What Are Non-Compete Agreements?
Danielle Mozingo, Author
Last month, Amazon made headlines by bringing a suit against a former Amazon marketing executive for taking a job at Google a month after his employment with Amazon ended. This suit, centered around the non-compete agreement signed by the former employee, has sparked controversy over balancing employer and employee interests. While a large corporation and a high-level executive are at issue in this case, non-compete agreements are entered into by employees of all ranks and businesses of all sizes. Non-compete agreements have become more widespread in the past ten years as business transactions became increasingly virtual and global, causing employers to become more concerned about competition. But just as economic makeup varies from state to state, laws on non-compete agreements also vary.
What is a Non-Compete Agreement?
A non-compete agreement prevents a former employee from competing against a former employer. This type of agreement generally contains a restriction from working in the former employer’s industry in a specific location for a specified amount of time. In North Carolina, an enforceable non-compete agreement is: (1) in writing; (2) reasonable; (3) part of the employment contract; (4) based on valuable consideration; and (5) not against public policy.
When is a Non-Compete Agreement Enforceable?
In general, courts do not like to enforce non-compete agreements because they are viewed as overly restrictive. The enforceability of a non-compete agreement depends on whether the agreement restricts only what is necessary to protect the employer. Courts will only enforce a non-compete agreement if it is "reasonable," which the party seeking enforcement of the agreement, usually the employer, has the burden of proving.
In determining whether or not the agreement is reasonable, the court will consider together the amount of time and the territory covered in the agreement. Non-compete clauses that restrict practicing in general geographic locations, specific towns, or specific counties are usually enforced so long as the area strongly relates to the business interest. The employer must show that restricting the location protects the employer's legitimate interests in maintaining its current customers. The court will also consider the employee's previous employment position and the skills and knowledge he obtained during his employment. For example, a primary care that restricts a doctor from practicing in the same county is more likely to be enforced where the doctor worked for the employer for twenty years and there are only two primary care practices in the county.
How Do Non-Solicitation Agreements Compare?
A non-solicitation agreement is a form of non-compete that only restricts an employee from soliciting the former employer’s clients. The employee is allowed to immediately start work in the same industry and in the same geographic area, making it less restrictive than a non-compete. Because they are less restrictive, non-solicitation agreements are generally considered reasonable and are more likely to be enforced.
While non-compete clauses typically restrict the working in a specific location, courts will enforce a non-solicitation agreement even if the agreement does not mention the location of the clients. However, these agreements must be explicit about the types of clients that may not be solicited. Non-solicitation clauses can only prohibit the employee from soliciting clients which employee had contact with while employed. An agreement that prevents an employee from contacting any of the employer's clients will not be enforced. Courts will determine the reasonableness of a non-solicitation agreement by considering many of the same factors used to determine the reasonableness of non-compete agreements.
What Should Employers Know When Drafting Non-Compete Agreements?
Non-compete agreements should be practical and narrowly tailored to meet your company's most important concerns. Avoid broad, all-inclusive non-compete agreements that all employees are required to sign. Consider focusing only on the specific activities your company needs to prevent and the employees who you would likely enforce the agreement against. The court may consider an employer's prior failure to enforce the non-compete agreement as an indication that the agreement is not necessary to protect the employer.
It is also important to make this agreement clear and detailed to ensure the court reads the terms as they were intended. The agreement should explicitly state the terms, including but not limited to, when the restriction will become effective, the length and location of the restriction, and whether a specific fee will be imposed for violating the agreement.
Courts in North Carolina can exercise the "blue-pencil" rule, which allows the court to strike out part of a contract if it is distinctly separate from other parts. If the non-compete agreement is not overly broad, the court may choose to apply this rule to make the non-compete agreement reasonable. However, it's important to remember that there is no guarantee the court will do this. Even if the court does choose to strike portions of the contract, the court will not revise or rewrite the contract, so it is important that the non-compete agreement is drafted carefully to ensure all its terms are enforced.
We Can Help
If you are a party to a contract with a non-compete or non-solicitation agreement, contact our office to discuss the agreement in your specific situation. We are for you. An analysis of your agreement can help you assess the legal implications of the agreement and determine the best course of action moving forward.
About the Author
Danielle Mozingo is a law clerk at Smith Dominguez, PLLC and a second-year law student at Campbell University Normal Adrian Wiggins School of Law. During her time at Campbell, Danielle has been involved in a variety of pro-bono projects including the Campbell Law Innocence Project, the Domestic Violence Advocacy Project and the Reentry Project. Danielle has also served as a court advocate for the Safe on Seven Domestic Violence Center in Winston Salem, NC.