North Carolina Business Litigation Report

Courts Shouldn't Question The Adequacy Of Consideration For Covenants Not To Compete, Rules NC Court Of Appeals

The adequacy of the consideration for a covenant not to compete entered into after the commencement of employment was the issue in Hejl v. Hood, Hargett, & Associates, Inc., decided by the Court of Appeals today.

In Hejl, the employer dealt with the consideration requirement by paying Hejl $500 to sign the non-compete.  Hejl signed and took the money, but argued after he left his employer that the consideration for the non-compete wasn't "anything of substance."  He persuaded the trial court to invalidate the covenant for lack of consideration. 

The Court of Appeals disagreed with that aspect of the trial court ruling.  Judge McGee said that the  trial court shouldn't have considered the issue of the adequacy of the consideration, and held:

the parties to a contract are the judges of the adequacy of the consideration. "'The slightest consideration is sufficient to support the most onerous obligation, the inadequacy, . . . is for the parties to consider at the time of making the agreement, and not for the court when it is sought to be enforced.'" Where there is no fraud and the "'parties have dealt at arms length and contracted, the Court cannot relieve one of them because the contract has proven to be a hard one.'"

Plaintiff makes no allegation the Agreement was induced by fraud. Further, the consideration was not illusory because Plaintiff accepted the $500.00 at the time he signed the contract. Therefore, because the parties dealt at arms length, and the Plaintiff received $500.00 as consideration for signing the Agreement, we find the Agreement is not void due to lack of consideration.,

The Court also summarized the types of consideration that can support a covenant not to compete entered after an employment relationship has begun:

Our Courts have held the following benefits all meet the "new" or "separate" consideration required for a non-compete agreement entered into after a working relationship already exists: continued employment for a stipulated amount of time; a raise, bonus, or other change in compensation; a promotion; additional training; uncertificated shares; or some other increase in responsibility or number of hours worked.

Notwithstanding the win on the consideration battle, the employer in the Hejl case lost the war on the issue of the reasonableness of the restriction.  Although the Court of Appeals held that the three year period of the restriction was presumptively reasonable, it found that the geographic territory was not. 

The employer had attempted to enjoin Hejl from competing not only in Charlotte, where its office was located, but also throughout North and South Carolina.  The restriction further extended to any potential customer to whom the employer had "quoted any product or service."  The Court found the two state restriction too broad, because Hejl did have "any personal knowledge of Defendant's customers in those areas."  The attempted extension to customers who had only gotten a proposal, as opposed to having done any actual business with the employer, was also deemed by the Court to be too broad. 

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Mack Sperling
Brooks Pierce, LLP
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