Non-competition agreements, also known as covenants not to compete or restrictive covenants, are employment contracts used by employers to limit the ability of an employee to compete with the employer by stealing customers or trade secrets. Enforceable agreements must strike a balance between protecting the employer’s legitimate business interests from an unfair competitive advantage with the employee’s right to work in a field for which he or she is trained.  In general, courts decide what is considered reasonable or not reasonable by examining the type and size of the business, how long and over what geographic area the restrictions apply and whether adequate consideration, or benefit, was given the employee at the time the agreement was signed.

The Law In North Carolina

In North Carolina, contracts not to compete are required by statute to be in writing and signed by the employee.  North Carolina courts have determined that restrictive covenants are enforceable if the terms are reasonable and necessary to protect certain legitimate business interests of the employer such as customer lists and company good will. Factors considered when determining reasonableness include the hardship an agreement puts on the former employee and the restrictions placed on time, territory and activity of the former employee.

Consideration

With any contractual arrangement, both parties must be giving and receiving something of value, also known as consideration. North Carolina courts have determined that the offer of initial employment is sufficient consideration or benefit to the employee in exchange for agreeing to not compete with the employer should the employment relationship terminate.  A non-competition agreement signed after employment has begun  requires that additional consideration be given by the employer such as an increase in salary or other benefits.

Reasonableness in Time and Geographic Scope

Agreements may be deemed unenforceable if a court finds that they are unreasonable in terms of duration, geographic scope and the type of employment or line of business being restricted. If a court finds an agreement is unreasonable, it may modify the agreement by using what is known as the “blue pencil rule” where offending portions of the agreement are deleted.  This is only possible if the remainder of the agreement reasonably stands on its own.   If this is not possible, the court will strike down the entire agreement.

Examples of non-compete agreements that North Carolina courts have found to be reasonable include:

• A 2-year, 25-mile radius restriction against a general surgeon from competing with his former hospital.
• A 3-year, 15-mile radius restriction against a dentist from opening a practice in competition with his former dental office employer.
• A 1-year, 2-state restriction against the former employee from working in a specific industry because the employee knew sensitive information in those two states and his job was identical to the one with the former employer.  

The courts have found restrictive covenants unreasonable or used the “blue pencil” rule to modify agreements in these situations:

• A 3-year restriction against a caregiver in the mental health industry because  of the “extraordinarily high” turnover of employee’s in this industry.
• A 3-year, statewide restriction against former car wash employee from working in any similar employment where the former employer only did business in the southern half of the state.
• A 2-year restriction against a software architect from working, directly or indirectly owning, or in any way participating in any business “similar” to the former employer’s software business in the “Southeast” United States.

Employers need to keep these issues in mind when asking employees to sign restrictive covenants. It is also important to know if potential new hires have a non-compete agreement with a former employer. In some cases, the new employer can be liable to the former employer if hiring the employee would put him or her in violation of the agreement. Different rules may apply to situations in which all or part of a business is being sold and a restrictive covenant is agreed to by the buyer and the seller.