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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 months 11 , 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.
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 years 20 , whereas the four that were enforced had a time restraint of two years or less. 21
