NC Non-Compete Law: Demystifying Legal Terminology
Understanding Your Non-Compete Agreement
Non-compete agreements are not particularly common outside of specific industries and particular positions, but they provoke a lot of anxiety when they do appear. The questions we hear most often in consultations about employment and severance agreements revolve around non-compete agreements — what they are and how they affect the employee’s ability to take advantage of new opportunities.
Note: In this article, we’re talking about non-compete agreements associated with employment. Non-compete agreements also arise in the context of the sale of a business, and the rules are less restrictive in that context.
Non-compete agreements associated with employment are enforceable in most states — only California, Oklahoma, and the District of Columbia refuse to allow them. That said, they are, as court decisions often say, “disfavored.” In plain English, courts do not like non-compete agreements because they are at odds with the ideals behind at-will employment.
You might have heard that the FTC is seeking to ban non-competes nationwide. That rule is in its very earliest stages. Until it actually makes it through the rule-making process, non-competes remain a matter of state law. And states differ widely on how they enforce and where they limit the effect of non-compete agreements. Which state law governs your non-compete will depend on a range of factors, and it may or may not be determined by a choice of law clause in your employment or severance agreement. This discussion focuses on North Carolina law, but the principles are similar to those followed by many other states.
North Carolina Non-Compete Law
Criteria For Enforcement
North Carolina courts will enforce non-compete agreements only if they meet certain defined criteria.
First, they must be in writing and part of an employment contract signed by both parties. You cannot be bound to a non-compete agreement by an oral agreement or by a unilateral communication.
Second, they must be based on “valuable consideration.” That means the employer must give you something in return for your agreement to the non-compete provision. If you sign a non-compete agreement as part of your initial employment agreement, the job itself is the consideration. If one is included in your severance agreement, the severance is the consideration. But in North Carolina, continued employment is not sufficient “consideration.” In other words, if your employer asks you to sign a non-compete agreement after you’ve been working there a while, they have to give you something in return for that agreement — something like a raise, promotion, bonus, or even a one-time payment. It doesn’t have to be a lot. Courts have found payments as low as $100 to be sufficient consideration for the agreement.
Third, the non-compete must be reasonable on three counts: time, territory, and scope.
- Time. Courts have not set any hard time limits on the duration of a non-compete agreement, but some guidelines have emerged. Assuming all other factors are reasonable, an agreement that endures for one year after employment ends is most likely to be found reasonable. Two years is pushing it a little, and no non-compete extending beyond five years has been found to be reasonable.
- Territory. This term refers to the geographic scope of the limitation. The territory must be defined to protect an employer’s legitimate business interest. For instance, if the interest the employer seeks to protect is knowledge about customers, the agreement should be limited to those areas where the employee works with customers.
- Scope. The reach of the agreement must be tailored to the narrowest scope that will protect the employer’s legitimate business interests. Thus, the limitation must be defined in a way that applies only to actual competitors. For instance, a company that manufactures and sells furniture directly to consumers has a very different set of competitors from one that manufactures and sells office furniture. A non-compete that bans a former employee of an office furniture company from working for “furniture manufacturers” may well be unreasonable as to scope.
Scope may also refer to the kind of work the employee is limited from doing. An employee who worked as an office furniture designer is probably not endangering any business interests if he goes to work for another furniture company as, for instance, an accountant.
The enforceability of a non-compete agreement may also be affected by some other factors. If you were terminated, a court may consider the context of your termination in deciding whether the non-compete agreement is fair. And doctors and attorneys may not be bound by non-compete agreements at all.
Contesting Your Non-Compete Agreement
Situations To Consider
Clearly, the best time to negotiate the terms of a non-compete agreement is when you’re asked to sign it. But employees starting a new job often aren’t thinking about what happens when they leave their current employer, and severance negotiations sometimes involve other considerations.
Often, non-compete agreements end up in court because a former employee takes a job that raises alarms for the employer. At that point, the employer will file a lawsuit seeking an injunction barring the employee from taking the job. Often, the suit names both the ex-employee and his or her new employer.
Occasionally, a non-compete can come to court because an employee — or a prospective employer — will ask the court to determine whether the agreement is valid in advance of a lawsuit. This is done through what is called an action for declaratory judgment.
Getting Help With Your NC Non-Compete Agreement
If you’re looking at a non-compete agreement as part of either an employment contract, offer, or severance package, you need to understand whether and how it binds you. If you’ve signed a NC non-compete agreement and are facing litigation over it, you need legal help to ensure the best outcome for you. In the Raleigh, NC, area, Miller Law Group is standing by to help you. Call us!