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NC Court of Appeals Says $500 Adequate Consideration to Support Two-Year Non-Compete

    Client Alerts
  • April 17, 2009

In North Carolina, if a non-competition agreement is established after employment has already begun, the employer must provide the employee with additional consideration beyond continuing employment.  This consideration can be in the form of a salary increase, a new benefit, or a one-time cash payment.

Employers frequently ask how much consideration is enough to support the non-compete.  According to a new case from the North Carolina Court of Appeals, not much.  In Hejl v. Hood, Hargett & Associates, Inc., the plaintiff signed a non-compete agreement fourteen years after beginning employment with the company.  In return for $500, he agreed not to solicit the employer’s customers in North or South Carolina for two years after leaving employment.

After being terminated, the plaintiff filed a lawsuit seeking to declare the non-compete invalid.  Among other things, he alleged that the $500 consideration paid lacked legal significance and materiality.  The Court of Appeals rejected this argument, refusing to delve into the issue of adequacy of consideration.  The court cited established contract law outside of the non-compete context to declare that the slightest consideration can support a non-compete, if the agreement was entered into of the employee’s free will.

Based on this reasoning, even negligible consideration could support a valid non-compete.  Employers should read this decision with caution.  First, plaintiffs can be expected to react to this case by alleging that they felt coerced to sign the non-compete, because failure to do so would threaten their jobs or job status.  An employee could point to the lack of valuable consideration to argue that fear of job loss was the actual motivation for signing the non-compete.

Second, the non-compete used in Hejl was less restrictive than one that would prohibit the employee from working in the industry.  It allowed him to accept any employment, as long as he did not solicit the former employer’s customers in the listed territory.  Judges reviewing non-competes have a high degree of discretion in determining their reasonableness.  In a situation where the judge believes that the agreement is unfair due to skimpy consideration, he or she could invalidate the agreement by declaring that its length, geographic scope, or business restrictions are too broad.

The best way for employers to obtain valid, enforceable non-compete agreements is to put them into effect upon the commencement of employment.  In addition to remaining legal concerns over the adequacy of consideration, the employer’s offer must be enough to entice the existing employee to sign the agreement without appearing to be coercive.