Today's economy is thriving with technological innovations that drive the market. The competition to stay ahead is fierce. While this sense of free market competition is a staple of a our society; unfair competition is not. Unfair competition is a term applied to dishonest or fraudulent rivalry in commerce. These cases typically arise in professional settings, when one skilled employee leaves an employer and begins competing in the market using the former employer's trade secrets or confidential information. This article discusses how to use restrictive covenants to protect your valuable business information and customers.
Non-compete agreements are restrictive covenants "in restraint of trade" and are disfavored by North Carolina courts. A non-compete covenant is a clause under which one party agrees not to enter into competition in the same profession against the other party.
To be enforceable in North Carolina, the covenant must be: (1) in writing; (2) as part of an employment agreement or independent contractor; (3) based on valuable consideration, including money or employment; (4) reasonably necessary to protect a recognized "business interest" of the company; and (5) reasonable as to time and territory. Of these requirements, two highly litigated areas involve what constitutes a business interest and assessing the reasonableness of the covenant.
Restrictive covenants should be narrowly tailored to protect the employer's business interests. For this reason, a valid restrictive covenant must either (1) protect the employer's relationship with its customers; or (2) protect its valuable trade secrets. Customers that retained by the employee in the during his/her employment are property of the employer. Therefore, when the employer-employee relationship ends, the ex-employee cannot keep those business contacts for future use.
Reasonable or Unreasonable?
Courts in North Carolina determine the reasonableness of the covenant by examining the time, territory, and scope of the restrictions. Some courts have stated six-month to three-year restrictions are reasonable. They have also presumed restrictions of five-years or more to be unreasonable. Territory is considered in tandem with time, so that a longer duration is acceptable when the geographic scope of the restriction is small and vice versa. To prove this, the employer must show where its employees are located and that the geographic restriction is necessary to maintain and protect those customer relationships.
When hiring employees, both employer and employees should closely examine the need, reasonableness, and enforceability of any proposed non-compete or non-solicitation agreement. This is because of the the affect post-employment restrictions often have on the burdened individual. If you own a business in North Carolina, contact me to discuss the best employment contracts to protect your business.
Please visit www.craineylaw.com or call the Law Office of Cedric Rainey to schedule an initial consultation.
[This blog does not offer legal advice. If you need legal advice, contact the Law Offices of Cedric Rainey to speak with a licensed attorney.]