Despite recent scrutiny, carefully-considered non-competes logical choice in many situations

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Last weekend, the New York Times published an article titled “How Noncompete Clauses Keep Workers Locked In.” The article focused on low and middle level workers who were sued or had a hard time finding new jobs because they had signed non-compete agreements with their former employers. One point made by the article is that when used with personnel who do not have significant executive, research and development (R&D), or sales responsibilities, non-competes provide little benefit for employers, can cause difficulties for employees (including limiting their mobility and ability to make higher wages), and hurt the economy.

In many cases, non-competes are necessary to keep former employees from competing unfairly with employers after leaving the company.  

Employers should keep in mind, however, that non-compete agreements are generally disfavored by the courts, and most states impose strict limitations on their enforcement.  In the Carolinas, non-competes are generally upheld only if they are:

• Necessary to protect a legitimate business interest of the employer (for example, to protect intellectual property or significant customer relationships);
• Reasonably limited as to time and place;
• Not unduly restrictive;
• Reasonable from a public policy standpoint; and
• Supported by valuable consideration (for example, a job offer, promotion, or raise offered at the time of signature).

A covenant that fails to meet any one of these five criteria will likely not be enforced by a South Carolina or North Carolina court.  In addition, some state legislatures have enacted, or are considering enacting, statutes imposing additional limitations on non-competes.  For example, California does not permit non-competes in the employment context.  In Illinois, a new law prohibits non-competes for low-wage workers in the private sector.  Additional information on state-specific limitations can be found in a New York Times article from last year titled “To Compete Better, States Are Trying to Curb Noncompete Pacts.”

Sometimes employers can meet their needs with a less burdensome restriction than a non-compete, such as a non-disclosure or non-solicitation agreement.  A non-disclosure agreement typically prohibits improper disclosure or use of confidential business information learned during employment.  Non-solicitation agreements typically prohibit soliciting employees, customers, or suppliers of the employer for a specified period after employment.  Both agreements are subject to some limitations, but are generally easier to enforce, and often just as effective, as non-compete agreements.  When using a non-compete, however, it is important to include reasonable and carefully-considered restrictions to increase the likelihood they will be considered fair and enforceable in court.

Our Insights are published as a service to clients and friends. They are intended to be informational and do not constitute legal advice regarding any specific situation.