An Overbroad Non-Compete Agreement May Protect Nothing

North Carolina, like many other states, does not like non-compete agreements. Companies that rely on non-compete agreements to protect their trade secrets and proprietary information must draft agreements that are enforceable. If one non-compete agreement is successfully challenged by an ex-employee, all of the non-competes are likewise unenforceable.

Most successful non-competes are directed at high-level employees (and not delivery drivers of a fast-food restaurant) and restrict the employee from taking a similar job with a competitor. The point is to protect legitimate proprietary information of the employer and not to unnecessarily keep an ex-employee from working.

Agreements in restraint of trade, including some non-compete agreements, are unenforceable as unfair trade practices in North Carolina. Our courts do not like to restrict people from working, but will allow these agreements on a case-by-case basis. Courts understand that employers have a legitimate need to protect their investments in training employees, trade secrets and proprietary information. Often, relationships with customers are a company asset and should not belong to the employee.

But these agreements need to be drafted very carefully so that they have proper consideration, are limited in time, limited in geographical scope and are limited to protecting a legitimate company interest.

A covenant not to compete is like any other contract — there has to be valid consideration for it to be enforceable. Usually the consideration is giving a new employee employment or giving a cash bonus to an existing employee in exchange for the employee agreeing to restrict his activities after employment ends.

In North Carolina, it is not valid consideration to be able to keep your existing job (“continued employment”) in exchange for signing a non-compete. The employee is agreeing to new conditions, but is not receiving anything in return.

In Amerigas Propane, LP v. Coffey, Amerigas acquired the company Coffey worked for, via a stock purchase. After the acquisition, Amerigas made the newly acquired employees sign a “Confidentiality and Post-Employment Agreement.” There was no additional consideration offered to these employees for giving up their ability to compete.

The Amerigas agreement was found unenforceable by the North Carolina Business Court because acquiring the stock or membership interests of a company does not terminate the employment of existing employees — these employment arrangements were acquired just like any other asset of the acquired company. If, however, the assets of a company are acquired (rather than the stock or membership interests), the original employment is terminated and a new non-compete will have valid consideration based on the new employment by the new owner of the assets.

North Carolina courts will also carefully scrutinize how an agreement defines competition.

In CopyPro, Inc. v Musgrove, Musgrove was a sales representative for sale and leasing of office equipment in Pender and Onslow Counties. He had a non-compete that prohibited his working for a competitor of CopyPro for three years in several eastern NC counties, including Pender and Onslow. He went to work for a competitor in a county listed in the non-compete agreement with CopyPro, but did not contact any of his former customers. He was sued for violation of the non-compete.

The North Carolina Court of Appeals concluded the covenant not to compete was unenforceable because it prohibited Musgrove from working for the competitor “in any capacity, including as a custodian.” The court found this noncompete provision was broader than it needed to be to protect the legitimate activities of the employer.

It is interesting to note that the Court of Appeals began its evaluation of what actions were considered competition; it didn’t start with analysis of the time and geographical limitations. In this particular case, the time and geographical restrictions also may have been too broad, but the Court found the contract unenforceable based solely on the public policy of defining competition as narrowly as possible while still protecting the legitimate interests of the Company.

It is more important than ever that your company’s non-compete agreements are narrowly tailored so they can protect your legitimate interests without unduly restricting your employees from continuing to work after they leave your company.