Restrictive Covenants not to compete, or non-compete contracts, are a tool used to protect a company from unfair competition. They are commonly used in the employment context to prevent this competition, but when analyzing them, you must ensure that they are no wider in scope than is necessary to protect a legitimate business interest.
Just like territory and duration, the legitimate business interest depends on many things and is weighed against the circumstances upon which enforcement is being sought.
Customer Relations
Customer relations are a widely accepted legitimate interest of the employer. United Laboratories, Inc. v. Kuykendall. That said, a departing employee can only interfere with that interest if that employee had close personal contact with the customers and they would have reason to trust or follow that employee. A.E.P. Industries v. McClure.
Trade Secrets
It is also widely accepted that the protection of trade secrets is a legitimate interest. In these circumstances, the court will look to whether or not the employee had access to these trade secrets and if the non-compete prevents employment in a position where this knowledge would not harm the employer.
Distinct Duties
The Courts have held that restrictive covenants are unenforceable where they prohibit the employee from engaging in future work that is distinct from the duties actually performed by the employee. VisionAIR, Inc. v. James. In VisionAIR, the crux of the argument was found to be the distinctiveness of the employment found when looking at “similar” businesses throughout the territory. In other words, because the non-compete prevented the employee from working at a business that was a similar business, that was overly broad.
Associate With
North Carolina Courts have consistently held that mere association with competitive businesses is not narrow enough for the protection of a legitimate business interest. The overbroad analysis becomes especially clear when the association includes, in some manner, the indirect ownership of any competitive business. VisionAIR v. James.
Affiliates
According to the Court in Medical Staffing Networking, Inc. v. Ridgway, there is no legitimate business interest in preventing an employee from competing with the affiliates of a parent company.
The two primary areas that constitute a legitimate business interest in North Carolina are the protection of customer relations and the protection of trade secrets. When you get beyond those, your non-compete is likely not going to be enforceable. The reason being is that our courts are reluctant to stifle competition. Non-competes are only available to prevent unfair competition.
If you’d like to know whether your non-compete is valid, or would like us to help you draft a valid and enforceable covenant not to compete, please feel free to contact us at richard@lawplusplus.com or by calling 919-912-9640.