In North Carolina, if you are an employee who is looking to change jobs, it is essential that you examine your Employment Agreement to see what restrictive covenants may be contained therein.  Often, there are confidentiality clauses, or clauses that prohibit you from soliciting other employees from your current employer.  One of the most popular tools used by employers is a clause prohibiting your ability to compete with your current employer.  Though such “non-compete” clauses are generally disfavored, courts will uphold such clauses if properly drafted (and sometimes even if they are not).  It is important to consult a lawyer before making a job change to discuss how such restrictive covenants may affect you.  Unfortunately, even a lawyer will often tell you that the enforceability of a non-compete clause depends on the judge assigned to the case; further, that the outcome is difficult to predict.  However, North Carolina law sets forth certain criteria lawyers and judges examine to try and assess the enforceability of such a clause.

When considering the enforceability of a covenant not to compete, the court examines the reasonableness of its time and geographic restrictions, balancing the employee’s right to work against the legitimate business interests of the employer.  To be enforceable in North Carolina, a non-compete agreement must be 1) in writing; 2) part of an employment contract; 3) based on valuable consideration; 4) reasonable as to time and territory; and 5) designed to protect the employer’s legitimate business interests.  A non-compete clause will generally be a paragraph or two and will set forth certain activities in which the employee is prohibited from engaging for a certain period of time in a certain region.

If you are an employee looking to make a wholesale change in terms of your career and do not intend to compete with your current employer, then a non-compete clause can not prevent you from working.  However, if you intend to stay in the same industry, work for a competitor, come into contact with your current client base, etc., then your employer can ask the court for a preliminary injunction to enforce the non-compete clause and enjoin you from working until the earlier of: (1) the expiration of the non-compete clause or (2) the resolution of the litigation.  Obviously, if the preliminary injunction is awarded, this can have serious financial consequences.

As previously stated, there are certain things a court looks at in determining the enforceability of a non-compete clause:

In Writing/Employment Contract.  Non-compete clauses must be put in writing.  It is critical that the agreement specifically set forth the parameters on the restrictions to compete in terms of time, territory and scope.  The best practice for employers is to include a non-compete clause in the Employment Agreement that the employee signs prior to commencing work.  If you are an employee and are asked to sign a non-compete agreement after commencing work, additional consideration must be provided for the clause to be enforceable.

Consideration.  For a non-compete agreement to be enforceable, the employer must provide you with some form of consideration.  Usually, that consideration is the new job and compensation you are being offered.  As stated above, if you are asked to sign such an agreement after commencing work, some additional form of consideration must be provided.  Consideration can take many forms, whether it is a pay increase, bonus or other perquisites “perks.”

Reasonable as to Time and Territory.  There is no set formula in North Carolina for what constitutes acceptable time or territory restrictions.  The only requirement is that such restrictions be “reasonable.”  With respect to time restrictions, the rule of thumb is that otherwise valid non-compete clauses are reasonable for a period of time up to two or three years.  There is some precedent in North Carolina upholding longer non-compete agreements, but those cases are few and far between.  The reasonableness of territory restrictions does not depend solely on the size of the area described in the non-compete agreement.  Instead, courts are more likely to look at where your employer’s customers are located and whether the territorial scope of the agreement is necessary to maintain those customer relationships.  If you only did business in Forsyth County and the surrounding 4 or 5 counties, then a non-compete clause prohibiting you from working in Raleigh or Charlotte may be overly broad in scope, thus potentially voiding the non-compete.  If you worked with your employer’s customers in all 100 counties in North Carolina, from Murphy to Manteo, then a larger geographical restriction may be found reasonable.  In short, courts will look at, among other things: the area or scope of the restriction, the area where you worked, the nature of your business, and the nature of your duties and responsibilities, as well as your knowledge of your current employer’s business operation.

Protection of Legitimate Business Interests.  Perhaps the most common battleground in non-compete cases is the scope of post-employment work your employer seeks to restrict.  Courts are supposed to examine the language of your agreement to see if the limitations are narrowly tailored to protect the employer’s competitive interests.  If the duties barred under the non-compete agreement are similar to the duties you performed for employer, the agreement is more likely to be found reasonable in scope and in furtherance of a legitimate business interest.  Thus, restrictive covenants prohibiting you from working in the same position for a competitor are usually valid and enforceable.  Restrictions prohibiting you from working in a capacity wholly unrelated to that in which you previously worked are likely overbroad and unenforceable.

In VisionAIR, Inc. v. James, 167 N.C. App. 504 (2004), the non-compete agreement stated that the employee may not “own, manage, be employed by or otherwise participate in, directly or indirectly, any business similar to Employer’s . . . within the Southeast” for two years after the termination of his employ with VisionAIR.  The court noted that, under this covenant, the employee would not merely be prevented from engaging in work similar to that which he did for VisionAIR, but that he would be prevented from doing even wholly unrelated work at any firm similar to VisionAIR.  Further, the court found that by preventing the employee from even “indirectly” owning any similar firm, that the employee may, for example, even be prohibited from holding interest in a mutual fund invested in part in a firm engaged in business similar to VisionAIR.  The court held that such vast restrictions could not be enforced.  Thus, it is critical that you have a judge who is willing to do the heavy lifting necessary and parse each word of the non-compete to determine whether the language really protects a legitimate business interest, or whether the agreement is overbroad and unenforceable.

Special Cases.  What happens when the Employment Agreement expires, but the employee continues to work under the same terms and conditions for a period of time?  Does the non-compete clause survive the expiration of the written contract such that the restrictive covenant would begin to run upon the employee’s termination, as opposed to the termination of the written contract?  There is law in North Carolina which states that where the employee continues to work for the employer under the exact same terms and conditions after the expiration of the written agreement, then a contract implied in fact is created which subjects the employee to the same duties and restrictions as those set forth in the original written employment agreement.  Whether this doctrine can be extended to include non-competition restrictions is unclear.  However, it is an argument that employees need to be aware of when assessing their rights.

The best practice for employees is to enter into another written agreement upon the expiration of the previous one so all parties understand the parameters of the employee’s rights, duties, responsibilities and restrictions going forward.  It would also be prudent for the employee to retain a lawyer to review the agreement before signing.  For employers, it is a good idea to have a lawyer review your employment agreement every few years to ensure it complies with the current state of the law.

If you are an employee who has questions about your rights under an employment agreement, or who has been sued by your former employer based on alleged violations of your employment agreement, or you are an employer seeking to enforce an employment agreement against a former employee, please call the Law Office of Kevin J. Williams for help with your case.

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