Business Law – Non-Compete Agreements

April 6, 2018  | By Erik Lincoln

Non-compete agreements are generally enforceable in North Carolina, except in certain businesses where they are prohibited by statute, rule, or regulation (e.g., the practice of law cannot be restricted by agreement – Rule 5.6 of the North Carolina Rules of Professional Conduct).  Although enforceable, non-compete agreements are not favored by North Carolina courts because they are generally in conflict with public policy and statutes that prohibit the restraint of trade. See N.C.G.S §75-1.  Because they are not favored, the requirements for a non-compete are strictly construed by the courts.

For a non-compete agreement to be enforceable in North Carolina, it must meet the following requirements:

  • in writing (N.C.G.S. §75-4),
  • designed to protect a legitimate business interest,
  • based on valuable consideration, and
  • reasonable in time and territory.

We now take a quick look at each of these requirements.

Legitimate Business Interest

Employers have a legitimate business interest in protecting their unique assets, including:

  • Customer contacts, and
  • Confidential information.

While employers can protect their business assets, they cannot protect them in a way that causes unreasonable hardship for employees. To avoid being unreasonable, non-competes should be narrowly tailored to protect the employers’ legitimate business interests, and no more. For instance, customer-based restrictions cannot extend beyond the customers with which the former employee had business contact.

Valuable Consideration

Under North Carolina business law, valuable consideration for a non-compete includes:

  • The promise of new employment
  • A change in the terms and conditions of employment, including new or separate consideration such as a:
  • raise in pay;
  • new job assignment;
  • promotion;
  • bonus; or
  • Three months’ severance in the event of termination without cause, provided that the employee sign a release that is acceptable to the employer in its sole discretion.

(Whittaker, 379 S.E.2d at 827; Hejl v. Hood, Hargett & Assocs., 674 S.E.2d 425, 428-29 (N.C. Ct. App. 2009); XPO Logistics v. Anis, 2016 WL 3944081 (July 12, 2016).)

North Carolina courts may set aside non-competes when the purported new or separate consideration is illusory.  Additionally, while continued at-will employment alone is not sufficient consideration, an offer of continued employment for a specified duration may be sufficient consideration.

Reasonable in Time and Territory

North Carolina courts consider time and territory together when determining whether a non-compete is reasonable, so that a longer restricted duration is acceptable when the geographic scope of the restriction is small and vice versa.

Courts have considered six-month to three-year restrictions reasonable, depending on the geographic restrictions. Restrictions of five years or more are presumed to be unreasonable (Farr Assocs., 530 S.E.2d at 881). For example, in:

  • Forrest Paschal Machinery Co. v. Milholen, the court held that a two-year, 350-mile restriction was reasonable (220 S.E.2d 190, 196-97 (N.C. Ct. App. 1975)).
  • Market America, Inc. v. Christman-Orth, the court held that a potentially nationwide restriction was acceptable where it only lasted for six months (520 S.E.2d 570, 577-78 (N.C. Ct. App. 1999)).
  • Precision Walls, Inc. v. Servie, the court held that a one-year restriction was reasonable where it prohibited a former employee from working in a specific industry in two states (568 S.E.2d 267, 272-73 (N.C. Ct. App. 2002)).

North Carolina courts consider several factors in determining whether a geographic restriction is reasonable, including:

  • The area assigned to the employee and where they actually worked.
  • The area where the employer operated.
  • The nature of the employer’s business.
  • The nature of the employee’s job and her knowledge of the employer’s business operation.

If you need a business attorney to help you draft or interpret a non-compete agreement, give us a call.

Erik Lincoln is a founding member of Lincoln. In addition to being an attorney he is also a CPA. Erik has consistently been recognized as one of the top attorneys in North Carolina, by Business North Carolina.