Non-compete agreements work for the employer. They don’t really make the employee’s life easier.
I understand the rationale. The employer invests heavily in a new recruit. This individual will be a loss-leader for a while. The employer built the practice. The employer believes he built the employee’s practice. And showed the employee all the tricks needed to be successful.
It would be maddening for this employee to leave after 9 months, set up shop across the street, and take all those new patients with him.
Still, there are two sides to this story.
Imagine the employee has worked diligently for many years at this practice. Initially, he was told he would make partner in three years. Three years came and went. Now, it’s six years, and no change appears in sight.
This employee owns a house. Is the sole bread winner for the family. And has two kids in a private high school. No one wants to move. Can you blame them?
This employee wants to open his independent practice a few miles away. This would butt heads with the employment contract he signed years ago. It says no competition for two years within 25 miles of the office.
Is he screwed?
Maybe not.
If he practices in California, such restrictive covenants are unenforceable. But in most states, restrictive covenants, while disfavored, can be enforced if they protect a legitimate business interest, are reasonable in geographic scope and length of the restriction. Some states, such as Texas, have amended laws related to non-compete agreements limiting the geographic restriction to five miles.
Suppose this vignette occurred in North Carolina.
North Carolina courts have a long history of scrutinizing covenants that prevent an employee from competing with his or her former employer. As a general rule, judges in North Carolina have disfavored enforcing restrictive covenants unless they are thoughtfully crafted to meet certain requirements. For restrictive covenants to be enforceable, must be (1) in writing, (2) made part of a contract of employment, (3) based on valuable consideration, (4) reasonable both as to time and territory and (5) not against public policy.
If one is hiring a new employee, the mere offering of the job is considered “valuable consideration.”
If the employer wants to impose a non-compete on an employee who already has a job there, then they must do more. They must give something of value – perhaps some extra pay or more time off. But something.
Which brings me to American Air Filter Company v. Samuel C. Price, Jr. and Camfil USA, Inc., a case that was heard in a NC Business Court.
What, pray tell, is a Business Court?
[D]ecisions of the North Carolina Business Court — a special Superior Court designed for complex business disputes – are not binding on other state trial courts unless and until the North Carolina appellate courts (the Court of Appeals or the Supreme Court) adopt the Business Court’s reasoning. That being said, the Business Court is the arbiter of many of the state’s employment disputes and North Carolina’s trial and appellate courts often rely upon the Business Court’s decisions for guidance in cases involving restrictive covenants.
In this case, the employee was asked to sign an employment contract 17 years after he became an employee. This agreement included a non-compete provision. And he was paid a bit more for executing the new agreement. So, he was given valuable consideration for the updated agreement with the non-competition clause.
This agreement had a one year term, and renewed automatically annually.
Many years later, the employee took a job with a competitor.
His now former-employer filed suit, alleging breach of the non-compete provision.
The Business Court concluded that while the employee was given valuable consideration for executing the contract initially, this contract had a term of one year. It renewed automatically. But, in essence, it was a new agreement year after year. And each “new agreement” would require additional valuable consideration to keep the non-competition term enforceable.
“…the employer failed to allege it had provided additional consideration each time the contract automatically renewed. As a result, the Business Court held that “[a]ny failure to provide consideration for a given year’s renewal would break the ‘chain’ and render the [original employment agreement] unenforceable as to subsequent years.”
Many employment agreements define the term of the agreement as lasting one year, renewable annually, with an onerous non-competition clause. In the case of this North Carolina employment agreement, failure to draft that agreement without new consideration annually (to keep the restrictive covenant alive) rendered that clause unenforceable. There were likely other ways to manage this puzzle vis-à-vis drafting. In any event, the employee found a home with another employer.
What do you think?
