Non-Compete Clauses – A Bully’s Approach to Building a Business

I am not an employment lawyer. In law school, I took a class on employment and contract law and know the basics of non-compete agreements. If you want a detailed reason why non-compete agreements are hard to enforce, talk to a lawyer about your particular non-compete agreement and why it may or may not be enforceable.

But I encountered a particularly obnoxious example of a non-compete agreement in my personal life and wanted to share with you some thoughts about it. This agreement was directed at a friend of mine who was employed for about a year as an hourly employee earning what I would consider less than poverty wages in a skilled field. When he quit the job, his ex-boss, a bumptious and obnoxious guy (my words, not my friend’s) has hinted that my friend must honor a non-compete agreement.

I’m not sure who wrote this non-compete agreement. It’s pathetically drafted, and looks to be pulled together from various bits of text on the internet after a few beers and assembled as a legitimate “contract.” A word to the wise: if you want to build a business and draft enforceable agreements, pay for a good lawyer. Doing so on your own just opens you up to ridicule and a possible countersuit if you try to enforce these poorly worded agreements in a lawsuit.

In general, North Carolina disfavors non-compete agreements as being against public policy. This means the former employer trying to enforce a non-compete agreement against a former employee is, likely, going to have a difficult time.

Nonetheless, non-compete agreements (NCA) continue to be popular, especially poorly drafted NCA’s written by small business owners who seek not to build their business through good will and good service, but by bullying behavior toward employees and former employees.

They may do this because they have no particular comparative advantage in the market or because it’s a tight margin industry. They may seek to build some sort of advantage through extra-market approaches, like resorting to law suits and NCAs. Who knows why they do the things they do! My job is not to wonder what goes through the mind of a man who seeks to enforce an NCA against a former employee who you paid only a little more than minimum wage. My job is also not to wonder what Judge or Jury in its right mind would enforce an agreement!

(Note well: these agreements are generally litigated in Superior Court, not District Court in North Carolina, and so the employer will have a much tougher time of it, especially if there are counterclaims.)

As noted above, NCAs are difficult to enforce and in North Carolina, will not always blue pencilled. If a court finds the NCA to be over-broad or too restrictive, the court will likely toss the whole agreement out, rendering the whole thing unenforceable.

As I said, the particular NCA in question essentially prohibits my friend from working in his chosen field within a significant distance of the business’ area. It even purports to prohibit my friend from working for free in his chosen field.

Because the lower level employees in this industry tend to be young and not legally sophisticated, or not financially well off enough (see above about how little they are paid even though they are skilled employees) to even hire a lawyer to write a letter telling the former employer to back off, an employer using such an NCA can seek an advantage by threatening legal action or posturing as if he’s seeking to sue, knowing that the mere threat will cause his former employees to cower.

NCAs tend to be enforceable if they focus on a narrow geographical territories, and are designed to protect the legitimate business interests of the original business. They are designed to protect established businesses from building up specific skills in a employee, and having that employee walk away and use those skills on behalf of a competitor. They are designed to also protect established businesses from having their client lists poached by an employee who leaves and departs for a different business, or to start his own business.

However, where the skills are general to the field – for instance, flight instruction in a flight school, knowledge of how to fix a car as an auto mechanic, knowledge of how to repair computers, or, indeed, medical or legal knowledge – then non-compete agreements are generally not enforceable because doing so would prevent the person from earning a living in his chosen field and would deprive the public of the competition necessary to create a vibrant marketplace.

“When considering the enforceability of a covenant not to compete, a court examines the reasonableness of its time and geographic restrictions, balancing the substantial right of the employee to work with that of the employer to protect its legitimate business interests.” Okuma Am. Corp. v. Bowers, 181 N.C. App. 85, 86, 638 S.E.2d 617, 618 (2007). The reasonableness of a non-competition covenant is a matter of law for the court to decide. Shute v. Heath, 131 N.C. 281, 282, 42 S.E. 704, 704 (1902). Such agreements are disfavored by the law. Howard v. Oakwood Homes Corp., 134 N.C. App. 116, 121-22, 516 S.E.2d 879, 883, disc. review denied, 350 N.C. 832, 539 S.E.2d 288 (1999), cert. denied, 528 U.S. 1155, 145 L. Ed. 2d 1072 (2000).

To be enforceable under North Carolina law, a non-competition agreement must be: (1) in writing; (2) part of an employment contract; (3) based on valuable consideration; (4) reasonable as to time and territory; and (5) designed to protect a legitimate business interest. See Farr Assocs. v. Baskin, 138 N.C. App. 276, 279, 530 S.E.2d 878, 881 (2000). The party who seeks enforcement of the covenant has the burden of proving the reasonableness of the agreement. Hartman v. Odell and Assoc., Inc., 117 N.C. App. 307, 311, 450 S.E.2d 912, 916 (1994), disc. review denied, 339 N.C. 612, 454 S.E.2d 251 (1995).

To be valid, the restrictions “must be no wider in scope than is necessary to protect the business of the employer.” Manpower v. Hedgecock, 42 N.C. App. 515, 521, 257 S.E.2d 109, 114 (1979). In North Carolina, “[t]he protection of customer relations against misappropriation by a departing employee is well recognized as a legitimate interest of an employer.” United Laboratories, Inc. v. Kuykendall, 322 N.C. 643, 651, 370 S.E.2d 375, 381 (1988), disc. review granted in part, 330 N.C. 123, 409 S.E.2d 610 (1991), aff’d, 335 N.C. 183, 437 S.E.2d 374 (1993). Additionally, a covenant is reasonably necessary for the protection of a legitimate business interest “‘if the nature of the employment is such as will bring the employee in personal contact with patrons or customers of the employer, or enable him to acquire valuable information as to the nature and character of the business and the names and requirements of the patrons or customers[.]’” A.E.P. Industries v. McClure, 308 N.C. 393, 408, 302 S.E.2d 754, 763 (1983) (citations omitted)).

This Court has held that restrictions barring an employee from working in an identical position for a direct competitor are valid and enforceable. See Precision Walls, Inc. v. Servie, 152 N.C. App. 630, 638-39, 568 S.E.2d 267, 273 (2002) (finding a one-year, two-state restriction against employment with a direct competitor to be reasonable and within a legitimate business interest).

However, we have held that restrictive covenants are unenforceable where they prohibit the employee from engaging in future work that is distinct from the duties actually performed by the employee. See, e.g., Paper Co. v. McAllister, 253 N.C. 529, 534-35, 117 S.E.2d 431, 434 (1960) (finding a non-compete covenant overbroad and unenforceable where the employee’s employment duties were confined exclusively to the sale and distribution of fine paper products, yet the restrictive covenant contained in his employment agreement sought to prevent him from engaging in the manufacture or distribution of all paper or paper products); see also VisionAIR, Inc. v. James, 167 N.C. App. 504, 508-09, 606 S.E.2d 359, 362-63 (2004) (finding a two-year restriction against employment with “similar businesses” throughout the Southeast to be unreasonable).

Again, always seek the advice of a lawyer before taking action that might land you in court. I am not an employment lawyer. But I am a criminal defense lawyer. And I have encountered bullies before in my practice. While it may seem easier to avoid the bully and agree to his demands, in the long run standing up for what is right might be the better option.

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Damon Chetson

Damon Chetson is a Board Certified Specialist in State and Federal Criminal Law. He represents people charged with serious and minor offenses in Raleigh, Wake County, and the Eastern District of North Carolina. Call (919) 352-9411.