In North Carolina, there are different standards for different types of non-competition clauses, formally called restrictive covenants against competition. Employee non-compete contracts are some of the most commonly used non-competes.
Employers typically create these non-competes to protect themselves from an employee taking their trade secrets, client lists, and goodwill to a competitor when the employee leaves. These employee non-compete clauses are, by default, discouraged, and must be proven to be no greater than necessary to protect the employer’s legitimate business interest. If the employer cannot show that, or the employee can demonstrate that the non-compete is overly broad, the non-compete will simply not be enforced, as courts have no authority to rewrite a covenant not to compete where it fails in any criteria.
The standard for a valid employee non-compete clause is that it must be (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. See Copypro, Inc v. Musgrove & Young v. Mastrom, Inc.
Non-compete agreements are also subject to careful scrutiny. Keith v. Day. They must be no wider in scope than is necessary to protect the business of the employer. Manpower of Guilford County, Inc. v. Hedgecock. Finally, these non-competes must not be against public policy. Moses H. Con. Mem. Health Serv. v. Triplett.
Commonly referred to as the Statute of Frauds, there are certain contracts that, in order to be valid, must be in writing. These are usually because you give up a substantial right, or they’re too open to fraud if we do not require them to be in writing. These covenants not to compete fit into the statute of frauds because employees would be giving up a substantial right. Furthermore, because of their strict interpretation, enforcement of oral non-competes would be virtually impossible.
Time and Territory
Although a valid covenant not to compete must be reasonable as to both time and area, these two requirements are not independent and unrelated aspects of the restraint. Each must be considered in determining the reasonableness of the other. Hartman v. W.H. Odell and Associates, Inc. citing Jewel Box Stores Corp. v. Morrow & Triangle Leasing Co. v. McMahon. This means that while a longer time frame should be met with a smaller territory or shorter time frame with a larger territory. The two must be weighed in light of the other.
Many non-compete analyses revolve around whether or not the time and territory restrictions are reasonable, and although there is a much larger analysis that goes into them, there is no clear guidance on what is reasonable, as it needs to be a case by case basis. For a more in depth analysis on the Time and Territory Reasonableness, check out our article here.
Part of an Employment Contract
The next element of the analysis is that the non-compete has to be made part of the employment contract. Non-competes must be signed before employment, or discussed in an equal amount of specificity as the written non-compete.
Based on Valuable Consideration
When a non-compete is entered into as part of an employment contract, the valuable consideration is the employment itself. Any employee non-compete entered into after employment starts, even by a day, must be met with new consideration. This can be a promotion, raise, cash, bonuses, or anything extra the employee gets. Courts will not typically examine the sufficiency of the consideration, but must still be actual consideration.
Legitimate Business Interest
One of the most argued over areas of non-competes is the legitimate business interest. Employers are only permitted to restrain the employment of their employees when it protects a legitimate business interest. This is typically protection of the company’s secrets or company’s clients.
A covenant not to compete must be no wider in scope than is necessary to protect the business of the employer. Hartman v. W.H. Odell and Associates, Inc. citing Manpower of Guilford County, Inc. v. Hedgecock. Anything beyond, or seemingly meant to limit fair competition, will leave the non-compete unenforceable.
The analysis that goes into determining a legitimate business interest is also fairly complex, but builds upon what we’ve discussed above.
In summary, non-competes are discouraged under North Carolina law, but if the employer can prove that they’re reasonable and aiming to protect a legitimate business interest, they could be a useful tool to prevent unfair competition.