Covenants Not to Compete

Most people in North Carolina are employed as an at-will employee without a contract. Therefore, those people can be fired for nearly any reason, and can likewise quit for any reason (the “two week notice” is a courtesy, not a legal requirement).

When employers do commit themselves to an employment contract, one of the clauses that they typically require is a non-compete clause. These clauses, also known as covenants not to compete, prevent employees and ex-employees from competing for business, even if they have left employment.

These clauses are subject to conflicting public policies in North Carolina. On the one hand, North Carolina policy is that people should be free to work wherever they want. On the other hand, people are also free to enter into whatever contracts they want and employers and companies have a right to protect their business. Therefore, while these clauses are allowed, they are looked at closely by the courts and they have certain restrictions.

The clauses must have the following:

1.    Be in writing
2.    Be supported by consideration
3.    Be reasonable in time and location
4.    Support a legitimate business purpose.

The first requirement should be obvious, but the second not as much. “Consideration” is a legal term. Essentially it is a contract requirement that to have a binding contract, you must give up something to get something. It doesn’t have to be much, or even close to equivalent value, but it has to be something. For non-compete clauses, the problem comes in when the employer has an already existing employee sign such an agreement. While the promise of new employment is legal consideration, the promise to continue existing employment is not and therefore, without something in addition, the clause is void.

The third requirement, that the clause be reasonable in time and location, is where most of the litigation occurs. The courts have resisted giving a bright line test of how long and how far is allowed. It is on a case by case basis. Ford Motor Company, who has business nationwide, would have a better chance of enforcing a national restriction on its employees than a local car lot. In addition, the requirements are to be read together, a shorter time period may allow a larger geographic area. In general, anything about five years is usually too long and two years is usually long enough.

The legitimate business purpose requires that the restriction actually mean something to the business. They can’t stop a former employee from any work, just work that would reasonably affect them.

So the non-compete clause can’t be just a blanket restriction, it has to be considered and as narrowly drawn as possible to protect a true business interest. The business should be prepared to show proof that they have the business in the category and geography covered by the clause, or they risk the entire clause being struck. In North Carolina, courts are usually not allowed to “blue-pencil” a contract and cut down a too broad limitation into one that is narrower. They have to either accept or reject the entire clause. 

-Bradley A. Coxe is a practicing attorney in Wilmington, NC who practices in Personal Injury, Car Accidents, Medical Malpractice, Contract and Real Estate disputes, and all forms of Civil Litigation.  Please contact him at (910) 772-1678