Non-Compete, Non-Solicitation and Confidentiality Agreements

Disfavored by the law, restrictive covenants in employment agreements must be carefully tailored to the circumstances.

Increasing numbers of non-compete agreements, non-solicitation clauses and confidentiality agreements are appearing in the employment marketplace.

     Trade secrets, business practices and employees’ institutional knowledge are causing employers to restrict the employment portability of their key people, shut down the unauthorized flow of information when an employee transitions to a competitor and stop employee poaching by former employees or business competitors. All three types of agreements have the purpose of trying to prevent someone from taking something from a business - customers, employees, business in general, proprietary products or trade secrets.

   The problem with all three is enforcement; once the damage has been done (the employee or trade secret has been stolen or competition has destroyed a business) it takes a lengthy and costly legal process to recover damages and put the genie back in the bottle, so to speak. In these cases, no one benefits but the lawyers.

   Non-compete agreements are used in two circumstances: (1) in an employment context when the employer wants to limit an employee’s post-employment activities which may be a competitive business for himself or for another employer already in the marketplace; and (2) in the business sale context, in which the selling owner may agree not to compete against the new owner for a specific time and/or within the market.

   In North Carolina, non-compete agreements in the employment context are generally disfavored. However, they are valid within reasonable limits and if consideration was given for the promise not to compete. Generally, Four elements: (1) consideration; (2) scope of restriction; (3) term and (4) geographic area must be reasonable for an employment non-compete agreement to be enforced by the NC courts.

   Consideration is what was given to the employee for the promise not to compete post-employment. Entering into a non-compete at the time of hire, as a part of the hiring, has been found to be valid consideration. Receiving “independent consideration,” such as a raise or additional benefits while already employed, has been found to be a valid consideration for execution of a non-compete in an employee’s mid-stream of employment. The key to consideration for an enforceable non-compete is whether the consideration given is a “real benefit” which is in addition to the employee’s current status. Real benefits might include: midstream (or post-termination) benefit agreements, promotions, or a cash payment

   The scope of the restriction refers to the type of work the individual is barred from performing under the agreement – generally, the same capacity in which the individual served in his or her prior employment. To take an extreme example, an employer may prohibit a software engineer from performing engineering activities at a competitor but it would likely be considered unreasonable to try to prohibit that same engineer from performing janitorial services for the competitor.

   Term is the length of time the non-compete will be in effect, post-employment. Generally, the Courts do not favor a term which is in excess of three years. Two or less years in length of term have been found more reasonable and, therefore, enforceable.

   Geographic area is just that, the area of commerce wherein the ex-employee is prohibited from plying his trade either for himself or a new employer. The reasonableness of the geographic area of prohibition depends upon the ex-employer’s zone of commercial activity. If the old employer operates only within a county or two wide area, it would be unreasonable for the employer to prohibit the employee from working nation-wide. Similarly, it may be reasonable for an employer who operates world-wide have a large geographic area of restriction.

   Additionally, North Carolina courts will view reasonableness of the relationship between the elements of term and geographic area to determine the validity of the non-compete agreement.

   A non-solicitation clause is sometimes confused with a non-compete agreement. A non-solicitation clause is utilized to deter a departing employee from soliciting the ex-employer’s clients for business post-employment or soliciting the ex-employer’s current employees to follow the departing employee to a new job or competitor. Generally, in order to be enforceable, a non-solicitation clause must meet four criteria: 1) it must not be void for public policy, or injurious to the public; 2) it should be no broader than necessary to protect the employer; 3) it should not cause undue hardship for the former employee; and 4) its term and geographic scope must be reasonable. If a non-solicitation clause meets these four elements it will be likely that the North Carolina courts will enforce it.

   A confidentiality agreement (also known as a “non-disclosure agreement” or “NDA”) is a contract in which a person or business promises to keep specific information secret or not to disclose the specific information to others without proper authorization. The NDA must identify or describe the information to be kept confidential. Generally, the confidential requirements include not disclosing the object and scope of the discussions between the parties, not using the conﬁdential information other than for the speciﬁed purpose agreed to by the parties, and not disclosing the conﬁdential information to persons or entities without authorization of the owner of the information.

   Conﬁdentiality agreements will usually exclude certain information from the deﬁnition of conﬁdential information; such as information that is or becomes public through no act of the bound party, information already in possession of the bound party as of the date of disclosure, or information required to be disclosed by court order.

   Generally, a conﬁdentiality agreement must also specify the time period during which conﬁdential information will cannot be disclosed. This term may be for weeks, months or a number of years. When a conﬁdant breaches his or her obligations under a conﬁdentiality agreement, he or she is subject to enforcement remedies which may include equitable relief and monetary damages. An injunction against a conﬁdant helps prevent any further breach of the agreement. A court may also award monetary damages if the injured party can quantify actual damages.

   It is often difficult and expensive to enforce a conﬁdentiality agreement even though the agreement is specific to what constitutes the trade secret or conﬁdential information and what would represent a disclosure violation. Also, while an injunction may prohibit further disclosures of the information, the information has been disclosed and may well travel beyond the purview of enforcement.

   It would be impossible to examine the “ins and outs” of these three types of employment agreements within the limited confines of this article. Both employers and employees should closely examine the need, reasonableness and enforceability of any proposed non-compete, non-solicitation or confidentiality agreement. Hiring employers need to be aware of any post-employment restrictions their new hire may be under. When one of these agreements are to be used, or required, both the employer and employee should seek advice of counsel regarding the terms and conditions of the proposed agreement or clause.