Whether a non-compete agreement is valid is often a vital question, both for employers and for employees. If an employee’s non-compete can be enforced, the employer can protect its own business interest in preventing competition. On the other hand, if an employee’s non-compete is invalid, the employee is free to move on to another employer or even to start the employee’s own business. Though non-compete agreements may be invalid for potentially infinite reasons, one issue comes up time and time again – the non-compete restricting the employee from competing “directly or indirectly.”
The reasonableness of the non-compete is the threshold question a North Carolina court will look when evaluating any non-compete agreement. The North Carolina Court of Appeals has repeatedly held that the agreement is reasonable as to the duration of the non-compete, the geographic restrictions, and whether it genuinely protects the employer’s business interests.
Moreover, courts often err on the side of the employee because “it is well-established that such covenants not to compete are disfavored by the law.” Medical Staffing Network v. Ridgway, 194 N.C. App. 649 (2009).
There can be many reasons for a non-compete agreement to be invalid. But the most common one in our experience, however, is the employer’s use of the term “directly or indirectly” when stating the scope of the non-compete agreement. Employers, in the hope of making their non-compete agreements as protective as possible, instead make the non-compete agreement so overbroad that it would never be enforced.
The flaw of the use of the term “directly or indirectly” is that it is overbroad. For example, a non-compete might state the following for an employee in the sale of (as in one case) compressed gasses:
The Employee shall not, directly or indirectly, on his account or in the service of others, be employed or otherwise participate in the field or area of supplying, retailing, wholesaling, or distributing compressed gases, welding products, or any other products sold by the company, within the restricted area.
Here, clearly, the employer is trying to prevent the employee from working in a competitive industry. But the use of the term “directly or indirectly” has been held by many courts have held to be so vastly overbroad that the whole agreement is unenforceable. The term might, for instance, prohibit the employer from buying stock in a competitor, or even doing a different type of work for the competitor – after all, should a salesperson be prohibited from working as a janitor for a competitor?
What sort of non-compete agreement will a court enforce? Each case is different, but, generally speaking, a court will enforce a non-compete that prevents an employee working in an identical position for a direct competitor. Anything more restrictive than preventing direct competition does not actually protect the former employer, is unreasonable, and therefore is unenforceable under North Carolina law.
That said, just having the words “directly or indirectly” does not necessarily mean the non-compete is unenforceable. Each agreement may contain a variety of terms, and the agreement must be reviewed as a whole. For instance, one non-compete agreement reviewed recently by our office contained the language “directly or indirectly,” but contained another provision stating that the agreement should not be construed as prohibiting anything more than working in the same position for a competitor, meaning that additional analysis was required.
There are numerous other reasons that a non-compete may be invalid. Courts have upheld and voided non-competes for an abundance of reasons, each of which depended on the facts of that case. When our office analyzes a non-compete, we need to take the nature and interests of the employer into consideration, as well as the facts specific to the employee’s position and work.
Nevertheless, the main point that both employers and employees should be aware of is that one major issue that frequently comes up when reviewing a non-compete is the problematic language of prohibiting competition “directly or indirectly.”
Dye Culik PC is a Charlotte, North Carolina law firm representing business, entrepreneurs, employers, and executives. If you or your business need a non-compete reviewed, contact our office to see how we can help.