Non-Compete Agreements: Enforceable in North Carolina if Properly Drafted

5.28.2014

Employers invest time and money into finding, training and retaining talented employees, and they often entrust those employees with trade secrets or other valuable insights into their business.  Naturally, employers want to protect their investment and prevent employees from going to work for competitors.  While some states such as California do not enforce non-compete agreements (“NCAs”), such agreements remain enforceable in North Carolina if they are carefully drafted.  The recent North Carolina Court of Appeals case of Horner International Co. v. McKoy, 754 S.E.2d 852 (2014) highlights that NCAs are not viewed favorably under North Carolina law and will not be enforced if they are overbroad.

In Horner, the plaintiff employer was a manufacturer of flavor materials for use in tobacco and food products.  In 2006, the employer hired the defendant employee to assist with setting up a new manufacturing plant in North Carolina and thereafter to serve as plant manager.  When the employee left the position in 2012 to join a Delaware company with a principal place of business in New Jersey that also manufactured and sold flavor materials, the employer sued the former employee to enforce the NCA that the employee had signed six years earlier.  The NCA purported to bar the employee

from ‘directly or indirectly’ being employed by or acting ‘as an advisor, consultant, or salesperson for, or becoming financially interested, directly or indirectly, in any person, proprietorship, partnership, firm or corporation engaged in, or about to become engaged in, the business of selling flavor materials’ for a period of 18 months after his employment with [the employer] ended.

Horner at 857.  The Court of Appeals found that this covenant was overbroad and unenforceable because of the “broad sweep” of the activities covered by the NCA.  The covenant purported to bar the employee from doing not just work similar to what he had been doing for the employer, but also wholly unrelated work for any firm that sells flavor materials, and prohibited even “indirect” financial interests in such a business.

The Horner decision emphasizes that employers must narrowly tailor their covenants not to compete to protect their legitimate interests and may not unduly restrict the employee’s future employability.  Otherwise, courts will find the covenant overbroad and will not enforce it.   North Carolina courts have previously held that in addition to not being overbroad in the scope of activities restricted, an enforceable NCA must also be:  (1) in writing; (2) part of an employment contract; (3) based on valuable consideration; (4) reasonable as to both time and territory; and (5) not against public policy.  See N.C. Gen. Stat. § 75-4; A.E.P. Industries, Inc. v. McClure, 308 N.C. 393, 302 S.E.2d 754 (1983).

For further information regarding non-compete agreements, please contact Marshall Gallop at mgallop@bwsw.com.

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