By: Jesse Jones

Are non-competes enforceable? Ask five different people, and you’ll get five different answers, and if one of them is a lawyer, they’ll say “it depends”. So, how do you know?

Non-compete agreements are historically state-law territory, and the states have come up with a varied approach to their enforceability. For example, North Carolina courts will not enforce a non-compete unless it is part of a written employment contract, based on valuable consideration, designed to protect an employer’s legitimate business interests, and reasonable as to both time and territory. With that said, most states agree that two of the main factors to consider are  geographical scope and the duration of the restriction. Over time, courts across the country have largely come to agree that the most restrictive (and enforceable) non-compete is 50 miles and two years after termination of employment.  An employer can get more than two years’ of protection, but would have to live with a geographical scope smaller than 50 miles; or more than 50 miles, but less than two years.

Technically, the rules just laid out are still applicable, but for the past two decades courts really have struggled with determining whether a non-compete should be enforced or is overly burdensome on the employee – or simply unnecessary to protect the employer. The old rules (particularly the parts around geographic scope) just don’t really work the same way when you’re talking about a digital company. Some states (California and a few others) have made non-competes void by statute, but even in states that have not passed anti-non-compete laws, courts have been trending toward avoiding enforcement of these provisions (in favor of the employee) for years. With that said, there are a handful of situations in which non-competes are normally enforceable, even in California (during the period of employment, in an M&A context, and between business partners, to name a few).

In February of 2021, the House of Representatives introduced H.R. 1367, aka the Workforce Mobility Act of 2021. The text of the Workforce Mobility Act is pretty direct:

Noncompete agreements are blunt instruments that crudely protect employer interests and place a drag on national productivity by forcing covered workers to either idle for long periods of time or leave the industries where they have honed their skills altogether.”

On top of that, President Biden released an Executive Order on July 9, 2021 in which he charged the Chair of the Federal Trade Commission to “curtail the unfair use of non-compete clauses and other clauses or agreements that may unfairly limit worker mobility.” Notwithstanding the President’s charge to the FTC, the law has not actually changed yet, and in his article, Tom Spiggle notes that it is unlikely that there will ever be a blanket ban on all non-competes in all circumstances. Business owners looking to grow by acquisition will certainly want to retain the “normal” rules that allow the enforceability of non-competes in the mergers & acquisitions context. If those M&A non-competes were no longer enforceable it would cause serious issues in the market for the sale and purchase of any business.

So, are non-compete agreements enforceable? I mentioned that a lawyer will say “it depends”, and that is the infuriating truth with respect to non-competes. So here are some suggestions.

  1. If the non-compete agreement is between business partners or in connection with the sale of a business, it is likely to be enforced as long as it is reasonable in terms of geography and duration.
  2. In an employment context – a non-compete is probably enforceable if it only applies while the individual is employed by the company.
  3. From the company side, including a non-compete is generally not going to hurt you from a legal perspective because in most cases an unenforceable non-compete puts the company in the same position it would be in if it did not have a non-compete at all. Plus it might keep an employee from competing even if it wouldn’t be enforced by a court. From a practical standpoint, however, company leadership should consider whether including a non-compete will make it more difficult to hire the right person, if it will slow down the hiring process, and whether the company actually needs a non-compete to protect itself against every employee.
  4. From the employee side, you will likely want to resist a non-compete. If it is necessary and the company insists, you should consider whether to negotiate for some kind of severance package or perhaps limit the non-compete to situations where you leave the company willingly.

Headquartered in the Research Triangle region of North Carolina, Fourscore Business Law serves entrepreneurs and businesses in the Triangle, throughout the Southeast and in Silicon Valley / San Francisco. We also represent venture capital funds and other investors who invest in companies throughout the U.S. The idea of delivering maximum impact in a simple and succinct manner is what we’re calling the Fourscore Principle. And that is what Fourscore Business Law is based on. Our clients operate in a broad range of industries including tech, IoT, consumer products, B2B services and more. Questions? Shoot us an email or give us a call at (919) 307-5356. Your first call is on us.