Given the highly technical nature of the industries in this region of the state, non-competition agreements are becoming common-place in both employment relationships and business transactions in Wake County. “Non-competes” are essentially agreements not to engage in certain jobs in a particular area, for a particular length of time after a business transaction or employment relationship. The restrictive nature of these agreements makes them highly susceptible to challenge in North Carolina courts. While North Carolina does allow non-competes, courts scrutinize their terms so as to strike a delicate balance of important interests – protecting the company’s legitimate business interests while also allowing the party subject to the restrictions to still earn a living. In order to be enforceable, non-competes must satisfy several requirements.
Non-competes are invalid if they are not reduced to a signed writing. Oral non-competes, therefore, will not survive a judicial challenge. Typically, non-competes are included as clauses in employment contracts or business transactional documents, rather than as a separate writing. However, sometimes existing employees are asked to sign them after already beginning their employment with the business.
Consideration means that some value must be given to the restricted party in exchange for the agreement for it to be enforceable. Usually this takes the form of the employment itself, or a pay increase if the employment already exists. If an employee executes a non-compete after the already have the job, without any new consideration, the non-compete is unenforceable and the rest of the requirements below do not matter.
In the business acquisition context, the sale of the business and/or its assets is adequate consideration on its own to include a non-compete in the purchase agreement. However, executing a non-compete after the fact, without additional consideration, will not suffice.
The scope of the restriction is often the most scrutinized issue concerning non-competes. The scope of the restriction is divided into two categories – the duration of the restriction and the geographic territory of the restriction, both of which must be reasonable under the circumstances of the agreement in order to be enforceable.
The reasonableness of the territory restriction will depend on the geographic location of the business, as well as the location of the business’ customers. A reasonable territory restriction will be limited to only the area where the employee actually made contacts during his employment, or where the business actually does business, whichever is smaller.
The reasonableness of the time restriction will depend on the circumstances of the business and skills of the employee. It also relates directly to the territory restriction. Courts will generally approve of a longer duration in a smaller geographic area, and vice versa. Additionally, courts are more likely to uphold a wider scope for a skilled employee than an unskilled employee.
The employer or business must have a legitimate business interest in restricting the employee or purchaser’s ability to compete. Practically speaking, the non-compete must relate only to industries and geographic areas where the business actually competes and cannot extend to other areas or industries. Restrictions prohibiting direct competition in a same or similar position are usually valid. However, restrictions prohibiting the employee from working in a different capacity, or for an entity not in competition with the employer, are generally not. Further, blanket restrictions prohibiting any competition with the employer, in any capacity, are not enforceable.
Non-competes must be narrowly tailored to protect the legitimate interests of the business without being susceptible to a successful challenge in court. If the agreement is too broad, it could be struck down and the former employee or business seller will be free to compete against the business.
When it comes to drafting a non-competition agreement, it pays to have a North Carolina business law attorney on your side. At StephensonLaw, we have experience drafting "non-competes" and can help your business draft an enforceable document. Contact us for a free initial consultation.
© Paul A. Yokabitus
*This blog is for educational purposes only and is not intended to provide, nor should it be used for, legal advice. Nothing herein should be construed as providing legal advice. By using this blog, you the reader acknowledge that no attorney-client relationship is being or has been created with the Author or his law firm. Non-attorneys should not use this blog for legal advice and attorneys should not use this blog as a substitute for their own legal research.