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Non-Compete Agreements: Do Not Overreach

As a business lawyer, I’m often asked about non-compete covenants or agreements. If you are selling a business, or if you provide specialized training, trade secrets, client lists, or other confidential information to employees, you have a need to protect your investment. Businesses often use covenants not to compete to help provide this protection.

Courts historically looked at covenants not to compete with some disfavor because they limit a person’s ability and right to work, and they restrict free enterprise. As a result, courts scrutinize covenants to ensure they serve a legitimate business need. However, a covenant may still have an effect, regardless of whether a court would enforce it. The covenant makes the employee or seller think twice about trying to compete, and it makes a prospective employer think twice about hiring a restricted employee. It also makes it harder for a valued employee to leave.

If you are an employee signing a non-compete agreement, there are factors to consider. If you agree to a restriction on work you can do in the future, or for whom you can work, know that you are limiting your future choices.

In addition to requiring a legitimate business interest, non-compete covenants are judged for their reasonableness, both in the length of time and in the geographic scope of the restriction. For example, if an employer does business only in Mecklenburg County, but tries to restrict an employee from later competing anywhere in North Carolina, that provision may be ruled as “overly broad.”

In some states, if a court finds a restriction to be too broad, the court shall rewrite the restriction. Such “savings provisions” usually do not work in North Carolina. As recently as March 18, 2016, the North Carolina Supreme Court ruled that a judge in Iredell County correctly refused to rewrite an overly broad covenant not to compete. In Beverage Systems of the Carolinas, LLC v. Associated Beverage Repair, LLC, ___ S.E.2d ___ [2016 N.C. LEXIS 177] (N.C. 2016), the Supreme Court ruled: [P]arties cannot contract to give a court power that it does not have. … We see nothing but mischief in allowing such a procedure. Accordingly, the parties’ agreement is unenforceable at law and cannot be saved.”

This ruling means that if you are trying to protect your interests by getting someone to agree to such restrictions, know that if you overreach, at least in North Carolina, you could end up with no protection at all.

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