Recent Legal Developments for Non-Compete Agreements

Recent Legal Developments for Non-Compete Agreements

            As you probably know, the enforceability of non-compete agreements has, in general, experienced considerable restriction over the last few years. State and federal courts have become increasingly unwilling to hold employees to non-compete agreements that lack specificity and reasonable limitation in scope. In recent months, several developments relating to the enforceability of non-compete agreements have further limited or continued to limit the scope of such agreements.

            First, the “janitor rule” continues to gain acceptance in non-compete contexts and was specifically referenced in a recent federal district court case in Illinois. The “janitor rule” provides that if a non-compete agreement would prevent an employee from being a janitor for a competitor, the agreement is likely overly broad and unenforceable. The takeaway for employers is to draft non-compete agreements in a manner that addresses specific and legitimate business interests. Simply barring any employment with a competitor risks a court holding the non-compete agreement as unenforceable.

            Second, and more broadly, individual states continue to restrict the scope of non-compete agreements. Specific to the Carolinas, last June, the North Carolina Business Court, in American Air Filter Company, Inc. v. Price, 2017 NCBC 54, held a non-compete agreement as unenforceable where the employer did not give separate consideration for each contract renewal period. Because each renewal period was not supported by separate and new consideration, the employee’s non-compete agreement was unenforceable. While the case applied Kentucky law to the employment contract at issue, North Carolina and Kentucky share the same legal requirement that non-compete agreements executed after employment begins require new consideration. Thus, this case presents strongly persuasive precedent for future North Carolina courts in cases where non-compete agreements are baked into more general employment contracts subject to renewal periods.

            Further, South Carolina also requires new consideration for non-compete agreements executed after employment begins. As such, American Air Filter Company, Inc. v. Price also provides potentially persuasive authority for similar application to South Carolina employment and non-compete agreements.

            Thus, if your business uses non-compete agreements, be vigilant as to the changing legal landscape of non-competes. The last thing any business wants is to seek enforcement of a non-compete with a former key employee and then learn that agreement is unenforceable.