Understand Your State’s Limitations on Non-compete, Non-solicitation and Non-disclosure Agreements

As to time and location limits, the shorter the time and the smaller the geographic area, the better the chance of a non-compete being enforced. North Carolina courts have enforced non-competes for as long as three years. (See CNC Access Inc. v. Scruggs, a 2006 N.C. Business Court opinion.)

An additional consideration is that the state where a company is located may not be the state whose law governs the agreement; in some situations, the law of the state where the worker is allegedly violating the non-competition agreement governs the enforceability of the agreement instead of the state where the company is located. Adding a choice-of-law provision to an agreement may help companies better predict which state’s law will control. Therefore, consulting with a local attorney is essential to giving a non-compete the best chance for achieving the needed goal.

NON-SOLICITATION AGREEMENTS

As the name suggests, non-solicitation agreements are agreements whereby a worker promises not to solicit or otherwise attempt to poach clients or customers of the employer.

Companies that have invested ample time and resources in bringing in new clients or customers likely value keeping those clients. A properly drafted, enforceable non-solicitation agreement can accomplish this goal by preventing a former worker from contacting or soliciting a company’s clients when they leave or, in the case of independent contractors, while they are performing work for the company.

Outside of California, where non-solicitation agreements are likely unenforceable under Section 16600 of the California Business and Professions Code, jurisdictions vary in their treatment of non-solicitation clauses. Narrowly drafted clauses generally stand a better chance of enforcement. In particular, companies should con- sider limiting the clauses to prohibiting solicitation of contacts the worker actually came into contact with during the employment or working relationship. Companies should also try to define “customers” or “contacts” as specifically as possible; including “prospective clients”, for example, could make a non-solicitation provision too vague to be enforceable.

North Carolina’s courts illustrate that narrowly drafted clauses fare better. In 2015, the U.S. District Court for the Middle District of North Carolina enforced a non-solicitation agreement against a former LabCorp employee. The court’s reasoning was that LabCorp’s desire to protect its customer goodwill and relationships was a legitimate business interest and that the non-solicitation promise did not pre- vent the worker from seeking gainful employment. (See LabCorp v. Kearns, 84 F.Supp.3d 447.)

NON-DISCLOSURE AGREEMENTS

In non-disclosure agreements, an employee agrees not to disclose confidential information about the business or trade secrets relating to the business practices or products.

Whatever makes a business successful, whether it be unique products, pricing strategy or the highest quality of service, is often the business’ most valuable asset. This type of information has economic value independent of the product or service itself. Non-disclosure agreements can protect information, such as trade secrets, that makes a company distinctively successful.
Unlike non-competition and non-solicitation agreements, non-dis- closure agreements are not by nature considered to be restraints on trade. As such, non-disclosure agreements are not subject to the same levels of scrutiny applied to non-competition and non-solicitation agreements. However, Florida jurisprudence suggests non-disclosure agreements are generally enforceable in Florida, which by contrast places strict limitations on non-competes and non-solicitation agreements.

Still, some jurisdictions have disfavored certain aspects of non-disclosure agreements—those with an unlimited durational term may be unenforceable. In North Carolina, the Business Court found in Roundpoint Mortgage v. Florez (Feb. 8, 2016) that continued at-will employment was not adequate consideration for an employee’s signing of a non-disclosure agreement. This suggests that employers may still need to offer new consideration, such as a bonus or raise, to workers being asked to sign a non-disclosure agreement.

Although these covenants can be extremely beneficial to businesses, state statutory and common law governing them varies significantly. Consult with a lawyer in your state to determine how best to protect your business.

Author’s Note: This article is not intended to give, and should not be relied upon for, legal advice. No action should be taken in reliance upon the information contained in this article without obtaining the advice of an attorney.

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About Caroline Trautman

Caroline Trautman is an attorney with Anderson Jones PLLC, Raleigh, N.C. She assists clients with construction litigation, contractual drafting and disputes, collections, lien and bond claims, licensing issues and other matters affecting businesses.

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