North Carolina Lawyers Weekly
After working in the same factory for nigh on 15 years, Johnny Paycheck sang, he wanted nothing more than to work up the nerve to tell his bosses to take this job and shove it, because he wouldn’t be working there no more. (He never actually goes through with it, though.)
Alas, the 1970s were a simpler time. Today, Johnny’s employment contract likely might contain a noncompete clause restraining his ability to go work for a competing company. Courts look upon such covenants not to compete unfavorably—after all, they restrict Johnny’s ability to secure gainful employment, and thus his ability to quit his hated job, or even negotiate for higher pay. But companies are using them more frequently than ever.
In North Carolina, noncompete clauses are generally enforced if they’re narrowly tailored to protect a company’s legitimate interests. But unreasonably broad clauses are unenforceable, and the state’s strict “blue pencil” doctrine forbids judges from trimming them down until they make the cut. That raises the stakes of overreach, since companies that try to restrict their departing employees too much may end up unable to limit them at all.
Lawyers Weekly spoke with several experienced employment attorneys about the most common mistakes that they see companies make when using noncompete clauses, ones that ultimately render them unenforceable. Call it the seven best ways to ensure that the courts will take your noncompete clause and, well … shove it.
- A five-year ache
The law imposes several restrictions on noncompete clauses. One of the most important is that they can only last for a reasonable period of time—the point is not to prevent Johnny from ever getting another job in the industry. Some may last for as little as six months, but attorneys say it’s not unusual for employees to sign noncompete clauses that purport to restrict their employment for up to five years, even though a restriction of that length is unlikely to stand up in court.
“What I’ve seen is, first of all, employers being a little too greedy, and they maybe want to restrict competition for too long,” said Nick Sanservino of The Noble Law Firm in Chapel Hill. “All other things being equal, anything from six months to two years is probably going to be okay. A covenant for five years is probably going to be too long. And then three years is more of a gray area. So, one thing that would jump out at me is an employer who is trying to restrict competition for more than two years.”
- Shasta, Alaska, Nebraska…
Noncompete clauses must also be reasonable in the geographic territory they cover. Traditionally, such clauses were most often imposed upon salesmen, based on the reasonable concern that employees might jump ship to a competitor and take all of the old company’s best customers with him. (Read the next item to see how widely they’re being applied today.) But a clause that prevents an employee from taking a sales job anywhere in the country, or world, will be too much for courts to stomach.
“If an employer does business [in just a few states], where they get in trouble is if they have a restriction that covers the entire country,” Sanservino said. “Rarely would it be justified to have anything beyond the states you’re doing business in. Even with a covenant that covers just the Southeast, you’re getting yourself into trouble because you’re encompassing areas beyond those states.”
Some clauses will restrict employees from working in certain states or counties, while others might black out a certain radius from the company’s office. Kevin Murphy, an attorney with Van Kampen Law in Charlotte, said that he perceives a difference in how courts view such boundaries, with the radius approach coming in for more skepticism.
“If you want a 30-mile radius, courts are saying, you’ve got to show me that you’ve actually got a customer 30 miles northwest of the office. They treat it a little more like you would want them to treat the political subdivision clauses,” Murphy said. “Arguably, the radius, if you kept it small enough, would be more narrowly tailored. But it may be counterintuitive in terms of what the courts are willing to enforce.”
- Giving the working man blues
Whereas in the past usually only the most valuable employees would be subject to noncompete clauses, today some companies are asking even entry-level workers to sign them. But Steve Dellinger, an attorney with Littler Mendelson who represents companies on both sides of these issues, cautioned that he wouldn’t recommend imposing such covenants on rank-and-file employees, and advised that companies should instead utilize them strategically.
“I would recommend typically that you want your rank-and-file employees to be cognizant of protecting your trade secrets and your confidential information. An agreement with your low-level employees should be an agreement to protect those things,” Dellinger said. “I think it also makes it easier to defend your agreements with higher level employees, the ones who can truly do you harm. Doing it just for the sake of doing it isn’t what I’d recommend.”
- Eight hours of pushing broom
Noncompete clauses also need to be narrowly tailored in terms of the sorts of jobs that a former employee is precluded from taking. Attorneys call this the “janitor rule,” when a clause is so unspecific that it would prevent a former employee from taking literally any job with a competitor, even as a janitor. (Thus, the janitor rule applies exclusively to employees who aren’t janitors.)
Attorneys warned that a noncompete clause would be in peril of the blue pencil if it didn’t specify the sort of work that the employee is doing for their current company, and prohibited only the sorts of jobs in which she would be doing related kinds of work for a competitor—salespeople should be precluded from taking jobs in sales, and so on.
“You increase the chances of enforceability when you tailor it specifically to the needs of what this employee is going to be doing for you,” Dellinger said. “That way it’s easier to go in and justify the legitimate business interests that need to be protected.”
- Blanket (ban) on the clients
Oftentimes what frightens companies most is the fear that a former employee will poach all of its best clients on behalf of a competitor. That’s a legitimate business interest, and covenants not to compete should be drafted to specifically protect that interest. Courts are more likely to enforce clause if, rather than saying that an employee is barred from working for a competitor, the employee is barred from interacting with the clients they had significant contact with while working for the company.
“Let’s say I’m an executive, and I have maybe 20 top clients that I have extensive contact with. It might be legitimate for a covenant to say that I can’t go to a competitor and work with any of those clients,” Sanservino said. “But where companies get into trouble is when they’re trying to restrict me from working with clients that I never had any connection with in the old job. That gets you into trouble with an agreement being struck down.”
- Just to try to save a dollar
A common theme running through all of these tips is that attorneys are, not shockingly, not fans of companies downloading a blanket, one-size-fits-all noncompete clause off the internet and trying to impose it on all of their employees. The cost of custom-drafting clauses that spell out each employee’s specific duties will still be small compared to the expense of litigation over a faulty covenant, as such disputes tend to be costly.
“I think the best thing to do is to get a uniquely tailored noncompete clause drafted for each individual employee rather than have one standard form that you have each employee sign.” Murphy said. “I think in some cases companies are maybe trying to have to pay an attorney only one time for a non-compete clause, and that causes problems.”
- All taking and no giving
One final point is that companies can do well by negotiating with an employee who’s headed out the door. In some ways, North Carolina’s unforgiving blue pencil doctrine can actually be an incentive for companies to come to the table and craft an agreement that protects their most vulnerable interests while also letting the employee get on with his career and pursue gainful employment elsewhere.
“When I deal with clauses that are governed by the law of another state where they don’t have the blue pencil rule, people are more likely to really rattle the sabre and say let’s fight it out in court,” Murphy said. “When it’s based on North Carolina law, you can say, if you want to fight me in court over this, there’s the risk that you could end up with nothing. But you can also say that you’re willing to abide by an actually reasonable condition rather than go to court and take a chance on a court ruling.”
Follow David Donovan on Twitter @NCLWDonovan
