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Don't Use Form Non-Compete with North Carolina Employees

    Client Alerts
  • August 17, 2016

Most states allow judges to “reform” provisions of employee non-competition agreements deemed overbroad. For example, if the court believes that a 100-mile territorial restriction is too broad, it can reduce the radius to 50 miles. However, a minority of states, including North Carolina and South Carolina follow a strict “blue pencil” rule. This means that courts may remove unreasonable provisions from an agreement, but cannot rewrite the agreement’s terms. This distinction can bite employers that use a “one size fits all” non-competition agreement with employees in multiple states.

Last month in RLM Communications, Inc. v. Tuschen, the Fourth Circuit Court of Appeals invalidated a non-competition agreement applying North Carolina law. The agreement contained standard language prohibiting “direct or indirect” competition, or participating in a business “similar to” that of the employer. The Fourth Circuit relied on North Carolina state court precedent to declare agreements with such broad and vague terms unenforceable. It noted that the agreement would prevent the employee from accepting any job with a competitor, even one completely unrelated to the work she performed for her former employer.

The Fourth Circuit also declined the employer’s request to reform or blue pencil the agreement. Removing the offending language would seem to alleviate the court’s concerns over the agreement, but the Fourth Circuit concluded that even without these broader provisions, the agreement never explained the specific competitive threat posed by the former employee. It refused to rewrite the agreement to provide such explanation.

Although cumbersome, employers with operations in the Carolinas should devise specific restrictive covenant agreements for use in each state. In addition, because these agreements are subject to judicial interpretation, they should be reviewed and replaced as the relevant appellate courts change their views with regard to permitted restrictions. Courts in both states are making non-competes increasingly difficult to enforce. However, with a little advance planning, employers with a presence in the Carolinas can increase their chances of producing valid post-employment restrictions.