Is My Non-Compete Agreement Enforceable?

By Associate Attorney Danielle Nodar

May is Small Business Month in Charlotte! As a small business, safeguarding the confidential information that makes you stand out from the competition is important to the long-term success of the business. Non-compete agreements are common tools used by businesses to help protect this kind of confidential and proprietary business information and allow for business to hire talented employees without worrying that the employee will take your idea and implement it elsewhere. These agreements generally restrict an employee from working for a competitor until a certain period passes and protect confidential information from being used by an ex-employee. However, with companies transitioning to a remote working environment and widespread unemployment, more businesses and lawmakers are re-evaluating the scope and legality of non-compete provisions.

Non-compete agreements are controlled by state law, meaning that each state has unique provisions for what is permissible in these agreements. In North Carolina, a non-compete agreement must meet the following requirements:

• In writing, signed by the employee agreeing not to do business.
• Made for valuable consideration. This means that the employee agreeing not to compete must get something of value for their end of the agreement. For new employees, the employment itself is the valuable consideration, and a promotion or bonus is consideration for existing employees.
• Must be made to protect a company’s legitimate business interest. These agreements cannot just restrict the employee’s ability to work elsewhere, but protecting confidential business information that you would not want to fall into a competitor’s hands, such as secret recipes or formulas, processes for production, or client information, have all been upheld as legitimate business interests.
• Must be reasonable in terms of time, territory, and the scope of activity being limited.

This last factor is oftentimes where a non-compete is deemed overly broad and overly restrictive of a former employee’s ability to find comparable work elsewhere. A court considers all these factors together when interpreting a non-compete provision and looks at the employee’s position along with the skills and knowledge obtained on the job in order to ensure that the company’s restriction is not wider than necessary to protect its legitimate business interest. Oftentimes, higher level employees with more access to trade secrets or confidential business information are more likely to be subject to a non-compete, so long as it is reasonable in time and geographic scope. If a court finds that a particular provision of a non-compete agreement is unreasonable, the court will strike that portion from the contract but enforce the rest.

With the changes in the employment landscape in the last year, there has been a growing movement to limit or even abolish the use of non-compete agreements. As more workers are forced to find new jobs, have moved to remote working environments, or move to a state outside of their employer’s home base, the question of how and when to enforce non-competes has been more present with business owners and lawmakers. As non-competes are governed by state law, it also makes it difficult for employers with employees residing in multiple states to be able to maintain enforceable agreements without careful planning. For example, some states have limited noncompete agreements to apply only to employees making over $100,000 a year, or to be valid only when a business interest is being sold.

There is also a push for the federal government to step in and put some overarching limitations on non-compete agreements that limit these agreements in cases where a narrow group of defined trade secrets are trying to be protected by a business. While it is too soon to tell if federal laws impacting non-compete provisions are on the horizon, it is important for employers to be mindful of the importance of crafting a narrowly tailored non-compete provision that works to protect their business while still allowing for fair treatment of former employees. Exploring other legal options that could be used to protect confidential business information is also crucial. If you have questions about how to best protect your business’ proprietary and confidential information, please call Jesson & Rains!