Over the last decade, non-compete agreements (which are sometimes referred to as covenants not to compete) have become increasingly popular.
Employers who utilize non-compete agreements should review them regularly to ensure that they are enforceable. Even well-drafted agreements that were adequate at the time they were implemented may not be enforceable due to changes in law.
In North Carolina, non-compete agreements are disfavored and highly scrutinized. In general, for a covenant not to compete to be enforceable, it must be: (1) in writing; (2) made a part of the employment contract; (3) based on valuable consideration; (4) reasonable as to time and territory; and (5) designed to protect a legitimate business interest of the employer. Courts will not re-write any of the restrictions, even if the parties expressly authorize them to do so.
Therefore, it is imperative that non-compete agreements be carefully and thoughtfully prepared, and contain each of the required elements.
Here are just a few of the many potential pitfalls that employers may face:
Employers fail to provide consideration (i.e., something of value) for the non-compete agreement
In North Carolina, initial employment can serve as consideration for a non-compete. However, continued employment, without more, is not sufficient. Accordingly, employers must either require employees to sign non-compete agreements at the inception of employment or provide something else of value—for example, a one-time payment of $100, which the North Carolina Court of Appeals has held to be sufficient.
Agreements that contain “evergreen” provisions
Some employment agreements are for a set term (often one year) and automatically renew at the end of the term. A few years ago, the North Carolina Business Court, applying Kentucky law, ruled that an employer must provide consideration for the non-compete agreement at the time of each renewal.
The Business Court has not yet been asked to interpret a similar provision under North Carolina law but, because Kentucky’s requirements are similar to North Carolina’s, employers should consider eliminating evergreen provisions from their employment agreements.
The non-compete covenant is overly broad
Courts have found that non-compete agreements that bar an employee from working in an identical position for a direct competitor are enforceable in North Carolina. However, an employer may not prohibit a former employee from having any association with a business providing similar services, including performing wholly unrelated work. (For example, an employer may not prohibit a former executive from working as a custodian for any entity that provides similar services.) Such prohibitions are overbroad and unenforceable.
If you would like help preparing or reviewing non-compete agreements for your employees, please contact the GS attorney with whom you usually work, or you can reach out directly to Tyler Peacock or Jared Gardner.