States within the Fourth Circuit vary in their enforcement of restrictive covenants. Virginia, Maryland, and South Carolina govern the use of restrictive covenants through common law while North Carolina governs through statute. Despite the variations in governing authority, many of the factors used in these states will be familiar, given the widely accepted “reasonableness” standard many jurisdictions have adopted as a metric for adjudicating the propriety of such agreements.
Law Governing Restrictive Covenants
Requirements for Enforcement of Restrictive Covenants
Common Law – “Virginia, restrictive covenants, such as non-compete clauses and non-solicitation clauses, are enforceable if they are reasonable.” MicroStrategy Inc. v. Bus. Objects, S.A., 233 F. Supp. 2d 789, 794 (E.D. Va. 2002), aff’d in part, rev’d in part and remanded, 429 F.3d 1344 (Fed. Cir. 2005); Foti v. Cook, 220 Va. 800, 805, 263 S.E.2d 430, 433 (1980)
Employer bears the burden of proof in establishing its reasonableness of the non-compete agreement.
In determining whether an employer has carried that burden, Virginia courts focus on three factors:
(1) the duration of the restraint;
(2) the geographic scope of the restraint; and
(3) the scope and extent of the activity being restricted.
These three factors are considered together rather than separately and the clear overbreadth of any factor can defeat the enforceability of the provision, even if the other factors are narrowly drawn.
Upheld only when employees are prohibited from competing directly with the former employer.
Common Law – Covenants not to compete may be applied and enforced generally “only against those employees who provide unique services, or to prevent the future misuse of trade secrets, routes or lists of clients, or solicitation of customers.”
Ecology Servs., Inc. v. Clym Envtl. Servs., LLC, 181 Md. App. 1, 14, 952 A.2d 999, 1006 (2008)
The court determines whether the restrictive covenant is reasonable in scope, both in terms of geography and duration, in the context of the employer’s business.
Next, the courts then consider the various factors in determining reasonableness:
(1) person sought to be enjoined is an unskilled worker whose services are not unique;
(2) whether the covenant is necessary to prevent the solicitation of customers or the use of trade secrets, assigned routes, or private customer lists;
(3) whether there is any exploitation of personal contacts between the employee and customer; and
(4) whether enforcement of the clause would impose an undue hardship on the employee or disregard the interests of the public.
The general rule in Maryland is that if a restrictive covenant in an employment contract is supported by adequate consideration and is ancillary to the employment contract, an employee’s agreement not to compete with his employer upon leaving the employment will be upheld ‘if the restraint is confined within limits which are no wider as to area and duration than are reasonably necessary for the protection of the business of the employer and do not impose undue hardship on the employee or disregard the interests of the public.
No contract or agreement hereafter made, limiting the rights of any person to do business anywhere in the State of North Carolina shall be enforceable unless such agreement is in writing duly signed by the party who agrees not to enter into any such business within such territory:
N.C. Gen. Stat. Ann. § 75-4
Restrictive covenants between an employer and employee are valid and enforceable if they are:
(1) in writing;
(2) made part of a contract of employment;
(3) based on valuable consideration;
(4) reasonable both as to time and territory; and
(5) not against public policy.
Restriction covenants are upheld when it is “directed at protecting a legitimate business interest” and areas where Plaintiff has connections or personal knowledge of customers.
Can enforce a restriction prohibiting a former employee from soliciting customers or clients.
“[A]greements not to compete, while looked upon with disfavor, critically examined, and construed against any employer, will be upheld as enforceable if such agreement is reasonable as to territorial extent of the restraint and the period for which the said restraint is to be imposed.” Team IA, Inc. v. Lucas, 395 S.C. 237, 245, 717 S.E.2d 103, 107 (Ct. App. 2011)
A covenant not to compete will be upheld only if it is:
(1) necessary for the protection of the legitimate interest of the employer;
(2) reasonably limited in its operation with respect to time and place;
(3) not unduly harsh and oppressive in curtailing the legitimate efforts of the employee to earn a livelihood;
(4) reasonable from the standpoint of sound public policy; and
(5) supported by valuable consideration.
Restrictive covenants are enforced when preventing disclosure or divulging of a trade secret. S.C. Code Ann. § 39-8-30.
When evaluating the restrictive covenants, courts look at whether the restriction is reasonable “in that it is no greater than necessary to protect the employer’s legitimate interests, and it is not unduly harsh in that it curtails the employee’s ability to earn a living.”
Subject matter is the only truly relevant factor and it must be balanced by “weighing the competing interest of employer and employee and giving full consideration to the public interest.”
“A geographic restriction is generally reasonable if the area covered by the restraint is limited to the territory in which the employee was able, during the term of his employment, to establish contact with his employer’s customers.”