Earlier this month, the North Carolina Court of Appeals held in Employment Staffing Group v. Little that an unmentioned $100 check would suffice as consideration for a non-compete agreement prohibiting an employee from "competing" or "soliciting" customers for 1-year within a 50-mile radius. Employers: 1 // Employees: 0.
Essentially, the case went like this: Employee was asked to sign an agreement that limited her ability to "compete" against her employer upon her departure from the company. This agreement also included a non-solicitation provision that essentially prohibited the employee from wooing away her employer's customers/clients and its employees upon her departure. The agreement was signed during the course of her employment (a.k.a. after she had already been established as an employee and NOT at the point of being hired) and it said absolutely nothing about consideration. *
[ * ] Consideration is legal jargon for money or another "perk" or "benefit" offered in exchange for agreeing to the terms of a contract. Contracts are only binding if there is consideration for the agreement so no consideration = no binding contract.
When said employee left the company, her former employer sought to enforce the non-compete agreement. Employee said no thanks and argued that without consideration the noncompete was non-binding. Employer fought back and pointed to a $100 payment employee received four or so days after signing the agreement- a payment the Employer says was offered in exchange for her signing the non-compete. One year later, the Court of Appeals sides with the employer.
In North Carolina, non-compete agreements have always been a tough nut to crack. There is no statute setting parameters for non-compete agreements so as an attorney frequently tasked with drafting these agreements (and sometimes tearing them apart), I look at the court cases. In short, in North Carolina a valid non-compete must be: (1) in writing; (2) reasonable in time and territory (meaning the agreement cannot extend for too long and cannot include too large of a geographic territory); (3) based on valuable consideration; and (4) fair to the parties and not otherwise against public policy. The writing requirement is easy to figure out. We also know from past cases that time and territory have an inverse relationship: the longer the time, the smaller the territory and vice versa. It is the "valuable consideration" that is tricky in Employment Staffing Group v. Little and here is why:
Problem 1: A valid non-compete must be in writing but after this case it appears not all the essential terms need to be in the writing. This is confusing and obviously opens up some questions about what actually must be stated in written form and what can be concluded from parol evidence outside of the four corners of the document. There is also the whole issue of everything that is not in writing becoming a "he said, she said" nightmare.
Problem 2: A non-compete may be valid without a single dollar sign in the agreement. This leaves consideration subject to some after-the-fact interpretation by the parties. Based on this case, so long as you can show that consideration was in fact paid within a reasonable time of signing the agreement you should be fine. The problem is that when the consideration is not specifically defined in the agreement, it can suddenly be anything. For example, a bonus an employee was already getting but maybe didn't know they were getting.
Problem 3: The threshold for what is "valuable" consideration just got lower. A lot of cases point to $500 as a solid example of valuable consideration. Now $100 seems to be okay. Granted, consideration's value is based on a lot of factors such as the employee's role in the company, their base salary, etc, but this number still seems low considering the employee in Employment Staffing Group was asked to sign a 1-year, 50-mile radius non-compete among other restrictive provisions.
So what do you do? For starters, keep in mind, this case may be appealed to the North Carolina Supreme Court (obviously, I'll keep you updated if this happens). But for now, here are some quick tips for non-compete agreements that should help keep you out of trouble (key word: help):
Tip # 1: Have an attorney look at your non-competes before you present them to employees. Or better yet, have one of us draft it for you. We may be socially awkward beings who use words like "barrister" and terms like "caveat emptor" but we actually do possess a very specialized body of knowledge and most of us generally do want to help.
Tip # 2: Mention consideration in the agreement. Just say what it is, how much it is, etc. This will save you some grief when and if you ever need to enforce the agreement. If the consideration is a check (as it usually is), the check should be issued within 24 hours of signing the agreement and the memo line should say something like "for consideration of agreement signed [DATE]."
Tip # 3: Have an attorney assist with the time and territory. This is also really tricky and really subjective so an attorney is a good moderator that can comfortably tell you whether or not thats going to fly in court. We have also drafted a few of these in the past and can probably give you some idea of what has worked and what has not. Just a thought.
If you have specific questions about employment agreements, non-competes, or the like, feel free to give us a call and we'll chat! #HappyMonday