North Carolina Business Litigation Report

Covenant Equipment Corp. v. Forklift Pro, Inc., October 3, 2008 (Tennille)(unpublished)

This case interpreted South Carolina law -- different than North Carolina law -- on the enforceability of a confidentiality agreement that the Defendant argued was overly broad.

The South Carolina precedent is Carolina Chemical Equipment Co. v. Muckenfuss, 471 S.E.2d 721 (S.C. 1996), where the South Carolina Supreme Court  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). 

In this case, the North Carolina Business Court 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 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. 

The North Carolina appellate case on the issue of enforceability of confidentiality agreements is 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.

Full Opinion

Brief in Support of Motion to Dismiss

Brief in Opposition to Motion to Dismiss

Reply Brief in Support of Motion to Dismiss

Trackbacks (0) Links to blogs that reference this article Trackback URL
http://www.ncbusinesslitigationreport.com/admin/trackback/103032
Comments (0) Read through and enter the discussion with the form at the end
Mack Sperling
Brooks Pierce, LLP
2000 Renaissance Plaza
230 North Elm Street
Greensboro, NC 27401
336.373.8850

1600 Wachovia Capitol Center
150 Fayetteville Street
Raleigh, NC 27601
919.839.0300