*This information is taken from ‘Restrictive Covenants in Employment Agreements by Jonathan Wall, partner with Higgins Benjamin PLLC in Greensboro, NC. This information was given as a Continuing Legal Education Class (CLE) on February 3, 2016.
*This article is specific to North Carolina law.
Noncompete agreements or covenant not to compete prevent an employee or previous owner from leaving employment and competing with the former employer. Usually noncompete agreements restrict a future employee’s employment for a specific length of time in a particular region or territory.
Requirements in noncompete agreements:
- In writing;
- Reasonable as to time, scope, and territory;
- Made a part of the employment contract;
- Based on valuable consideration; and
- Designed to protect a legitimate business interest of the employer.
The time and territory requirement, as you can imagine, is especially litigious. Courts usually say that a 5-year limitation is the longest ‘reasonable’ length of time to restrict a former employee. A 1968 North Carolina court ruled that a more targeted, specific geographic territory supports a longer period of restriction while a broader, less specific geographic restriction is usually enforceable for a shorter duration. (Jewel Box Stores v. Morrow). And, that was before the Internet or ‘working remotely.’
A 6-factor test can sometimes be used by the courts to determine the reasonableness of a geographic location:
- The area, or scope, of the restriction;
- The area assigned to the employee;
- The area where the employee actually worked;
- The area in which the employer operated;
- The nature of the business involved; and
- The nature of the employee’s duty and knowledge of the employer’s business operation.
In the case of an independent contractor, the law is somewhat vague. Because each case is different and unique, independent contractor situations must be evaluated on an individual level.
Most times noncompete agreements contain choice of law provisions, where the agreement will be interpreted and what rules/laws of a particular state govern the agreement.
As more companies broaden their markets and expand internationally noncompete agreements could potentially contain very broad, unspecific geographic locations.
This list is in no way exhaustive of noncompete information. We just wrote some highlights of noncompete regulations and rules.