The Enforceability of Non-Competes in North Carolina
When you start a new job, there is a lot of paperwork to fill out, from employment contracts to W2s, waivers, tax documents, and fact sheets. In some industries, you may also be asked to sign a non-compete agreement, whether contained within your employment contract or by way of a separate document. Buried among the mountain of paperwork, you may have signed it without really contemplating what the non-compete clause was asking of you.
While common practice, non-competes are not always enforceable. In fact, some states do not even recognize these kinds of restrictive contracts. Whether you plan on taking a second job or if you are considering leaving your current employer to explore opportunities elsewhere, it is important to know what you agreed to in that non-compete and if the agreement is enforceable.
What are non-competes?
A common type of “restrictive covenant,” a non-compete is an agreement or contractual clause often found in employment contracts. These clauses generally prohibit an employee from competing with the employer by taking a comparable job in a similar geographical area, within a certain timeframe.
Non-competes are designed to protect employers by temporarily restricting an employee from working for a competitor or otherwise competing with the employer either during employment or for a short time after the employment relationship ends. This is because when an employee leaves a company to work for a different employer, that employee will often take inside knowledge of the former company’s inner workings, from its trade secrets to sensitive client information. While non-competes are intended to protect trade secrets and other business practices that could be harmful to an employer if shared with a competitor, employers may also benefit from reduced employee turnover.
As such, non-competes tend to be more favorable to employers than to the employees themselves. But this begs the question: Are they fair? Are they enforceable?
The short answer: It depends.
How often do courts enforce non-competes?
The enforceability of non-compete clauses is frequently the subject of litigation. In general, as long as the terms of the non-compete are reasonable and not overly broad, the non-compete will be enforced. However, enforceability varies by state. North Carolina courts generally do not favor non-competes. When challenged, a non-compete is subject to scrutiny by the court and will be enforced when its terms are more generous to the employee (i.e., not overly restrictive).
To be enforceable, non-competes must be fair and equitable to all parties. They must also be specific and narrowly-tailored to serving the particular goals and outcomes the employer is seeking. For example, the non-compete must include a specific date on which the agreement takes effect, as well as specific dates the employee is barred from competing with the employer. In other words, a non-compete cannot bar the employee from working in competition with the employer permanently. There must be a specified duration, as well as a reasonable restriction on the location. Additionally, the non-compete must address how the non-competing party will be compensated for agreeing to the non-compete. The non-compete must be supported by some form of “consideration,” that is, some benefit to the employee for agreeing to tie his hands.
North Carolina law has not specifically defined what is a “reasonable” time or territory restriction for a non-compete. When a non-compete is challenged, the court will consider factors like the scope of the business, where the employee was assigned to work, and whether the area restricted by the non-compete is appropriate to maintain the employer’s customer relationships. Further, while there is no law defining how much time is reasonable, generally North Carolina law has held that up to two years is “reasonable.”
What is the “blue pencil” rule?
Generally, North Carolina law allows courts to strike through unreasonable portions of a non-compete clause and uphold the remainder of the agreement. This practice, known as the “blue pencil” rule, is limited to omitting provisions – not rewriting them entirely. This rule allows employers to enforce a non-compete even when a portion of the agreement is found unreasonable, so long as there is a reasonable clause addressing the time and geographical restriction.
The North Carolina Court of Appeals laid out the criteria for enforceable non-competes in Safety Equipment Sales & Service, Inc. v. Williams. The Court held that while non-compete agreements are not favored, they are enforceable when certain criteria are satisfied: in writing, a reasonable restriction on territory and time, valuable consideration is given and protects a legitimate business interest.
In 2017, the North Carolina Supreme Court clarified the blue pencil rule in Beverage Systems of the Carolinas, LLC, v. Associated Beverage Repair, LLC. The subject of the lawsuit was a non-compete agreement prohibiting sellers from conducting business in the beverage industry anywhere in North Carolina or South Carolina. The agreement also contained language allowing courts to amend the clause as necessary in the event of a dispute. Ultimately, after the matter was appealed to the North Carolina Supreme Court, which agreed with the trial court’s decision not to take on the role of rewriting the contract to make it enforceable.
In clarifying the blue pencil rule, the North Carolina Supreme Court held that courts may use the blue pencil rule to strike out any provisions that are overly broad and therefore, unreasonable. However, if there is no remaining clause addressing the restrictions on time and territory, the non-compete will not be enforced. The court may not supplement, revise, or otherwise amend the language of an overly broad non-compete to make it enforceable, even when the contract itself contains language granting the court permission to make these changes.
An employment attorney can help you understand a non-compete clause in your contract.
If you have specific questions about the enforceability of a non-compete agreement in your contract, reach out to one of our attorneys for a consultation. We are committed to delivering the best possible results for our clients and take pride in offering superior legal counsel.
This article does not establish an attorney-client relationship and must not be construed as legal advice.