Are Noncompetition Agreements Enforceable?

Anyone who has ever had his or her best employee leave, become a fierce competitor,
and take away key customers, knows the importance of enforceable noncompetition
agreements. North Carolina, as well as many other states that follows principal of common
law¹, will enforce a properly drafted, tailored noncompetition agreement that is reasonably
limited as to time and territory. From a practical standpoint, most noncompetition
agreements are probably not enforceable or not completely enforceable for one or more
reasons. In many instances, what began as a legally enforceable noncompetition agreement
intended for a specific use became a form that was misused over time. In some instances,
the form simply was not updated over the years as the law pertaining to noncompetition
agreements evolved.
Elements – Under applicable law in North Carolina, a noncompetition agreement is
enforceable in equity if it is:

In writing,
Entered into at the time and as part of the contract of employment,
Based on a valuable consideration,
Reasonable both as to time and territory embraced in the restrictions,
Fair to the parties, and
Not against public policy.

See Forrest Paschal Mac. Co. v. Milholen, 27 N.C. App. 678, 220 S.E.2d 190 (1975); Brooks
Distrib. Co. v. Pugh, 91 N.C. App. 715, 373 S.E.2d 300 (1988), rev’d on other grounds, 324
N.C. 326, 378 S.E.2d 31 (1989); Hartman v. W. H. Odell & Associates. Inc., 450 S.E.2d 912
(N.C. App. 1994).
Must be Tailored – All too often the problem with the typical noncompetition is that
it was drafted for one purpose and used for another. A noncompetition agreement intended
to be used by an engineer or research scientist is often not proper for use by a salesperson or
project manager. All too often companies attempt to do a “one size fits all” variety of
noncompetition agreement/clause.

Primary Purpose: Protect Customer Base – The primary purpose of a
noncompetition should be to protect the employer’s customer base. Its primary purpose
should not be to stifle competition or to deny the employee the right to make a living in his
or her chosen profession. However, because the law in North Carolina and a number of
states evolved over many years, including horse and buggy days, there are requirements to
be enforceable that a noncompetition contract contain “time and territory” restrictions. This
is true even though an employer’s customer base may be spread all over the United States.
Noncompetition law in North Carolina does not adequately address the fact that “time and
territory restrictions” do not provide adequate protection to employers when valued
customers are nationwide or worldwide. For example, if a noncompetition prohibits an
employee from competing anywhere in the state of North Carolina, the employee can
sometimes simply move to another state, set up a competing business, and take all or most
of the customers of his former employer. If instead, the employer uses only a customer
restriction, that would violate the requirement to have a “reasonable time-and-territory”
restriction. As noted below, some courts have enforced a “customer only” restriction with
no stated territory.
“Time and Territory” – Under North Carolina law, to prove that a geographic
restriction in a covenant not to compete is reasonable, an employer must first show where its
customers are located and that the geographic scope of the covenant is necessary to maintain
those customer relationships.

Hartman v. W. H. O’Dell and Associates, Inc., 450 S.E.2d 912
(N.C. App. 1994). “A restriction as to territory is reasonable only to the extent it protects
interest of the employer in maintaining [its] customers.” (Emphasis added.) Hartman, supra,
quoting from the language in Manpower of Guilford County, Inc. v. The Hedgecock 42 N.C.
App. 515, 523, 257 S.E.2d 109, 115 (1979). (Emphasis added.) See also Carolina Pride
Carwash, Inc. v. Kendrick, 618 S.E.2d 875 (N.C.App. 2005).

As a general rule, when a covenant not to compete is overly broad, North Carolina courts will not save it by “blue penciling” the agreement to make it “reasonable.” Hartman, supra. There are some very limited exceptions. From the foregoing, it is important that an employer not simply adopt a “50-mile” or “200-mile” restriction, but make a concerted effort to determine where the
employer’s customers are actually located. Regarding “time,” courts often uphold one year
and often look hard at more than two years. However, a small territory can be paired with
a longer time, and a short time period can be paired with a larger territory.
North Carolina courts also appear to have recognized customer-based restrictions as
a substitute for territorial or geographic restriction. See Wade S. Dunbar Insurance Agency,
Inc. v. Barber, 147 N.C.App. 463 (N.C.App. 2001), 556 S.E.2d 331 (No. COA01-345) and
cases cited therein as well as Market America, Inc. v. Christman-Orth, 135 N.C. App. 143, 520 S.E.2d 570 (1999) and cases cited therein. The courts have enforced noncompetition
agreements that did not contain a geographic territory restriction but contained restrictions
on soliciting existing customers of the employer.
Noncompetition Agreements: Not Favored; Must Be Reasonable –
Noncompetition agreements are generally enforceable only in a) employer-employee
relationships, and b) buyer-seller relationships where a business is sold. The annotations to
N.C.G.S. Chapter 75 Monopolies, Trusts, etc., and specifically N.C.G.S. §75-1,
“Combinations in restraint of trade illegal” recite that agreements not to compete are not
favored in law. Quoting from cases construing the statutes: “An individual’s voluntary
contractual restraint on his right to carry on his trade or calling is prima facie illegal and must
be shown to be reasonable by the parties seeking to enforce it.” (Citations omitted.) In
Hartman v. W. H. Odell & Associates. Inc., 450 S.E.2d 912 (N.C. App. 1994), the Court
stated:
“Accordingly, to prove that a geographic restriction in a covenant not to compete is
reasonable, an employer must first show where its customers are located and that the
geographic scope of the covenant is necessary to maintain these customer
relationships.”
“A restriction as to territory is reasonable only to the extent it protects the legitimate
interests of the employer in maintaining [its] customers. Hartman, Page 917. “The
employer must show that the territory embraced by the covenant is no greater than
necessary to secure the protection of its business or goodwill… if the territory is too
broad, “the entire covenant fails since equity will neither enforce nor reform an
overreaching and unreasonable covenant.”
In the case of Manpower of Guilford County, Inc. v. Hedgecock, 42 N.C. App. 515,
257 S.E.2d 109 (1979) the Court stated: “Where the alleged primary concern is the
employee’s knowledge of the customers, if the territory should only be limited to areas in
which the employee made contacts during the period of his employment.”
Overly-Broad Restrictions – Employers should take care to avoid using unnecessarily broad language in restricting what an employee may do upon termination of the employee. Courts may refuse to enforce prohibitions such as a requirement that an employee refrain from “engaging in any conduct or business in competition with” the employer’s business rather than simply stating the employee will not engage in the employer’s business. Although the maker of a soft drink may have a legitimate interest in precluding a former key employee from working for a soft drink company, that is not justification for prohibiting the employee from working for all the companies that make products that satisfy the need of thirsty customers—water, orange juice, milk, and so forth. In like fashion, an employer should avoid broad restrictive language such as a prohibition against going to work for “any company that designs, manufactures, or distributes” in a situation where such a restriction is simply not necessary. For example, if that language were used in an effort to preclude a toolmaker from designing or manufacturing tools for another toolmaking company, there would be no good reason to deny the toolmaker the right to work as a sales clerk for Sears or Wal-Mart simply because those companies also “sell and distribute tools” as well as many other products.
In Electrical South, Inc. v. Lewis, 96 N.C.App. 160, 385 S.E.2d 352, (N.C.App.
1989), the Court refused to enforce a territorial restriction that reached beyond the employer
and also added that “the employee will not, directly or indirectly own… or be connected in
any manner with… any concern… which competes directly or indirectly with the company”
within the territory. The net effect would have prohibited the employee (or his family) from
working for a company anywhere in the world if that new employer also worked “in the
territory.” Thus even if the employee move thousands of miles from the former employer,
he could not work for a large company that competed in his former territory. The Court of
Appeals criticized the “shotgun” approach to drafting noncompetition provisions and refused
to enforce it at all.
“Covenant of Good Faith and Fair Dealing”—Jury Trial – “In every contract there
is an implied covenant of good faith and fair dealing that neither party will do anything which
injures the right of the other to receive the benefits of the agreement, and each party is
deemed to have agreed to act in good faith in performing the contract.” Bicycle Transit
Authority, Inc. v. Bell, 314 N.C. 219, 228, 333 S.E.2d 299, 305 (1985), North Carolina
Pattern Jury Instructions Civil 501.01. Contracts – Issue of Formation. If coupled with
questionable conduct on the part of an employer, this covenant could be fertile ground for
an employee to raise jury issues about the fundamental fairness of actions and inactions of
an employer who makes promises to an employee to induce the employee to sign a
noncompetition agreement and then unreasonably denies the employee the right to pursue his
or her chosen field of employment.
Independent Contractors – Many companies seek to impose noncompetition
requirements on “1099 employees” or, more accurately, independent contractors. It is
abundantly clear that the language quoted above under Elements, “at the time as part of the
contract of employment” envisions that there is in fact an employer-employee relationship.

Even more importantly, the entire concept of “independent contractor” envisions
“independence.” For example, a distributor who sells a number of lines acts independently
of any one manufacturer. Furthermore, an agreement by a distributor to sell only one
manufacturer’s product is often the very “restraint of trade” that Chapter 75 and anti-trust
laws generally are designed to prohibit. The North Carolina Court of Appeals has allowed
a six-month noncompetition agreement to be enforced. See Market America, Inc. v.
Christman-Orth, 135 N.C. App. 143, 520 S.E.2d 570 (1999). However, the Court of Appeals
in Market America, Inc. relied on an earlier decision, Starkings Court Reporting Services,
Inc. v. Collins, 67 N.C. App. 540, 313 S.E.2d 614 (1984), which actually refused to enforce
the particular noncompetition agreement as being an unreasonable restraint on competition.

Proprietary Information – Employers can also use clauses to protect customer lists,
pricing strategies, trade secrets, and much more. This includes marketing and sales
information as well as technical information. As courts will often protect proprietary data
when they will not enforce a noncompetition clause, employers should always have a
“Proprietary Information” clause in the employee’s contract when it is appropriate to do so.
Risks to and Rights of New Employers – Under established North Carolina case
law, interference with contract is justified if it is motivated by legitimate business purpose,
as when plaintiff and defendant are competitors. See Embree Const. Group v. Rafcor, Inc.,
30 NC 487 (411 S.E. 2nd 911 (1992) See also People’s SEC Life Ins. Co. v. Hooks, 322 NC
216, 367 S.E. 2nd 647 (1988), in which the Court recognized that a competitor is privileged
to hire away employees even in the face of noncompetition agreements. (See, to the contrary,
United Laboratories, Inc. vs. Kuykendall, 322 N.C. 643, 665, 370 S.E.2d 375, 389 (1988)).
Quoting the Court in Hooks:
“The motion under Rule 12(b)(6) should be granted when the complaint reveals that
the interference was justified or privileged… Numerous authorities have recognized
that competition in business constitutes justifiable interference in another’s business
relations and is not actionable so long as it is carried on in furtherance of one’s own
interest and by means that are lawful.”
Risks to Employer: Enforcing an Invalid Agreement – An employee improperly
denied a new job because of his or her prior employer’s attempt to enforce an invalid
noncompetition contract can sometimes sue the former employer for “tortious, intentional
interference with contract,” being the contract with the new employer. See American Marble
Corporation v. Crawford, 84 N. C. App. 86, 351 S.E.2d. 848 (C.A 1987). That decision is consistent with the view that a competitor is privileged to hire away employees even in the
face of noncompetition agreements. See the Peoples Security Life Insurance Co. v. Hooks
case sited above. According to the courts, the benefits of competition outweigh any claim
by the former employer to some “right” to hold onto customers forever. In American Marble
Company v. Crawford, the Court of Appeals reversed the trial court for granting summary
judgment against the employee’s claim for wrongful, malicious interference with contract
rights where the employee’s evidence tended to establish that a valid contract existed between
him and his new employer, the former employer had knowledge of the contract, the former
employer intentionally induced the new employer not to perform its employment contract
with the employee, the former employer’s acts caused the employee actual damages, and the
former employer acted without justification in that the former employer was seeking to
enforce a covenant not to compete that was legally invalid as an unreasonable restraint of
trade.
Stated otherwise, American Marble Company v. Crawford holds that an employer
who interferes with an employee’s new employment relationships in an attempt to enforce
a covenant not to compete does so at the employer’s peril. If in fact the covenant not to
compete is determined to be invalid, the employer may be liable to the employee for
wrongful or malicious interference with contract rights for its actions in attempting to enforce
a covenant not to compete that by law constitutes an “unreasonable restraint of trade.”
Evolving Law; Choice of Law – The law pertaining to noncompetition agreements
is not static but continues to change and evolve. In addition, a number of states have enacted
statutory noncompetition laws with “savings clauses” to avoid the all-or-nothing approach
of many courts. Equally important is the issue of choice of law, choice of forum and
conflicts of law and whether a state court will enforce a “home state” choice of law. An
excellent analysis appears in the November 3, 2011 Order entered in a North Carolina
Superior Court case, Azko Nobel Coatings, Inc. v. Rogers, 2011 NCBC 41 (The Order can be
viewed online at www.ncbusinesscourt.net/opinions/2011_NCBC_41.pdf). It is a good idea to
have an expert in the field review company noncompetition forms, clauses, and procedures
every few years, even if an experienced attorney approved the initial form used by the
employer.