Although non-compete agreements are viewed unfavorably under North Carolina law, they continue to remain popular among businesses that have trade secrets, key clients, or other business interests they fiercely want to protect.
Below, we discuss more about non-compete agreements, when they may be used, and what elements are necessary for a non-compete agreement to be enforceable.
What Is a Non-Compete Agreement?
At the most basic level, a non-compete agreement prevents someone from leaving their current position to work for a competitor, solicit former clients, or otherwise take their former employer’s business contacts or trade secrets with them.
Employers generally ask their employees or contractors to sign non-compete agreements at one of two points: (1) when making an employment offer; or (2) after the employee has been hired and has started to access trade secrets.
These two scenarios are treated differently under North Carolina law.
For scenario (1), or a pre-employment non-compete, North Carolina considers the parties to have relatively equal bargaining power. That is, the employer is free to offer the non-compete agreement as a term of employment; the prospective employee is free to accept it or reject it and walk away.
Scenario (2), or the post-employment non-compete agreement, is treated differently. In that situation, the employer has far more bargaining power than the employee, who may not feel free to reject the agreement and walk away. As a result, non-compete agreements that have been executed after an employee has already begun working for the company tend to be tougher to enforce.
What Elements Make a Non-Compete Agreement Enforceable?
In order for either a pre-employment or post-employment non-compete agreement to be enforceable in North Carolina, it must have five key elements. The agreement must be:
- In writing
- As part of a contract of employment
- Based on valuable consideration
- Reasonable “as to time and territory”
- Not against public policy
Though the first two elements can be self-explanatory (and often taken for granted), the other three are more likely to be placed under a microscope.
Consideration is an essential element of any contract – it means that each side is providing something in exchange for the other side’s agreement. In a pre-employment non-compete agreement, the consideration provided by the employer generally comes in the form of a job offer, salary, or bonus. The employee’s consideration consists of relinquishing the ability to conduct certain business activities covered by the non-compete.
For a post-employment non-compete, consideration may look like a bonus, salary increase, or higher title in exchange for giving up the ability to conduct those business activities.
Reasonable as to Time & Territory
Another essential element of a non-compete agreement is that it is “reasonable as to time and territory.” This means that a non-compete can’t prevent the employee from working any similar jobs within a 500-mile radius or within five years of leaving their previous employment; the employee must retain a way to make a living in their former industry. Every non-compete agreement is unique, and it will be up to the trial court to determine whether the time and territory restrictions of a particular non-compete agreement are reasonable.
Not Against Public Policy
A non-compete agreement that forces the employee to do something illegal or against public policy – like promoting a monopoly, committing tax fraud, or engaging in false advertising – is unlikely to be enforced. To be legally valid, a non-compete agreement must comport with public policy, including all federal, state, and local laws and regulations.
Elements of an Unenforceable Non-Compete Agreement
An unenforceable non-compete agreement will be missing one of the five crucial elements outlined above. If your agreement isn’t in writing, doesn’t involve the exchange of consideration between the parties, is unreasonable as to time or territory, or contains provisions that are against public policy, it may be ruled invalid. An example is where a company has business only in Piedmont, yet wishes to bind an employee to a non-compete in the entire State of North Carolina.
However, there are some exceptions. If your non-compete agreement has a severability clause, it may be possible for one or more invalid provisions to be thrown out without impacting the enforceability of the non-invalid portions of the agreement.
How Are Non-Compete Agreements Used?
Non-compete agreements are most often used to keep employees from taking key trade secrets, marketing information, or valuable clients with them when they leave. Many businesses heavily rely on retaining existing clients, and losing a single employee who takes 10-20% of the customer base with them could spell catastrophe for many businesses.
If an employer believes a former employee to be violating a non-compete agreement, a couple of things may happen. First, the employer may try to work the situation out informally. Next, they could send the employee a letter reminding them of their obligations under the non-compete and warning them that further violations may lead to legal action.
If these steps don’t stop the objected-to conduct, the employer may file a civil lawsuit against the employee and seek an injunction to enforce the non-compete. This injunction request may argue that immediate court action is needed to prevent the employee from causing irreparable damage to the employer’s business; if the court agrees, it will issue a temporary restraining order (TRO) to prevent the employee from taking specified actions.
Depending on how the lawsuit proceeds, one party may be required to pay money damages to the other party. If the non-compete is deemed enforceable and the employee is judged to have violated it, the employee may be required to pay damages to the employer. If the non-compete is unenforceable, the employer may sometimes be required to pay the employee’s legal fees.
How to Get a Non-Compete Agreement in North Carolina
Obtaining a non-compete agreement can be as simple as drafting a narrowly-tailored agreement that sets out the specific areas and trade secrets you’d like to protect. Ensure that this agreement is in writing, isn’t overly broad, and clearly sets forth each side’s rights and responsibilities.
Because non-compete agreements are disfavored under North Carolina law, it’s important that they be drafted by an experienced attorney
At Weaver Bennett & Bland, P.A., our attorneys have decades of experience in drafting, reviewing, and even fighting against non-compete agreements on behalf of our clients in the Charlotte area.