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In an increasingly competitive, specialized and service-driven economy, all employers facean urgent need to protect the very lifeblood of their businesses - their relationships with clientele. Predictably, employers are protecting these interests with varying degrees of success.

One of the common denominators between employers who are most successful in preserving their relationships with clientele is the focus of this article: usage of the enforceable covenant not to compete.

The following hypothetical situation illustrates the necessity of an enforceable covenant not to compete. Raleigh Widgets, an established Raleigh-based manufacturer of widgets, hired Jeff Singer, a young, dynamic and personable sales representative, to service some of its more valuable accounts.Fueled by a burning desire to satisfy the customer and a lifelong dream to establish himselfas synonymous with widgets in the Raleigh area, Jeff quickly established a loyal following of many of Raleigh Widgets' clientele. A Greensboro based competitor, Widget World, subsequently enticed Jeff to quit his job at Raleigh Widgets and become a senior sales representative to expand Widget World into the Raleigh area.When Jeff changed jobs, Raleigh Widgets lost many of its valuable clientele to WidgetWorld because it failed to execute an enforceable covenant not to compete with Jeff. Needless to say, Raleigh Widgets' failure to execute an enforceable covenant not to compete with Jeff was devastating.

In North Carolina, the following requirements must be satisfied for a covenant not tocompete to be enforceable. First, the covenant not to compete must be in writing and signed by the party against whom enforcement is sought. Although not expressly required by North Carolina courts, the covenant not to compete should include all essential elements of a contract.

Second, the covenant not to compete must be part of the employment contract. Althoughcourts have yet to delineate what constitutes a covenant that is "part of the contract of employment," this requirement is usually addressed by courts in conjunction with the writing or consideration requirements.

Third, an employee's covenant not to compete must be based upon valuable consideration.Covenants executed at the inception of employment are generally considered to be based on valuable consideration.

However, if a covenant is entered into between two parties who already enjoy an employer-employee relationship, then such covenant must be based upon new consideration, such as a definite and identifiable change in an employee's status, duties, benefits or compensation.

New consideration is more likely to be found when the employer's promises are specific and are not discretionary (e.g., consideration is found to be lacking when promotion is promised "when the economy improves"). A mere promise to allow the employee to continue his employment is not considered new consideration.

Fourth, the covenant not to compete must be reasonable as to time and territory. Courtsevaluate time and territory together to determine reasonableness as time and territory restrictions inversely effect each other. For example, if the time restriction is longer then the territory in which competition is prohibited should be smaller if the time and territory restrictions are to be upheld.

Courts typically uphold whatever reasonable territory restrictions are needed to protect the interests of the employer. In determining the reasonableness of territory restrictions, Courts consider the area in which the employee actually worked, the area, or scope of the restriction in the covenant, the nature of the business involved and the area in which the employer operated.

Finally, courts will not enforce covenants against public policy. In instances whereenforcement of covenants is against public policy, public policy concerns override the parties' right to freedom of contract. Public policy concerns most often arise when an employer attempts to enforce a covenant against a medical professional (i.e., medical doctors). In determining whether to enforce a covenant on grounds of public policy, courts consider, among other things, whether the professional performs highly specialized tests and protocols not performed by other doctors, whether losing the professional's services would likely result in possible critical delays in patient care and whether the patients' "ease of access to second opinions" would be impaired by enforcement of thecovenant.

Employers who do not use covenants not to compete are well-advised to consider the benefits of enforceable covenants against the cost of implementing them. Employers who have covenants not to compete in place with employees should ensure that such covenants are in conformity with the criteria set forth above. Otherwise, the same fate which befell Raleigh Widgets may be in the offing.