Non-Compete Agreements In NC – A Major Shift?

Employers often ask their key employees to sign non-competition agreements, commonly referred to as non-compete agreements. Up until very recently, it seemed that North Carolina law was quite strict in refusing to enforce such agreements in an employer-employee context. Now, the North Carolina Court of Appeals has potentially decided to change the rules of the game to clearly benefit employers.

Now, the North Carolina Court of Appeals has potentially decided to change the rules of the game to clearly benefit employers.

A Valid Non-Compete Agreement must be:

1. in writing
2. reasonable as to time and territory
3. made a part of the employment contract
4. based on valuable consideration
5. designed to protect a legitimate business interest of the employer

North Carolina law provides that an employer has the right to protect its customer contacts and confidential business information, but this is tempered by the restriction of imposing an unreasonable hardship on the employee. Therefore, the restrictions on the employee cannot be broader than is necessary to protect the employer’s legitimate business interest.

Can North Carolina Courts Overrule a Non-Compete Agreement?

Often, an employee’s argument to invalidate a non-compete agreement centers around the fact that the restricted geographical zone is too broad or the time period is too long. Employers always ask, “Why can’t the court simply mark out the overbroad restriction and limit the enforceability to a reasonable geographical area or duration?” Life is not that simple in the world of non-compete agreements in North Carolina . . . or is it?

For many years, North Carolina has adopted what is known as the “strict blue pencil doctrine” which limits the authority of a court to take out its “pencil” and re-write the over-broad provisions of a non-compete agreement. Instead, an over-broad non-compete agreement is generally struck down in its entirety. A court, at most, may choose not to enforce a distinctly separable part of a non-compete agreement in order to render the overall agreement reasonable. However, a court may not otherwise revise or rewrite the non-compete agreement.

The “blue pencil doctrine” has always benefited the employee. Thus, employers are always looking for a way around it. They may have found it . . . .

Will an Agreements Language Change the Court Ruling?

The rules of the game may have changed completely. In August, 2014, the North Carolina Court of Appeals was faced with a case of first impression. The issue the Court of Appeals faced is whether a judge has the power to re-write an over-broad non-compete agreement if the agreement gives the court the authority to do so. For example, if a non-compete agreement states that an employee cannot work anywhere along the east coast . . . can a judge re-write the non-compete agreement to say that the restriction is limited to North Carolina?

This was not possible under the “strict blue pencil doctrine”. However, the Court of Appeals has now ruled that the parties to a non-compete agreement can include language in the non-compete agreement that allows a judge to re-write overly broad provisions. As such, an over-broad non-compete agreement will not be ruled invalid; it will simply be re-written by the judge in a manner to make it valid.

This is potentially a major change in North Carolina law. Over time, every employer will learn to include such language in their non-compete agreements. This could be the effective end of the “blue pencil doctrine”. The North Carolina Court of Appeals has stated that the “blue pencil doctrine” is still valid law, but the parties can get around it completely by expressly including language allowing a judge to re-write an over-broad non-compete agreement.

How does the Shift Affect Employees?

What does this mean for the employee . . . well, the days of having non-compete agreements thrown out in court for being over-broad may be coming to an end. This seems like a complete win for employers. It should be noted that the August, 2014, decision of the North Carolina Court of Appeals dealt with a scenario where the non-compete agreement was signed in connection with the sale of a business.

The North Carolina Court of Appeals has not expressly ruled that employers can now have non-compete agreements re-written to the detriment of employees. However, the North Carolina Court of Appeals has clearly shown its hand, and the natural progression is for this recent ruling to apply to all types of non-compete agreements.

There is one other glimmer of hope from an employee perspective . . . the recent decision of the North Carolina Court of Appeals was not a unanimous decision by all of the appellate judges. As such, the parties have the right to ask that the North Carolina Supreme Court overturn this decision. It will be important to see if the decision is appealed to the North Carolina Supreme Court and the result thereof.

Contact an Experienced Raleigh Lawyer to Review Your Non-Compete Agreement

If we can help your company in drafting your non-compete agreements or, as an employee, in reviewing your existing non-compete agreement, then please do not hesitate to contact our Raleigh law firm by calling (919) 615-2473 or by filling out the contact form below.

It pays to have counsel who has both successfully drafted non-compete agreements for employers but who has also successfully advised employees as to the enforceability of their non-compete agreements.