MESSAGE FROM ASSOC. PROF. PAMELA S. EVERS, ATTORNEY AT LAW
This article has been offered by web posting to UNCW students for educational purposes only.
Articles posted may have been edited for clarity and format by Pamela S. Evers.
http://www.ncbusinesslitigationreport.com/
Courts Shouldn't Question The Adequacy Of Consideration For Covenants Not
To Compete, Rules NC Court Of Appeals
Posted on April 7, 2009 by Mack Sperling
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.
North Carolina Business Court Dismisses Claim That Confidentiality Agreement
Was Invalid Because It Was Overly Broad
Posted on December 28, 2008 by Mack Sperling
Can a confidentiality agreement be too broad to be
enforced? The North Carolina Business Court said it can
be, under some circumstances, in Covenant Equipment
Corp. v. Forklift Pro, Inc.
Before you keep reading, know that the case involved
South Carolina, not North Carolina, law. North Carolina
law on this point looks to be pretty different, as discussed
at the very end of this post, but the case is still worth a
look.
The facts are typical for a lawsuit against a former employee: Caldwell had sold his forklift
business to the Plaintiff and became Plaintiff's employee. As a part of the sale, Caldwell agreed
that he “w[ould] not, directly or indirectly, disclose or furnish any non-public, proprietary or
confidential information obtained from or relating to the Business.”
Caldwell left the Plaintiff and started a new competitive business. The Plaintiff sued, arguing that
Caldwell had breached his confidentiality obligations. Caldwell moved to dismiss this claim,
arguing that under South Carolina law the confidentiality provision was overly broad and
unenforceable.
The motion to dismiss was based on the South Carolina Supreme Court’s 1996 decision in
Carolina Chemical Equipment Co. v. Muckenfuss, 471 S.E.2d 721 (S.C. 1996), where it held that
a broad confidentiality agreement, which would have the effect of a covenant not to compete,
will be subject “to the same scrutiny as a covenant not to compete.” The confidentiality
agreement at issue in Muckenfuss prohibited the use of virtually all of the knowledge which
Muckenfuss had gained during his employment with the plaintiff. The South Carolina Supreme
Court held that this broad provision was tantamount to a covenant not to compete, and that it was
invalid because it contained no restrictions as to time or territory.
The following year, however, the South Carolina Legislature overruled Muckenfuss, at least in
part, by enacting the South Carolina Trade Secrets Act. A provision of that statute provides that
“a contractual duty not to disclose or divulge a trade secret, to maintain the secrecy of a trade
secret, or to limit the use of a trade secret must not be considered void or unenforceable or
against public policy for lack of a durational or geographical limitation.” S.C. Code Ann. §39-130(D) (2007). (There is no counterpart to this provision in the North Carolina Trade Secrets
Protection Act).
Judge Tennille, finding no definitive guidance from South Carolina’s courts on the interplay
between the court decision and the statute, interpreted South Carolina law to be as follows:
South Carolina law, as it applies to this case, prohibits an employer (or business purchaser)
from enforcing a restriction on the use of information that would amount to an unlawfully
broad restrictive covenant preventing a person from using the general skills and knowledge
acquired as an owner or employee of a business. On the other hand, expiration of a
restrictive covenant does not permit a former employee or business owner to use
proprietary and confidential information or trade secrets of a business that are otherwise
protectible.
Thus, Judge Tennille observed, South Carolina law would permit the Plaintiff to restrict
Caldwell from using “specific customer or supplier pricing information” he had learned before
leaving the company. But South Carolina law would not permit the Plaintiff to restrict Caldwell
“from using his general knowledge of how prices are set in the forklift repair business to
compete.”
The Court then denied the motion to dismiss, interpreting the confidentiality provision to be
permissibly limited to prohibiting Caldwell’s use of non-public, proprietary information to
which he had access at the business he had sold, and which had been part of the assets purchased
by the Plaintiff.
There is no North Carolina appellate decision I'm aware of which analyzes a confidentiality
agreement under the same factors applicable to non-compete agreements. That approach was
rejected by the Court of Appeals In Chemimetals Processing, Inc. v. McEneny, 124 N.C.App.
194, 476 S.E.2d 374 (1996), where the Court held:
An agreement is not in restraint of trade, however, if it does not seek to prevent a party from
engaging in a similar business in competition with the promisee, but instead seeks to prevent the
disclosure or use of confidential information. Such agreements may, therefore, be upheld even
though the agreement is unlimited as to time and area, upon a showing that it protects a
legitimate business interest of the promisee.
Chemimetals might leave room for a North Carolina court to say that a confidentiality agreement
seeking to protect all information of a former employer is invalid because the breadth of such a
restriction doesn't protect "a legitimate business interest" of the former employer. The
Covenant decision might be of some help in an argument like that.
Covenant Not To Compete, And Summons, Held Invalid
Posted on July 22, 2008 by Mack Sperling
Today, in its Order and Opinion in Bolick v. Sipe, the North Carolina
Business Court rejected a novel argument regarding the validity of
post-employment consideration for a covenant not to compete. It also
dealt with the issue of the validity of a summons issued in the wrong
name.
On the non-compete side, Plaintiff signed the non-compete with the
cleaning company for which she had worked three years after she
began employment. Defendant argued that it had held off from firing
the Plaintiff in exchange for her execution of the agreement, and that
this was valid consideration.
Judge Tennille disagreed, holding:
"The Court is not aware of any prior decisions holding that a decision not to fire someone is
adequate consideration for a non-compete. Instead, this state has found that '[w]hen the
relationship of employer and employee is established before the covenant not to compete is
signed there must be consideration for the covenant such as a raise in pay or a new job
assignment.' Whittaker Gen. Med. Corp. v. Daniel, 324 N.C. 523, 527, 379 S.E.2d 824, 827
(1989) (citing Chemical Corp. v. Freeman, 261 N.C. 780, 136 S.E.2d 118 (1964)). That
consideration can NOT be the continuation of employment. Mach. Co. v. Miholen, 27 N.C. App.
678, 686–87, 220 S.E.2d 190, 196 (1975). Indeed, under Defendants’ theory, every employer
could offer an employee the option of being fired or signing a non-competition agreement and
argue that 'consideration' had been paid. That is not the law in North Carolina. The restrictive
covenant in this case was invalid."
The issue involving the validity of the summons arose because Plaintiff had sued a company
called Molly Mops, LLC, but had meant to sue a different company, Molly Mops Cleaning
Service, LLC. Plaintiff discovered the error promptly, and amended her complaint before any
responsive pleading was filed, but never had a new summons issued.
Plaintiff sought leave to amend the original summons to properly name Molly Mops Cleaning
Service, LLC. Judge Tennille denied the Motion, even though the right party had notice of the
lawsuit, holding:
This is not a case of misnomer. The wrong entity was named in the summons which was never
amended. There is no doubt that MMCS had notice; however, that does not cure the defect. It
may well be that plaintiff intended to sue MMCS and was confused; however, that does not cure
the defect. Plaintiff did file an amended complaint; however, that did not cure the defect. A
proper summons was never served on MMCS and thus no action has been commenced against it.
***
In this case, Plaintiff made a substantive mistake and sued the wrong entity. That mistake was
fatal. The court does not have jurisdiction over MMCS because no valid summons was issued
and served on MMCS.
Court Of Appeals Rules That NC Wage And Hour Act Has No Application
Outside North Carolina
Posted on June 3, 2008 by Mack Sperling
The North Carolina Wage and Hour Act does not
apply to out-of-state employees working for North
Carolina companies even if their employment
agreements provides that the law of North Carolina
applies, per the ruling of the North Carolina Court of
Appeals today in Sawyer v. Market America, Inc.
Sawyer, a resident of Oregon, worked for Market
America, a North Carolina based company, under an
independent contractor agreement. All of Sawyer's
work was done outside of North Carolina.
The Agreement between Sawyer and Market America provided that it should be "governed and
construed under the laws of the State of North Carolina."
When Sawyer sued, he made claims under the North Carolina Wage and Hour Act. He argued
that since the parties had agreed to the application of North Carolina law, there was no reason for
the Court to reach the issue whether the Act has extraterritorial effect.
The Court of Appeals rejected this argument, relying on venerable North Carolina Supreme
Court precedent that "every statute is confined in its operation to the persons, property, rights, or
contracts, which are within the territorial jurisdiction of the legislature which enacted it. The
presumption is always against any intention to attempt giving to the act an extraterritorial
operation and effect.”
The conclusion of the Court of Appeals was that summary judgment had been properly entered
by the trial court, because "the North Carolina Wage and Hour Act does not apply to the wage
payment claims of a nonresident who neither lives nor works in North Carolina."
Dismissed Employee Did Not Have Public Policy Claim
Posted on May 29, 2008 by Mack Sperling
Today, in Eglinton v. Blue Ridge Bone & Joint Clinic,
P.A., the Business Court dismissed Plaintiff's claim
that he had been dismissed from his employment in
violation of the public policy of North Carolina.
Plaintiff, a doctor who had been employed by the
Defendant medical practice, alleged that he had been
forced to resign his employment while he was disabled
and seeking medical treatment. He asserted that the
Defendant's "conduct in demanding an unnecessary
resignation agreement of a disabled employee while he was in a vulnerable state . . . offends the
public policy of the State of North Carolina."
Judge Diaz disagreed and granted Defendant's Motion to Dismiss. He held:
While Plaintiff’s original and amended pleadings assert that he was disabled and seeking medical
treatment at the time he was purportedly coerced by BRBJ into resigning from employment,
Plaintiff does not allege facts sufficient to show that he met the criteria for disability under any
relevant statute, nor does he allege that BRBJ discriminated against him on the basis of any such
disability. Cf. Baucom v. Cabarrus Eye Ctr., P.A., No. 1:06CV00209, 2007 U.S. Dist. LEXIS
25101, at *19–22 (M.D.N.C. Apr. 4, 2007) (dismissing claim alleging wrongful termination
where Plaintiff failed to allege facts sufficient to demonstrate disability under state or federal law
or that Defendant discriminated against plaintiff on the basis of any such disability).