NC Case Law: Non-Compete Covenants

NC Case Law: Security National v Rice and Non-Compete Covenants: -or- Do I Have to Wait? (NC COA16-215, 11/15/2016)

The court here said, among other things, that it was not unreasonable for a Fayetteville full service salon to hold an employee-nail technician who later became a hairdresser and opened her own place to a two-year seven-mile non-compete agreement. While the case was primarily about the proper legal machinations of the courts (for the eggheads, specifically the propriety of summary judgment in the matter), our focus here is solely on the light the court sheds on the non-compete issue as between an employer and employee.

According to the court, to be enforceable a non-compete covenant must be a part of an otherwise valid contract and also requires five further conditions. It must be “(1) in writing; (2) made part of a contract of employment; (3) based on valuable consideration; (4) reasonable both as to time and territory; and (5) not against public policy.” “Not against public policy”, in this context, means that the non-compete must be designed to protect a legitimate business interest of the employer. Most of arguments concern the fourth and fifth requirements. The question on the ground is: how long—and how big an area?

Clients routinely ask us “how long it too long?” when crafting such a covenant, or when trying to determine to what extent they are bound by a covenant that they have already signed.

As to the time and territory requirement: NC does not regard them as independent factors, but considers them in tandem. So, a longer period of time might be acceptable if the geographic area is rather small, and a larger geographic area might be enforceable if the time-period is quite short. A five year limitation is the outer-boundary that NC courts have considered reasonable, but is probably too much in most settings. Going the other way, in Okuma Am. Corp v Bowers the court said a geographic area that it admitted was quite broad was not per se unreasonable given that the period was only six months. In general, and among other things, an employer must show where its customers are located and that the restriction is no more broad than necessary to protect those relationships. A non-compete covenant will rarely be enforced in NC if it reaches to an area where the employer does not actually do business.

The risk an employer runs in seeking to craft a restriction that is too broad is that the whole provision may be found unenforceable: under our famous “Blue Pencil Rule” a NC court will not rewrite or modify contract language to make it acceptable, but rather will simply refuse to enforce it (though it may enforce other provisions elsewhere in the same contract). As the NC Supreme Court recently observed in another case involving a covenant not to compete, the restriction will be enforced “as written or not at all.” Beverage System of the Carolinas v Associated Beverage et ux, filed March 18, 2016. In that case plaintiff-corporations were trying to enforce a non-compete that by its terms covered all of NC and SC, but there were large swaths of the Carolinas where the plaintiffs were not doing business.