11 Jun Is my non-compete agreement enforceable?
North Carolina’s only statutory provision directly addressing non-compete agreements requires that any contract limiting a person’s right to do business anywhere in the state must be in writing and signed.1 This statute, however, does not directly address when these types of agreements are a permissible restraint on trade. Like most other states, North Carolina courts have only been willing to enforce such agreements when they are “reasonable as to time and territory.”2 The reasonableness analysis involves a detailed consideration of the employee’s previous employment position along with the skills and knowledge he obtained in order to ensure that the restriction is not wider in scope than necessary to protect the business of the employer.3
Unlike many states, North Carolina will apply a form of the “blue-pencil” rule if the covenant not to compete is overly broad.4 This rule allows the court to strike out a distinctly separable part of the covenant in order to render the non-compete agreement reasonable.5 The court, though, may not otherwise revise or rewrite the covenant.6
In analyzing the time and territory restrictions it is important to remember that these two terms should not be considered independent of one another, but rather “each must be considered when determining the reasonableness of the other.”7 For example, in Market America, Inc. v. Christman-Orth, the court determined that the employment restriction at issue covered the entire United States.8 Despite this vast geographic territory, the court still found the covenant a reasonable restraint on trade.9 In the case of CNC/Access, Inc. v. Scruggs, however, the court found a covenant not to compete that only limited employment in the state of North Carolina an unreasonable restraint of trade.10 The seemingly inconsistent results of these two cases can be reconciled by the different time restrictions contained in each contract. In Market America, Inc., the country-wide restriction was limited to six months11, whereas in CNC/Access, the state-wide restriction lasted three years.12 Thus, the results in these cases are not inconsistent because the requirements of time and territory are related and must be considered “in tandem.”13 Therefore, while the data displayed below may provide some direction in determining what time or territorial restraints are permissible, it is important to ensure that all terms limiting employment serve as a reasonable means of protecting the employer’s legitimate business interests.
- Geographic area: 17
- Specific mileage: 9
- Client-based: 5
- Competitor-based: 0
- None: 0
- Geographic area: 8
- Specific mileage: 6
- Client-based: 2
- Competitor-based: 1
- None: 2
- Geographic area: 25
- Specific mileage: 15
- Client-based: 7
- Competitor-based: 1
- None: 2
As shown in the chart above, the most common way that employers attempt to restrict competition from former employees is by preventing them from working within a given geographic area. In the vast majority of these cases employees were restricted from working in a given territory where their former employers did business. While some of these territorial restrictions contained a specific mileage radius where employment was prohibited, others simply prevented employment within a particular county, state, or country. Even more open ended, however, were non-compete agreements with terms that merely limited employment within vague geographical regions such as “the Southeast.”14 While general geographic restrictions do appear to be frequently enforced, North Carolina case law clearly suggests that the prohibited areas need to have a strong relationship to a business interest. For example, covenants that narrowed the restricted territory to counties or towns where the former employee actually worked were more likely to be enforced than those that extended the restriction across all states or regions of the country where the employer conducted business.15
The second most common way North Carolina non-compete agreements restricted territory was by giving a specific mileage radius within which employment was prohibited. As revealed in the chart, nine out of fifteen, or 60%, of the cases where employment was restricted within a specific mileage radius were enforced. In fact, the 1975 case of Forrest Paschal Machinery Co. v. Milholen even upheld an agreement that barred the plaintiff from any kind of employment for any individual, firm, or corporation within a radius of 350 miles of Siler City, North Carolina.16 While such expansive territorial restrictions are rarely upheld, this case demonstrates the importance of considering the unique business interest sought to be protected. The Forrest court reasoned that, because the plaintiff did business all over the United States, it was not overly broad for the company to limit competition within 350 miles of just one of its offices.17 After Forest, however, the next highest mileage limit enforced by any court was 150 miles.18 Thus, if Forrest is set aside as an outlier, the average enforceable contract in North Carolina is around 57 miles, whereas the average unenforceable contract is around 103 miles. Admittedly, with only fifteen cases containing precise mileage restrictions, these averages do not provide a clear picture of exactly how many miles can be covered before a territorial restriction becomes unreasonable. Nevertheless, these averages do provide a good starting point for any North Carolina employer attempting to determine how much territory can be reasonably restricted in a typical non-compete agreement.
Perhaps the most recent and effective trend in non-compete agreements is to limit the employee from working with clients of the employer. Of the six North Carolina cases found with these “client-based” restrictions, four have been decided since 2000.19 Furthermore, the only two that were not enforced had unusually long time restrictions of five years20, whereas the four that were enforced had a time restraint of two years or less.21
- 6-12 months: 8
- 18-24 months: 16
- 36 months: 2
- 48 months: 1
- 60 months: 2
- 61+ months: 2
- None: 0
- 6-12 months: 1
- 18-24 months: 7
- 36 months: 4
- 48 months: 0
- 60 months: 7
- 61+ months: 0
- None: 0
- 6-12 months: 9
- 18-24 months: 23
- 36 months: 6
- 48 months: 1
- 60 months: 9
- 61+ months: 2
- None: 0
Unlike territorial restrictions, which can be described in many different ways — and sometimes not at all — every covenant not to compete case in North Carolina had a clear and comparable time restriction. As the chart above reveals, most time limitations found in employment contracts lasted two years or less. Data from all fifty cases also seem to suggest that reasonableness maxes out at around five years,22 with two notable exceptions.
A covenant not to compete restricting employment for ten years was upheld by the North Carolina Supreme Court in 1968.23 Despite the decade-long restraint, the court found the covenant reasonable since it only covered a ten-mile radius and merely prevented the defendant from selling jewelry and not other merchandise.24 In a second case, a time restriction of seven years was “reasonable as a matter of law” since it only covered two counties.25 Thus, these two cases suggest that any non-compete clause restricting employment for more than five years needs to cover a very specific activity within a narrowly proscribed territory.
From just a quick glance at the chart one can see that most restrictions of two years or less are enforceable whereas most restrictions longer than two years are not. In fact, if the two unusual cases where a ten and seven-year restriction were upheld are set aside as outliers, the average enforceable non-compete agreement in North Carolina is exactly twenty-four months. On the other hand, the average unenforceable covenant not to compete in North Carolina contained a time restriction of around thirty-nine months. This data therefore implies that by deciding to go with a three rather than two-year restriction, an employer will move from a covenant that is usually enforced to one that is not. While there are certainly cases where contracts with restrictions of two years or less were not enforced, the data as a whole suggest that employers will be most successful at enforcing non-compete clauses if they stick within a two-year time limitation. In fact, of the eight cases where a limitation of two years or less was struck down, all but one26 either contained territorial restrictions of at least two-hundred miles27 or applied to medical professionals28. Thus, North Carolina case law strongly implies that almost any non-compete agreement with a time limitation of two years or less that covers non-medical business practices will be enforced as long as the territorial restriction is not overly broad.
Dozier Miller Law’s Business Litigation Counsel:
1. N.C. Gen. Stat. § 75–4 (2005).
2. ChemiMetal Processing, Inc. v. McEneny, 124 N.C. App. 194, 197, 476 S.E.2d 374, 376 (Ct. App. 1996) (citing Professional Liab. Consultants v. Todd, 122 N.C. App. 194, 197, 468 S.E.2d 578, 580 (Ct. App. 1996)).
3. Manpower of Guilford County v. Hedgecock, 42 N.C. App. 515, 521, 257 S.E.2d 109, 114 (Ct. App. 1979) (citing Comfort Spring Corp. v. Burroughs, 217 N.C. 658, 9 S.E.2d 473 (1940)).
4. Hartman v. W.H. Odell & Assocs., Inc., 117 N.C. App. 307, 317, 450 S.E.2d 912, 920 (Ct. App. 1994).
7. Jewel Box Stores v. Morrow, 272 N.C. 659, 665, 158 S.E.2d 840, 844 (1968).
8. 135 N.C. App. 143, 153, 520 S.E.2d 570, 578 (Ct. App. 1999).
10. No. 04 CVS 1490, 2006 WL 3350854, at *8 (N.C. Super. Nov. 15, 2006).
11. Market America, Inc., 135 N.C. App. at 146, 520 S.E.2d at 574.
12. CNC/Access, 2006 WL 3350854, at *2.
13. Id. at * 7 (citing Farr Assocs., Inc. v. Baskin, 138 N.C. App. 276, 530 S.E.2d 878 (Ct. App. 2000)).
14. See VisionAIR, Inc. v. James, 167 N.C. App. 504, 506, 606 S.E.2d 359, 361 (Ct. App. 2004).
15. Compare Orkin Exterminating Co. of Raleigh v. Griffin, 258 N.C. 179, 128 S.E.2d 139 (1962) (upholding an employment agreement limiting employment in twenty-five specific NC towns), and Keith v. Day, 81 N.C. App. 185, 194–95, 343 S.E.2d 562, 567–68 (Ct. App. 1986) (upholding an employment agreement not to open a hardware store in the greater Raleigh area), and Calhoun v. WHA Med. Clinic, PLLC, 178 N.C. App 585, 589 & 600, 632 S.E.2d 563, 566 & 573 (Ct. App. 2006) (upholding a restrictive covenant preventing a physician from practicing in seven North Carolina counties), with Carolina Pride Carwash, Inc. v. Kendrick, No. COA04-451, 2005 WL 2276904, at *3 (N.C. Ct. App. Sept. 20, 2005) (holding that a covenant not to compete covering all of North Carolina, South Carolina, and Virginia was not enforceable), and VisionAIR, Inc. v. James, 167 N.C. App. 504, 508, 606 S.E.2d 359, 362 (Ct. App. 2004) (holding that a contract preventing the defendant from being employed in any similar business in the Southeast was unenforceable), and Masterclean of North Carolina, Inc. v. Guy, 82 N.C. App. 45, 345 S.E.2d 692 (Ct. App. 1986) (refusing to grant injunctive relief when a former employee breached a broad restriction that prevented him from working in a similar business in any city, town, borough, township or village in the United States in which the Company has been or has signified its intentions to be engaged in rendering its said service).
16. 27 N.C. App. 678, 687, 220 S.E.2d 190, 196–97 (Ct. App. 1975).
18. Safety Equip. Sales & Serv., Inc. v. Williams, 22 N.C. App. 410, 206 S.E.2d 745 (Ct. App. 1974).
19. Okuma America Corp. v. Bowers, 181 N.C. App, 638 S.E.2d 617 (Ct. App. 2007); Wachovia Ins. Servs., Inc. v. McGuirt, No. 06 CVS 13593, 2006 WL 3720430 (N.C. Super. Dec. 19, 2006); Wade S. Dunbar Ins. Agency, Inc. v. Barber, 147 N.C. App. 463, 556 S.E.2d 331 (Ct. App. 2001); Farr Assocs., Inc. v. Baskin, 138 N.C. App. 276, 530 S.E.2d 878 (Ct. App. 2000).
20. Farr Assocs., Inc., 138 N.C. App. at 282, 530 S.E.2d at 882; Prof’l Liab. Consultants, Inc. v. Todd, 345 N.C. 176, 478 S.E.2d 201 (1996).
21. Okuma America Corp., 181 N.C. App. at 87, 638 S.E.2d at 618 (six-month time restriction); Wachovia Ins. Servs., Inc., 2006 WL 3720430 (two-year time restriction); Wade S. Dunbar Ins. Agency, Inc., 147 N.C. App. at 465, 556 S.E.2d at 333 (two-year time restriction); Triangle Leasing Co., Inc. v. McMahon, 327 N.C. 224, 225, 393 S.E.2d 854, 855 (1990) (two-year time restriction).
22. See also Engineering Assoc., Inc. v. Pankow, 268 N.C. 137, 139, 150 S.E.2d 56, 58 (1966) (holding that only under extreme conditions will a five-year time limitation not be unreasonable).
23. Jewel Box Stores Corp. v. Morrow, 272 N.C. 659, 158 S.E.2d 840 (1968).
24. Id. at 665, 158 S.E.2d at 844–45.
25. Bicycle Transit Auth., Inc. v. Bell, 314 N.C. 219, 226, 333 S.E.2d 299, 304 (1985).
26. Manpower of Guilford County, Inc. v. Hedgecock, 42 N.C. App. 515, 522, 257 S.E.2d 109, 115 (Ct. App. 1979) (holding that a covenant not to compete with a one-year time restriction within a twenty-five mile radius was unreasonable because the territorial restriction exceeded reasonable limitations).
27. See e.g. Electrical South, Inc. v. Lewis, 96 N.C. App. 160, 162–63, 385 S.E.2d 352, 353–54 (Ct. App. 1989) (holding a covenant not to compete with a twenty-four month time restriction overly broad because it prohibited the defendant from working for any employer within a 200-mile radius of Greensboro); Static Control Components, Inc. v. Darkprint Imaging, Inc, 240 F. Supp.2d 465, 474 (M.D. N.C. 2002) (holding that while a two-year period, by itself, appears reasonable when considered in combination with the a world wide geographic limitation, the restriction is overbroad).
28. See Nalle Clinic Co. v. Parker, 101 N.C. App. 341, 399 S.E.2d 363 (Ct. App. 1991) (holding a non-compete agreement with a twenty-four month time restriction unenforceable since it would force young children to travel one and one-half hours for treatment by a pediatric endocrinologist); Statesville Med. Group, P.A. v. Dickey, 106 N.C. App. 669, 418 S.E.2d 256 (Ct. App. 1992) (holding a covenant not to compete unenforceable since it would prevent an endocrinologist from practicing in the county and the next closest endocrinologist was forty-five minutes away).