The Status of Non-Compete Clauses in North Carolina

March 1, 2024

You better not try to stand in my way
As I’m a-walking out the door.
Take this job and shove it, I ain’t a-workin’ here no more.

—David Allen Coe, 1977

A company hires a woman to be their sales representative for Western North Carolina.  She is new to the industry, but the employer trains her, sends her to industry trade shows, and introduces her to major customers in her territory.  A few years later, a competitor company comes along and dangles a much better pay and benefit package to the sales rep, and having become disenchanted at her current job, she readily takes the deal.

The owner of the original company, relying on a non-compete agreement that the sales rep signed as a condition of being hired, brings suit. What result?

The answer is the same as attorneys frequently give:  It depends.  A 2023 decision by the North Carolina Business Court, which applied the state’s standards for enforcement of non-compete clauses, provides a good lesson on not going too far in trying to protect a company’s business.

As a preliminary matter, one should know that North Carolina will enforce non-competes if the language meets the following tests:

It is in writing;
It is made part of a contract of employment;
It is based on valuable consideration (such as the initial hiring or a subsequent bonus);
It is reasonable as to time period, territory, and scope (i.e., the specific work that is restricted); and
It is not against public policy.

In determining whether the non-compete agreement is reasonable, a court will balance the factors: One might be close to overbroad, but if the other factors are narrow, it might pass muster. Nevertheless, there are some clear parameters. For instance, a non-compete agreement limiting your employment for six years over all 50 states is very likely going to be viewed as overly broad, but a prohibition for, say, one year in a location within 10 miles of where the former employee worked may be approved—depending on the scope of the prohibition.

In terms of public policy, examples include a restriction against the only cardiologist or Spanish-speaking family doctor within the territory, or a restriction that prevents the former employee from working literally anywhere, could fail under this prong.

In April of last year, in Prometheus Group Enterprises, LLC v. Gibson, the North Carolina Business Court considered a non-compete imposed on a “data management consultant” at Prometheus, which develops asset management software.  In an opinion by Judge Julie Earp, the court invalidated a non-compete that stated as follows:

I will not directly or indirectly engage in (whether as an employee, consultant, proprietor, partner, director or otherwise), or have any ownership interest in, or participate in the financing, operation, management or control of, any person, firm, corporation or business that engages in a Restricted Business in a Restricted Territory.

The court focused on three components of the clause:

“Directly or indirectly.”  The court first noted that opinions from the state Court of Appeals and the Business Court have “routinely refused” to enforce covenants with such language because it is “unreasonably broad,” and that  “North Carolina courts have repeatedly warned the drafters of restrictive covenants about the dangers of using the phrase ‘directly or indirectly’ when defining the scope of a non-compete.”

Why this result?  It’s what’s known as the “janitor” rule:  Courts evaluate the language based not on what the former employee is actually doing in the new workplace, but what, at the time the agreement was written, was possible, and “indirectly” competing would prevent the former employee from working as a night-time custodian at the competitor.

“Restricted Business.”  The non-compete agreement defined “Restricted Business”  as “any business related to the creation, development, distribution or servicing of enterprise application software designed to improve enterprise asset management capabilities and related operations, or conducting research or development with regard thereto[.]” (Emphasis added). The court found this language fatally overly broad, stating that it would “prohibit [the Defendant] from taking a wholly unrelated position with a company that produces and services IT products if one of its products falls within the definition of Restricted Business.”  Consequently, “even working as a line cook in the cafeteria at IBM, Oracle, or SAP would be forbidden.” For that matter, the “related to phrasing” could prohibit being, say, a vendor of office furniture to the business.

“Restricted Territory.”  In the definition of “Restricted Territory,” Prometheus had used a “step-down” provision, a clause with alternative geographies.  Such provisions are often inserted because North Carolina courts, contrary to those in many states, are not permitted to narrow or modify unreasonable clauses: but may strike “distinctly separable” phrases and enforce the remainder.  For instance, the agreement might restrict competition “anywhere in North Carolina, but if a court holds such territory unreasonable, then only in Guilford County.”  In Prometheus, multiple territories were listed—“the entire world,” the United States, a subset of states, North Carolina, and, finally, Wake County.”  Importantly the itemized areas erroneously were listed in the conjunctive-using “and” versus “or” between each option, which the court said made them inseparable (North Carolina and Wake County being different than North Carolina or Wake County).

The Prometheus decision is a lesson in not reaching too far to protect a company’s legitimate business interest. While there are many more nuances to consider in evaluating non-compete enforceability, it is clear that it’s better to be safe and narrow in wording non-competes.  Otherwise, a business’s form prohibitions could all prove worthless.

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