North Carolina Business Court Dismisses Claim That Confidentiality Agreement Was Invalid Because It Was Overly Broad

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. §39-1-30(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.

The photo at the top came from Tom Arthur's Photostream on Flickr.

Possible Settlement Announced In Wachovia-Wells Fargo Merger Litigation

Wachovia and Wells Fargo have probably reached a settlement with the Plaintiff in the class action lawsuit over the merger between the two banks.  The settlement, announced in Wachovia's Form 8-K filed with the Securities and Exchange Commission yesterday evening, will if finalized require approval by the North Carolina Business Court.

The 8-K filing references a Memorandum of Understanding setting out the anticipated terms of the settlement.  The Memorandum wasn't a part of the SEC filing, but the filing says that Wachovia and Wells Fargo will agree not to appeal the (pretty insignificant) win by Plaintiff on the invalidity of the 18 month "tail" in the Merger Agreement, and Wachovia will agree to make additional disclosures in its proxy statement.

The filing says the following:

Wachovia and Wells Fargo agreed not to appeal from the portion of the Court’s Order dated December 5, 2008 that enjoins the 18 Month Tail Provision. Wells Fargo for its part also agreed to waive the enforceability by Wells Fargo of the 18 Month Tail Provision to the extent enjoined by the Court’s Order. Wachovia and Wells Fargo also agreed to make certain additional disclosures related to the proposed merger, which are contained in this Form 8-K. The memorandum of understanding contemplates that the parties will enter into a stipulation of settlement.

The stipulation of settlement will be subject to customary conditions, including court approval following notice to Wachovia’s shareholders. In the event that the parties enter into a stipulation of settlement, a hearing will be scheduled at which the Court will consider the fairness, reasonableness, and adequacy of the settlement. There can be no assurance that the parties will ultimately enter into a stipulation of settlement or that the Court will approve the settlement even if the parties were to enter into such stipulation. In such event, the proposed settlement as contemplated by the memorandum of understanding may be terminated.

The Form 8-K also contains the additional disclosures which Wachovia agreed to make in its proxy statement. There's nothing particularly new or revealing in those.

The picture of the Wachovia sign at the top is from CounterBreak, on Flickr.  

Watch Out For Soccer Balls, They Can Be Dangerous

All lawyers know, from first year torts class, that if you are hit by a baseball at a baseball game, you are unlikely to have any claim against the operator of the baseball stadium.  There's a well developed body of law to that effect.

Today in Allred v. Capital Area Soccer League, Inc., the North Carolina Court of Appeals held that the rules of the game may be different when it's a soccer game being played.  The Allred case is apparently one of only three cases in the country that deals with injuries suffered by spectators from soccer balls kicked into the stands.

The Plaintiff in Allred was attending a women's professional soccer game at State Capital Soccer Park in Cary, North Carolina.  She was sitting in the stands behind one of the goals, and was hit in the head by a ball during warmups, when "many balls were directed towards the nets in a relatively short period of time."  Op. at 4..  She suffered "substantial head injuries."   Op. at 2. 

The trial court granted Defendant's Motion to Dismiss on Plaintiff's claim of negligence, but the Court of Appeals reversed.  Judge Steelman began the unanimous opinion of the Court by observing that there were no reported cases in North Carolina involving injuries to spectators at soccer games, but that the cases involving baseball games "have been uniformly decided against the spectator, either on the basis that the stadium operator was not negligent or that the spectator assumed the risk of being hit by a baseball."  Op. at 5.

The Court's analysis then turned to two issues: the duty owned by the sports facility operator to the spectator, and whether the Plaintiff had assumed the risk by attending the game.

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Metatags And Google AdWords Lead To Personal Jurisdiction In North Carolina Trademark Infringement Case

The Internet advertising activities of the Defendants, including the use by Defendants of Plaintiff's trademark to generate "sponsored links" in a Google AdWords campaign and the use of the Plaintiff's trademark in metatags, supported personal jurisdiction in an infringement action.  The case, Market America v. Optihealth Products, Inc,  was decided by Magistrate Judge Eliason of the Middle District of North Carolina on November 21, 2008.

The parties compete in the sale of food supplements containing oligomeric proanthocyanidins, an antioxidant which is presumably good for you.  The Plaintiff's product is OPC-3, for which it has a registered trademark. The Defendants sell a competing product under the trademark OPCXtra. 

The Defendants had sold some of their product in North Carolina, but argued that none of their allegedly infringing activity had occurred in this State because none of the product shipped to the State included Plaintiff's trademark. The Court disagreed, however, and denied the Motion to Dismiss for lack of jurisdiction.  It found that "Defendants engage in a number of activities using Plaintiff's trademark, which is intended to draw individuals to their website, which, in turn, is used to make out-of-state sales." 

Among those activities was the Defendants' participation in Google's AdWords program.  The Defendants had purchased through AdWords the word OPC3, the name of Plaintiff's trademarked product.  That meant that if a person using Google searched for OPC3, a link to Defendants' website would be returned. 

The Defendants had also placed metatags on their website which used the Plaintiff's trademark.  Metatags aren't visible, but if a person searched for "OPC" or "OPC3," that person would be directed to the Defendants' website due to the metatags being "seen" by the search engine.

With regard to the metatags, Magistrate Judge Eliason held that "the mere fact that a defendant did not visually display the plaintiff's trademark through the use of a metatag is not determinative on the issue of use, but rather is more properly a factor to be used in deciding whether there is a 'likelihood of confusion' caused by defendant's activity." The Court declined to follow a Second Circuit decision, 1-800 Contacts v. WhenU.Com, Inc., 414 F.3d 400 (2nd Cir. 2005), which holds that the use of a metatag does not amount to use of a trademark.

The Court further held that the Defendants' use of the OPC3 metatags was "for the express purpose of increasing the chance that Internet search engines will point potential customers, including customers from North Carolina, to their website."

Another factor in the denial of the Defendants' Motion to Dismiss was their purchase of the domain name “www.opc3.com” so that Internet users typing in the “opc3” mark owned by Plaintiff would be directed to Defendants' website and Defendants' competing products.

The Court found the use of Google AdWords, metatags, and the OPC3 website were not "inadvertent choices," but rather "intentional activity seeking to use Plaintiff's trademark in order to draw potential customers of Plaintiff to Defendants' website. . . ."  That made out sufficient minimum contacts for personal jurisdiction, and the New York Defendant will as a result be defending this case in the Middle District of North Carolina.

North Carolina Supreme Court Finds Negligent Mispresentation Based On Multiple Listing Service Listing

The North Carolina Supreme Court reversed the Court of Appeals today in a case involving a claim of negligent misrepresentation over a realtor's Multiple Listing Service (MLS) listing.

The Plaintiffs had purchased a home thinking it was connected to the city sewer system.  That's what the MLS listing said.  That was wrong, the home actually had a septic tank, which repeatedly overflowed after the purchase.

Plaintiffs won a jury verdict, but the Court of Appeals reversed.  The basis for the reversal was that the version of the MLS listing given to the Plaintiffs was not the same version as put on the service by the Defendant real estate brokers. The Defendants' listing stated "Information deemed RELIABLE but not GUARANTEED."  The version seen by the Plaintiffs did not have this language.

The Court of Appeals majority in Crawford v. Mintz, 653 S.E.2d 222 (N.C. App. 2007) held that "a buyer cannot demonstrate reliance on a representation made in an MLS listing unless that buyer relied on a version of the MLS listing containing the same qualifying language as was originally entered by the listing agent."

The Supreme Court's reversal was based on Judge Steelman's dissent.  He reasoned that the absence of the qualifying language "rather goes to the question of whether the plaintiffs relied upon the MLS listing, and whether any reliance was justifiable.  It was for the jury to determine the credibility of the witnesses, and the weight to be given to the evidence."

The Supreme Court didn't write much of an opinion, it ruled Per Curiam, stating only that it was "reversing for the reasons stated in the dissenting opinion."

There were other several other rulings from the Supreme Court today, you can find them here.

Should Your Clients Talk About Their Lawsuit On YouTube?

The Plaintiffs in Fisher v. Communications Workers of America, 2008 NCBC 18 (N.C. Super. Ct. Oct. 30, 2008), a pending Business Court case involving the North Carolina Identity Theft Protection Act, are live and on YouTube, talking about their claims.

The Fisher case is the first court decision under the Act. It involves whether the posting of social security numbers on a bulletin board is a violation of the Act.  In his October 30th opinion, Judge Diaz denied the Defendants' Motion to Dismiss.

The YouTube video (at the bottom of this post) brings out an interesting element of the case that isn't mentioned in the Complaint. The Plaintiffs contend in the video that the bulletin board posting of their social security numbers was done by the defendant Union intentionally, to retaliate against them either because they wouldn't join the Union, or because they wanted to (or had) quit the Union.  They say that the Union deliberately posted their social security numbers in order to expose them to the risk of identity theft. 

The video is on Freedom@Work, a blog associated with the National Right to Work Legal Defense Foundation.  The Foundation is representing the Plaintiffs and is publicly promoting their case, starting with a Press Release issued at the time the lawsuit was filed.

The use of YouTube in this way struck me as an unusual, and potentially risky, litigation strategy.  If you put your clients out on YouTube talking about their claims, you are not only creating deposition fodder for opposing counsel, you are also taking the risk that what they say about the lawsuit may not receive the absolute privilege that covers statements made in court proceedings. That's true even if you put a faux courtroom background in your video, as the Foundation did in theirs.

 

 

 

 

Use This Blog To Research North Carolina Business Litigation Issues

Even if you read this blog regularly -- and thanks if you do -- you may not know that the Case Database feature here is a great place for researching a North Carolina business litigation issue. To get to that part of the blog, there's a Case Database button near the top left:

Click on that.  You'll see the interface down below.  Let's say you were trying to decide whether a particular case fell within the Business Court's statutory mandatory jurisdiction.  If you looked in the annotations to N.C. Gen. Stat. §7A-45.4, you wouldn't find any cases at all on that point.  The same would be true if you searched that term on Westlaw.  But if you check the "mandatory jurisdiction" box in the search box, or type those words as a search term, you'll get links to more than ten unpublished cases decided by the Business Court on that subject. 

That's just one example.  The Database contains searchable summaries of every numbered decision of the Business Court, which currently total 150 opinions going back to 1996.   The Database also has nearly 100 summaries of decisions of the Court that didn't get a number, and which therefore aren't "published."   Every summary has a link to the opinion or order.  The unpublished orders and opinions can't be found anywhere else other than the Court's website.  They aren't readily accessible there and they get taken off line when a case is closed.

Here are a few examples of unpublished cases in the Database:

You can enter your own search term or use pre-defined terms, like these:


The more recent summaries I've done include links to the briefs of the parties.  The briefs often have thorough discussions of the issues and extensive case citations.

It's taken a while to get this feature working smoothly.  It's still not perfect and it doesn't have the sleekness or high functionality of a Westlaw or a Lexis, but it's working well enough for me to mention it specifically and to ask you to please try it out.

NC Business Court Denies Motion For Preliminary Injunction In Wachovia-Wells Fargo Merger Case

Ehrenhaus v. Baker, 2008 NCBC 20 (N.C. Super. Ct. Dec. 5, 2008)

The North Carolina Business Court has denied Plaintiff's Motion for a Preliminary Injunction with regard to the pending merger between Wachovia and Wells Fargo.

The opinion of Judge Diaz was issued early Friday evening, after the close of business.  The principal holdings of the 28 page opinion, briefly, were that (1) the Wachovia Board of Directors, in approving the merger deal, satisfied its obligations under the Business Judgment Rule in light of the dire economic circumstances and lack of alternatives faced by the Board, (2) the Board complied with North Carolina law in the issuance of new shares of stock to Wells Fargo which gave it 39.9% of the voting control over Wachovia, and (3) the grant of this voting bloc was not coercive to Wachovia's shareholders. 

Judge Diaz also found, however, that the continuation of Wells Fargo's right to vote these shares for an 18 month period if the Wachovia shareholders reject the merger was invalid.  That narrow victory for the Plaintiff won't, however, have any effect on the transaction.

The Court's holdings, in more detail, were as follows:

Business Judgment Rule 

The Board satisfied its responsibilities under the Business Judgment Rule. The Court held that:

this case does not fit neatly into conventional business judgment rule jurisprudence, which assumes the presence of a free and competitive market to assess the value and merits of a transaction. But other than insisting that he would have stood firm in the eye of what can only be described as a cataclysmic financial storm, Plaintiff offers nothing to suggest that the Board’s response to the Hobson’s choice before it was unreasonable.

Op. at ¶¶124-25. As the Court put it:

The stark reality is that the Board (1) recognized that Wachovia was on the brink of failure because of an unprecedented financial tsunami, (2) understood the very real and immediate threat of a forced liquidation of the Company by government regulators in the absence of a completed merger transaction with someone, and (3) possessed little (if any) leverage in its negotiations with Wells Fargo because of the absence of any superior merger proposals.

Against that backdrop, the Board had two options: (1) accept a merger proposal that, although partially circumscribing the shareholders’ ability to vote on its merits, nevertheless still gave the shareholders a voice in the transaction and also provided substantial value; or (2) reject the Merger Agreement and face the very real prospect that Wachovia shareholders would receive nothing.

Pared to its essence, Plaintiff’s argument is that he would have voted to reject the Merger Agreement and take his chances with the government had he been sitting on the Board on 2 October 2008. But it is precisely this sort of post hoc second-guessing that the business judgment rule prohibits, even where the transaction involves a merger or sale of control.

Op. at ¶¶131-33.

The Share Issuance Was Valid

The Wachovia Board complied with North Carolina law in issuing new shares to Wells Fargo which represented 39.9% of the voting stock of Wachovia. Op. ¶¶107-11.  Shareholder approval was not required for the exchange of those shares for Wells Fargo shares, because shareholder approval for a share exchange is required only when the shares exchanged are "already outstanding" shares.  These were not.

The Share Issuance Was Not Coercive

The grant of 40% voting control to Wells Fargo was not coercive, because a majority of Wachovia shareholders were still free to accept -- or reject -- the proposed merger.  As Judge Diaz observed:

while it is certainly true that slightly over 40% of the total votes to be cast on the Merger Agreement have been spoken for, and that Plaintiff and those in his camp face a substantial hurdle in defeating this transaction, a majority of Wachovia shareholders (owning nearly 60% of all Wachovia shares) “may still freely vote for or against the merger, based on their own perceived best interests, and ultimately defeat the merger, if they desire.In re IXC Commc’ns. S’holders Litig., 1999 Del. Ch. LEXIS 210, at *23 (concluding that a vote-buying transaction did not disenfranchise the remaining shareholders where a numerical majority of shareholders were still in position to independently vote against the merger).

Op. at ¶142.  Judge Diaz further observed, with regard to Plaintiff's contention that the Share Exchange had deterred other potential bidders: "the sobering reality is that there are few (if any) entities in a position to make a credible bid for Wachovia that would be superior to the Merger Agreement."  Op. at ¶151.  If Wachovia's Board had not taken the Wells Fargo deal, it faced "the obliteration of most, if not all, of the shareholder equity."  Op. at ¶152.

18 Month "Tail" Held Invalid

In a small, but meaningless victory for the Plaintiff, the Court found invalid the provision of the Merger Agreement providing that Wells Fargo would retain its 40% stake for at least 18 months after the vote of the shareholders.  It entered an injunction against that particular portion of the Merger Agreement.  

This looks like the end of the road for the venerable North Carolina institution known as Wachovia. It seems very unlikely that the merger won't receive the 50% plus 1 vote of the outstanding shares required under North Carolina law for the approval of a merger.

Brief in Support of Motion for Preliminary Injunction

Wachovia Brief in Opposition to Motion for Preliminary Injunction

Wells Fargo Brief in Opposition to Motion for Preliminary Injunction

Reply Brief in Support of Motion for Preliminary Injunction

Wachovia Sur-Reply in Opposition fo Motion for Preliminary Injunction