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Many North Carolina Non-Compete Covenants Could Be in Jeopardy

8/8/17

By: Paul H. Derrick

Automatic renewal provisions are ubiquitous in employment contracts, and many such contracts include non-compete obligations that limit the extent to which an employee can use his/her knowledge and skills on behalf of a competitor in the same industry. A decision by the North Carolina Business Court could have a profound effect on whether non-compete covenants are valid at all when an employment agreement automatically renews.

In American Air Filter Company, Inc. v. Samuel C. Price, Jr. and Camfil USA, Inc., the employee and his employer entered into an employment agreement 17 years after his employment began. The contract contained an automatic renewal provision, as well as non-compete obligations that limited the employee’s future employment for a period of time after his employment ended. Because contracts entered into after employment has already begun often require new consideration beyond continued employment (e.g., a bonus, pay increase, or promotion), the company paid the employee something of value that he was not otherwise entitled to receive. Years later, and after the employment agreement had automatically renewed several times, the employee quit and went to work for a competitor.

The former employer sued for breach of contract, claiming that the worker’s new employment with a competitor violated the non-compete covenant in the agreement. The court determined that that the employee had received sufficient consideration to make the agreement enforceable and valid at the time it was signed. However, it concluded that the agreement was no longer valid at the time the employee went to work for a competitor because the original employer had not provided additional consideration each time the contract automatically renewed in subsequent years. Because the employment agreement was not supported by additional consideration when it renewed, its non-compete covenant was invalid and the employee did not violate any legal obligation when he went to work for a competitor.

A couple points are worth noting. Although the court was applying Kentucky contract law to this particular case, the relevant laws of Kentucky and North Carolina are very similar, and there is no indication that the court would have reached a different result if it had applied North Carolina law. Also, decisions of the North Carolina Business Court are not binding on other courts unless they are affirmed by an appellate court. However, the state’s trial and appellate courts typically look to the Business Court’s decisions for guidance in cases involving restrictive covenants, so it is likely that this decision could become persuasive authority.

For now, it is safe to say that businesses in North Carolina should be aware of this substantial development if they use non-competes and other restrictive covenants in their employment agreements. At the very least, changes may be required in employment agreements that contain automatic renewal provisions so that some amount of new or additional consideration is given each time the contract renews.

If you have any questions or would like more information, please contact Paul Derrick at [email protected].