Are you asking “should I sign a non-compete agreement?” You are not alone. Employers have increasingly used, non-compete, non-solicitation and non-disclosure agreements to protect trade secrets, computer code, technical knowledge and preserve competitive advantages in a difficult economic environment. The ability to use restrictive covenants in the employee-employer relationship encourages companies to invest in employees, training and intellectual property. Recently there has been discussion of whether the wide-spread use of restrictive covenants has gone too far like in the case of a college student working as a counselor in a summer camp who was required to sign a non-compete agreement. The law regarding restrictive covenants varies from state to state. And some states like Massachusetts are debating whether the use of non-compete agreements places its economy at a competitive disadvantage to other states. The enforcement of non-compete agreement varies widely across the United States. Courts in California and North Dakota will not enforce non-compete agreements while states like Texas and Florida have few limits on the scope of such agreements. North Carolina courts generally have an unfavorable view of non-compete agreements and have a strict standard for their enforcement.
ISSUES FOR NON-COMPETE AGREEMENTS
In most states for a non-compete agreement to be enforceable, the agreement must protect a legitimate business interest and it must be narrowly tailored and reasonable in scope and duration. The North Carolina Supreme Court has stated that a restrictive covenant between an employer and an employee is only valid and enforceable under North Carolina law if it is: (1) in writing; (2) reasonable as to terms, time, and territory (3) made part of the employment contract; (4) based on valuable consideration; and (5) not against public policy. In order for a restrictive covenant to not be against public policy, it “must be no wider in scope than is necessary” to protect the legitimate business interests of the employer. When considering the enforceability of a covenant not to compete, a court examines the reasonableness of its time and geographic restrictions, balancing the substantial right of the employee to work with that of the employer to protect its legitimate business interests.
NON-COMPETE AGREEMENTS DISFAVORED BY COURTS
Covenants not to compete between an employer and employee are ‘not viewed favorably in modern law. Restrictive covenants between employers and employees restrain trade and are scrutinized strictly. The reasonableness of a restrictive covenant is a matter of law for the court to decide. The party seeking enforcement of the restrictive covenant has the burden of proving that the covenant is reasonable.
EMPLOYEE MUST RECEIVE CONSIDERATION
Generally, when a restrictive covenant is entered into between an employer and an employee in connection with the initial hiring of the employee, mutual promises of employer and employee furnish valuable considerations each to the other for the contract. However, when the employment relationship is already established before the restrictive covenant is entered into, the covenant must be supported by new or separate consideration.
North Carolina courts have upheld the following benefits as new or separate consideration sufficient to uphold a restrictive covenant entered into after a working relationship already exists: continued employment for a stipulated amount of time; a raise, bonus, or other change in compensation; a promotion; additional training; uncertificated shares; or an increase in responsibility or number of hours worked.
GEOGRAPHIC LIMITS OF NON-COMPETE AGREEMENTS MUST BE REASONABLE
When considering the geographic limits outlined in a restrictive covenant, North Carolina courts look to six overlapping factors: (1) the area, or scope, of the restriction; (2) the area assigned to the employee; (3) the area where the employee actually worked or was subject to work; (4) the area in which the employer operated; (5) the nature of the business involved; and (6) the nature of the employee’s duty and his knowledge of the employer’s business operation. The time and geographic limitations of a covenant not to compete must be considered in tandem. For instance a longer period of time may acceptable where the geographic restriction is relatively small, and vice versa.
IS MY NON-COMPETE AGREEMENT ENFORCEABLE?
To recap. In North Carolina a restrictive covenant between an employer and an employee is only valid and enforceable only if it is:
• In writing
• Reasonable as to the terms, time and territory
• Made part of the employment contract
• Based on valuable consideration
• Not against public policy