What Is a Non-Compete Agreement?

Non-compete agreements, commonly referred to as non-competes, are contracts between an employer and an employee in which the employee agrees, either during or after his or her employment with that employer, not to use or disclose the employer’s trade secrets or other confidential information, or not to compete with the employer’s business. In other words, non-competes protect business’s intangible assets by restricting competition from former employees. With the right restrictions, a non-compete generally ensures that an employee can’t go directly from his or her employer to a competitor of that employer without some sort of punishment.
While non-competes are used in many industries, employers in highly competitive fields like technology, financial services, manufacturing, and specialized professional services rely on them heavily. Non-competes are popular with employers because they give business owners peace of mind that former employees can’t easily leave, take business contacts with them, and immediately compete with the employer . Even if the non-compete isn’t enforceable, they serve their purpose as an effective deterrent against employees who plan to leave and compete.
North Carolina law broadly authorizes the use of non-competes in most industries. The only limitation is that the restrictions imposed on an employee must be reasonable under the particular circumstances that surround the employee’s role in the company, his or her knowledge, the interests of the employer, the employer’s industry, and the geographic area in which the employee’s competition may take place. Overly restrictive non-competes may not be enforceable, however. For example, a non-compete with extreme time, distance, or scope-of-business restrictions may not be enforceable under North Carolina law. The reason for this is that a non-compete is a restraint on trade that must be necessary for the protection of the employer—not the public or employee—and not overly broad in time, scope, or geography. If a non-compete is unduly restrictive, there are many instances in which a court may refuse to enforce it in its entirety or strike out the overreaching restrictions altogether.

Requirements for Valid Non-Compete Agreements

Non-compete agreements must be carefully tailored to fit within the specific requirements outlined under North Carolina law. These agreements are generally enforceable in North Carolina, provided that they follow a set of legal parameters.
Essentially, there are a total of four legal requirements that any non-compete agreement must follow in order to be considered enforceable in North Carolina. In order for such an agreement to be legal, it must be:
As is evident by the above requirements, the scope of restriction placed on the employee cannot be overly harsh or constraining, as courts will be unlikely to enforce them in such cases. Ideally, the restrictions placed as part of the non-compete agreement should cause the least hardship for the employee, while still providing adequate protection for the employer against unfair competition from its onetime worker.
The duration of time that the agreement will remain in effect must be reasonable. For example, the court would likely have an issue with a non-compete agreement that lasted for two years, but that was limited to locations only five miles from where the employee worked. Alternatively, if the party to the agreement were a highly-skilled professional who may be reasonably expected to work for competitors across the country, then a non-compete agreement that would keep him or her confined to one state for up to three years might be considered reasonable.
The geographic scope of the agreement must similarly be reasonable. Restricting an employee’s ability to enter into the same field of work for a company less than ten miles away from his or her previous place of employment would likely be considered unjust. Most likely, a scope of 10 to 20 miles would be considered reasonable by the court.

How Are Non-Compete Agreements Enforced?

One of the most significant ways in which a non-compete agreement can be found to be unenforceable is if it is subject to "blue pencil" on its own, i.e., if one or more of the terms cannot be modified as a matter of law.
Otherwise, courts are prepared to enforce the agreement, even if not as written, by "blue-penciling" the offending term(s). For instance, in Hughes v. Advanced Cardiovascular, S.P.A., 2018 WL 7252651, at *6 (M.D.N.C. Dec. 26, 2018), the parties’ agreement restricted the employee’s ability to compete for five years after his cessation of employment. The court found that such a long period was facially unreasonable. But it did not find the entire agreement unenforceable, as it could merely "elide" the offending term to render it facially reasonable, and blue-pencil the otherwise enforceable portion of the agreement. Id. Accordingly, the period of non-competition was reduced from five to two years.
The North Carolina Court of Appeals, in Russell v. The Commissioners’ Alliance, 227 N.C.App. 428, 441 (2013), approved the so-called "blue pencil doctrine," but noted that "[t]he more general view is that the blue pencil rule is applicable ‘only when the contract provision to be modified constitutes a severable part of the whole agreement, so that the contract stands intact except for the excised language.’" Although the Supreme Court of North Carolina has explained that blue-penciling should be liberally applied (see Beverage Systems of the Carolinas, LLC v. Associated Beverage Supervisors, Inc., 2016 WL 7324189, at *8 (E.D.N.C. Dec. 16, 2016), aff’d, No. 16-2163, 2017 WL 109196 (4th Cir. Jan. 12, 2017)), blue-penciling in North Carolina is not mandatory. See Beverage Systems, 2016 WL 7324189, at *6 (noting that "blue pencil" modification is "a matter largely within the Court’s discretion.") (quoting Beverage Sys. of the Carolinas LLC v. Associated Beverage Supervisors, 2016 WL 7324189 (E.D.N.C. Dec. 16, 2016)); see also Bernhardt v. Gaydos, 219 N.C.App. 737, 740 (2012) (upholding trial court’s refusal to blue-pencil invalid provision).
The North Carolina Supreme Court has only applied the "blue pencil rule" twice, and only in dicta. In Greene v. Keene, 195 N.C. 33, 36 (1929), involving a contract for sale of stock, the court stated that, "if the time or other restrictions are too broad and unreasonable, the court may separate them, one from the other, and retain only those showing reasonableness and validity." Twenty-two years later, in Moore v. McDaniel, 241 N.C. 338, 341 (1955), the court echoed Keene: "If the restraint is so broad as to preclude its enforcement in part, the court may separate the valid portion from the offensive restrictions."
With respect to employee non-compete agreements, courts have found blue-penciling to require an initial determination of "what is the clause or clauses that must go." See Beverage Systems, 2016 WL 7324189, at *8.

Common Challenges to Non-Compete Agreements

Common Challenges Against Non-Compete Agreements in North Carolina
Both senior and mid-level employees challenging non-compete agreements have advanced a number of legal theories for invalidating employment agreements. A common legal argument is that the non-compete agreement imposes an undue hardship on the employee in light of his or her limited ability to earn a living in light of his or her professional experience or because it limits the odds that the employee will find work in his or her profession given the limited geographic area of the agreement.
In order to rebut a claim of undue hardship, the courts may consider any of the following: A common legal argument for invalidating an employment agreement is that consideration for a non-compete agreement is either nonexistent or inadequate given the employee’s length of service, with six months being the benchmark for modifying or creating a new employment agreement. In addition to whether the non-compete agreement is supported by consideration, one issue that arises in litigating non-competes is whether the employer placed adequate notice of the non-compete agreement in the employee handbook. If an employee handbook is provided to all employees, then the employer must use language that is reasonably calculated to put an employee on notice of any restrictions contained in a non-compete agreement. If the documented notice is deemed adequate, the employer may be entitled to recover damages by showing that the employee was aware of the restrictions even if the employee testimony at trial was to the contrary.

Recent Trends and Examples of NC Non-Compete Cases

The non-compete laws in North Carolina have seen recent changes both legislatively and in the courts. North Carolina is unique because it is one of the few states that has an explicit statute regulating non-compete agreements. N.C.G.S. § 75-4 prohibits employers from constraining an employee’s freedom of movement under a non-compete agreement unless they can prove "the restraint is necessary to protect their business interest and it is reasonable with respect to time and place." Additionally, the Carolina League of Professional Baseball Clubs has retained a lobbyist to change law so that the statute no longer applies to teams when it comes to players. They argue that the restraints are "necessary to protect [their] business interest, and . . .are reasonable with respect to time and place." On November 30, 2017, the Fourth Circuit Court of Appeals upheld a North Carolina district court’s ruling that a non-compete agreement signed by an employee of the Pee Dee Crusaders baseball team did not violate the state’s antitrust laws. The Pee Dee Crusaders baseball team based out of Florence, South Carolina, was established as part of the Coastal Plain League in 2005 before transitioning into the Southern Collegiate Baseball League in 2014. Like collegiate summer leagues, collegian amateur baseball leagues operate under a non-profit model, employing college players for their summer teams to gain exposure to scouts for future professional baseball drafts. The Southern Collegiate Baseball League has been lauded for its model, given its admission policy allowing all players to participate on its teams regardless of skill and without fee. The case Farm Bureau Mut. Ins. Co. v . Sabo (citing Keresztury v. Sports Holdings, Inc.) stems from a former player suing the Pee Dee Crusaders for barring him from playing for another member of the league, with the plaintiff estimating he lost over $5,000 in salary as a result. The Philadelphia Phillies drafted the plaintiff from the University of Kentucky in the 36th round of the MLB Draft, where he played during the 2015 season. In January 2016, the plaintiff signed with the Cleveland Gladiators, a team in West Virginia, and was informed in a voicemail from the Pee Dee Crusaders’ owner that he could not play for the team, as the Cincinnati Steam were interested in the plaintiff as well. The plaintiff signed his contract with the Gladiators and showed up for spring training, but the owner then called the plaintiff and told him "there is nowhere we can put you" before telling the plaintiff to return to the Pee Dee Crusaders. After being forced to return to the Crusaders by his father, the plaintiff forwarded his contract to the parent organization of the Crusaders, but the contract was returned unsigned. Subsequently, the plaintiff was uninvited to spring training before signing with the Gladiators later in 2017, where he earned $4,400 on the season. In his complaint in the district court, the plaintiff alleged his case fell under the "nonstatutory labor exemption," which provides immunity from antitrust scrutiny for joint efforts by employees in which they agree not to compete with each other. However, despite the district court issuing a stay as appeals progressed, the plaintiff’s father continued to issue defamatory statements against the Crusaders and its owner. The case was dismissed in its entirety.

Advice for Employers and Employees

Employers should ensure their non-competition agreement is tailored to North Carolina law and their business needs. The agreement should set its parameters in the context of the business.
When drafting a non-competition agreement, start with the customer. Be specific about the scope of the customer non-competition covenant. Consider the current and prospective customer base so that the covenant is more likely to be enforceable in North Carolina. Non-competition covenants covering prospective customers are more likely to be found unenforceable absent a showing that the customer was mentioned on the employer’s customer lists.
An employer should also consider any time periods for the non-competition provision, including how long should the non-competition restriction prohibit competition with customers who no longer do business with the employer? Twelve months is the benchmark unless you can show the need for a longer restriction (perhaps at least 18 months); in which case consider whether the longer period is reasonable under the circumstances of your particular business. If the employer seeks enforcement of the non-competition covenant, be prepared to bear the burden of proof that the length of time is reasonable.
Employers seeking to unilaterally reduce the geographic scope of the non-competition covenant(s) should describe the end date in the agreement as a specific point in time or event that may be calculated or pointed to, e.g., "six months following the termination of the employment," or "the date the Owner opens a competing business," or "the date the Owner sells or otherwise conveys his or her interests in the Company."
Employers should also consider the scope of prohibited activities, including those activities that an employee may not engage in during the term of the non-competition covenant.
Employees asked to sign a non-competition covenant before or shortly after employment should be aware that they may sue if the employer waits until after the employee has signed and returned the employment contract or agreement before presenting him or her with an employment handbook and asking him or her to sign a non-competition covenant. An employer cannot treat its employees differently from customers. An employer may not impose more onerous entry requirements on its employees than it does on its customers.
An employee who is offered employment conditioned on signing a non-competition covenant should read the non-competition covenant carefully and consult with an attorney knowledgeable about the nuances of modification prior to signing it. Do not rely on the employer to tell you what rights you are giving up upon signing the agreement. You have the right to question whether the covenants will actually protect the employer’s legitimate business interests and whether the covenants may be poorly worded, unreasonable, overly broad in scope or otherwise unenforceable in North Carolina.
But know also that if you wait to negotiate a more favorable covenant or to sue and are unsuccessful, then you may be bound by the restrictive covenant.

The Future of North Carolina Non-Compete Law

In this article, we have explored the complex legal landscape surrounding non-compete agreements in North Carolina. From the enforceability of non-competes to the potential for litigation and legal remedies for breach of contract, we have covered the essential elements of non-compete agreements in this state. One of the intriguing aspects of the future of non-compete law in North Carolina is how the past may inform the future. As more companies employ non-compete and non-solicitation clauses , how much of that will be tested in court? Will North Carolina follow federal trends on non-competes? How will new laws potentially change the way courts handle non-compete issues? While no crystal ball can predict the future of North Carolina non-compete law, one thing remains certain: It will continue to be a dynamic area that lawyers and non-lawyers should keep a close eye on.