Increasing numbers of non-compete agreements, non-solicitation clauses
and confidentiality agreements are appearing in the employment
marketplace.
Trade
secrets, business practices and employees’ institutional knowledge are
causing employers to restrict the employment portability of their key
people, shut down the unauthorized flow of information when an employee
transitions to a competitor and stop employee poaching by former
employees or business competitors. All three types of agreements
have the purpose of trying to prevent someone from taking something from
a business - customers, employees, business in general, proprietary
products or trade secrets.
The problem with all three is enforcement; once the damage
has been done (the employee or trade secret has been stolen or
competition has destroyed a business) it takes a lengthy and costly
legal process to recover damages and put the genie back in the bottle,
so to speak. In these cases, no one benefits but the lawyers.
Non-compete agreements are used in two circumstances: (1)
in an employment context when the employer wants to limit an employee’s
post-employment activities which may be a competitive business for
himself or for another employer already in the marketplace; and (2) in
the business sale context, in which the selling owner may agree not to
compete against the new owner for a specific time and/or within the
market.
In North Carolina, non-compete agreements in the employment
context are generally disfavored. However, they are valid within
reasonable limits and if consideration was given for the promise not to
compete. Generally, Four elements: (1) consideration; (2) scope of
restriction; (3) term and (4) geographic area must be reasonable for an
employment non-compete agreement to be enforced by the NC courts.
Consideration is what was given to the employee
for the promise not to compete post-employment. Entering into a
non-compete at the time of hire, as a part of the hiring, has been found
to be valid consideration. Receiving “independent consideration,”
such as a raise or additional benefits while already employed, has been
found to be a valid consideration for execution of a non-compete in an
employee’s mid-stream of employment. The key to consideration for
an enforceable non-compete is whether the consideration given is a “real
benefit” which is in addition to the employee’s current status.
Real benefits might include: midstream (or post-termination) benefit
agreements, promotions, or a cash payment
The scope of the restriction refers to the type of
work the individual is barred from performing under the agreement –
generally, the same capacity in which the individual served in his or
her prior employment. To take an extreme example, an employer may
prohibit a software engineer from performing engineering activities at a
competitor but it would likely be considered unreasonable to try to
prohibit that same engineer from performing janitorial services for the
competitor.
Term is the length of time the non-compete will be
in effect, post-employment. Generally, the Courts do not favor a term
which is in excess of three years. Two or less years in length of
term have been found more reasonable and, therefore, enforceable.
Geographic area is just that, the area of commerce
wherein the ex-employee is prohibited from plying his trade either for
himself or a new employer. The reasonableness of the geographic
area of prohibition depends upon the ex-employer’s zone of commercial
activity. If the old employer operates only within a county or two
wide area, it would be unreasonable for the employer to prohibit the
employee from working nation-wide. Similarly, it may be reasonable
for an employer who operates world-wide have a large geographic area of
restriction.
Additionally, North Carolina courts will view
reasonableness of the relationship between the elements of term and
geographic area to determine the validity of the non-compete
agreement.
A non-solicitation clause is sometimes confused with a
non-compete agreement. A non-solicitation clause is utilized to
deter a departing employee from soliciting the ex-employer’s clients for
business post-employment or soliciting the ex-employer’s current
employees to follow the departing employee to a new job or
competitor. Generally, in order to be enforceable, a
non-solicitation clause must meet four criteria: 1) it must not be void
for public policy, or injurious to the public; 2) it should be no
broader than necessary to protect the employer; 3) it should not cause
undue hardship for the former employee; and 4) its term and geographic
scope must be reasonable. If a non-solicitation clause meets these four
elements it will be likely that the North Carolina courts will enforce
it.
A confidentiality agreement (also known as a
“non-disclosure agreement” or “NDA”) is a contract in which a person or
business promises to keep specific information secret or not to disclose
the specific information to others without proper authorization. The
NDA must identify or describe the information to be kept confidential.
Generally, the confidential requirements include not disclosing
the object and scope of the discussions between the parties, not using
the confidential information other than for the specified purpose agreed
to by the parties, and not disclosing the confidential information to
persons or entities without authorization of the owner of the
information.
Confidentiality agreements will usually exclude certain
information from the definition of confidential information; such as
information that is or becomes public through no act of the bound party,
information already in possession of the bound party as of the date of
disclosure, or information required to be disclosed by court order.
Generally, a confidentiality agreement must also specify the
time period during which confidential information will cannot be
disclosed. This term may be for weeks, months or a number of
years. When a confidant breaches his or her obligations under a
confidentiality agreement, he or she is subject to enforcement remedies
which may include equitable relief and monetary damages. An injunction
against a confidant helps prevent any further breach of the agreement. A
court may also award monetary damages if the injured party can quantify
actual damages.
It is often difficult and expensive to enforce a
confidentiality agreement even though the agreement is specific to what
constitutes the trade secret or confidential information and what would
represent a disclosure violation. Also, while an injunction may prohibit
further disclosures of the information, the information has been
disclosed and may well travel beyond the purview of enforcement.
It would be impossible to examine the “ins and outs” of
these three types of employment agreements within the limited confines
of this article. Both employers and employees should closely
examine the need, reasonableness and enforceability of any proposed
non-compete, non-solicitation or confidentiality agreement. Hiring
employers need to be aware of any post-employment restrictions their
new hire may be under. When one of these agreements are to be
used, or required, both the employer and employee should seek advice of
counsel regarding the terms and conditions of the proposed agreement or
clause.
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