of the trial, either replacing it or simply ending it, but it can also be removed by appeal or at any point by the trial judge that issued it. The permanent injunction can be instated at the end of the trial and can only be removed through appeal, as it is a final order.

 

Caution

Non-competes are very complicated. Because of how strict their rules are, even most attorneys get these wrong. They cannot apply to all situations and each one should be custom made. The rules regarding these covenants are also in flux. In March of 2016, the NC Supreme Court rules against “blue penciling,” a principle that allowed courts to modify a non-compete to make it valid if the contract provided that the court could do that. The NC Supreme Court followed longstanding precedent in making this decision, but since 2014, many non-competes were drafted thinking that blue penciling was allowed.

 

If you want a valid non-compete, or want to find out if your non-compete is valid, feel free to contact us at richard@lawplusplus.com or by calling 919-912-9640.

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