A noncompetition agreement (or noncompete) is an agreement between an employer and employee where the employee agrees not to engage in “competitive activity” for a defined term and geographic scope. These agreements can be a valuable tool for employers to help protect confidential information and ensure that high level and specialized employees do not immediately leave to work for a competitor after the employment relationship ends. However, many employers stumble when it comes to drafting enforceable noncompetes. This article will provide a big picture overview of North Carolina’s requirements regarding noncompetes and best practices for employers.
Basic Requirements
In order to have an enforceable noncompete, it must meet four basic requirements. The noncompete must be:
- In writing.
- Based on valuable consideration.
- Reasonable about time and territory.
- Designed to protect a legitimate business interest.
The first two requirements are usually readily apparent, so most of the litigation focuses on the reasonableness of the time and territory and whether the noncompete was designed to protect a legitimate business interest.
Blue Pencil
North Carolina courts use a limited blue pencil approach to overbroad noncompetes. This means that North Carolina courts may modify or blue pencil an unreasonable noncompete restriction by deleting severable parts of the agreement to make the restriction reasonable. Noncompete restrictions that are otherwise too broad are not rewritten or enforced.
For example, for the restricted territory, it is always best to list out the regions, states, or counties/cities the employee is restricted from working rather than a generalized or more broad approach. This is because a court in North Carolina can delete one or two locations while permitting others to govern the restrictions. This increases the likelihood of enforceability.
Practice Tips
Simply providing the employee “continued employment” is not enough to be valuable consideration for a noncompete. The start of a new employment relationship, however, is sufficient. If the agreement is not signed at the onset of employment, the employer must provide something tangible, such as a salary increase, new benefit, or one-time lump sum payment.
Do not try to have a one-size-fits-all noncompete. An employer’s noncompete to its chief engineering officer should not also be given to the employer’s director of marketing. The employer should look to where the employee will be working, with whom the employee will be working, and what legitimate business interest the employer is trying to protect.
When looking at the overall reasonableness of the noncompete, North Carolina courts consider time and territory together when determining whether a noncompete is reasonable so that a longer restricted duration is acceptable when the geographic scope of the restriction is small and vice versa. Generally speaking, courts consider six-month to three-year restrictions reasonable depending on the geographic restriction.
When there is a restriction on the type of activity, it is best to define that type of activity rather than simply “working for a competitor.” For example, if we are restricting our Director of Marketing from earlier, it is best to define “competitive activity” as performing marketing or related services. The restriction should only apply to work that is the same or similar to that performed by the employee.
Noncompetes drafted for use in other states may not meet North Carolina’s requirements for effective agreements.