A Covenant Not To Compete Cornucopia From The Business Court

On Friday,  the Business Court issued an opinion on a number of covenant not to compete issues, in Akzo Nobel Coatings Inc. v. Rogers, 2011 NCBC 41.  The Defendants were former employees of the Plaintiff, which had acquired the company for which they had worked.  The Defendants had executed non-competition and confidentiality agreements in connection with the acquisition.  The Defendant claimed a violation of the agreements and asserted a number of tort based claims, a 75-1.1 claim, breach of contract claims, and a trade secrets claim.

The Defendants moved for judgment on the pleadings.  There wasn't one overriding issue, but a host of issues decided by Judge Gale, which ended with a partilal grant of the motion and a denial of the motion as to some of the claims. Here's a summary:

Choice of Law Issue.  The covenants called for Delaware law to apply.  That was significant because Delaware law allows the Court to "blue pencil" an overly broad covenant, while North Carolina does not provide the Court with that power.  Defendants said that the Court should not enforce the choice of law provision because it would violate an entrenched public policy of North Carolina law (that "blue pencilling" is not allowed). The Court side-stepped this issue, ruling that the choice of law provision had been bargained for and was therefore valid.  That decision was no doubt prompted by Plaintiff's status as a Delaware corporation, and its payment of $9.5 million to Defendant Rogers for his stock in the acquired company.

Covenants Given In Connection with the Sale of a Business.  Judge Gale followed the general rule that "[N]on-compete covenants which accompany the sale of a business generally are afforded more latitude than covenants ancillary to employment contracts." Op.¶45.  He mentioned that point several times in his opinion while ruling on some aspects of the dismissal motion.  E.g. Op. ¶¶ 55, 60, & 67.

Standard for Non-Solicitation Agreements.  It has been an open question in my mind whether an agreement by an employee that she won't solicit employees of her old employer at a new employer is governed by the same requirements as a covenant not to compete.  There are distinctions to me between a non-solicitation agreement and a non-compete.  Judge Gale had no doubts about that, ruling "[t]he elements are the same for non-competition and non-solicitation clauses, but the latter are more easily enforced, as their restraints on employees are generally more tailored and less onerous on employees’ ability to earn a living." Op. ¶46.

The Language "Directly or Indirectly".  Covenants not to compete typically prohibit the employee from competing with his employer "either directly or indirectly."  Judge Gale said that "North Carolina courts have refused to enforce non-competition clauses using" that term.  He held back on the enforceability of that term pending "a more fully developed record."  Op. ¶61.  And he threw out this nugget: that the covenant wasn't necessarily unenforceable under NC law because Rogers had the right under the agreement containing the covenant to "invest in competing firms under terms that are more narrowly drawn to protect Akzo Nobel’s interests." Op. 62.

Breadth of Covenants.  Judge Gale reserved ruling on the reasonableness of a four year covenant restricting Rogers from competing on an international basis with Akzo.  He noted Rogers' extensive job responsibilities with Akzo and his broad knowledge of Akzo's business practices.He struck down the restrictions on three other employees of the acquired entity.  One swept too broadly, purporting to prohibit an employee named Schoning from "working for a competitor [of Akzo's] in a position wholly outside the scope of his employment with Chemcraft and from indirect ownership of a competing firm." That provision went "farther than is necessary to protect a legitimate business interest."Op. ¶ 74.  The other two employees escaped enforcement of a five year restriction, which Judge Gale said was "incurable and unreasonable as a matter of law" due to the time length of the restriction. Op. ¶86.

Tort Claims.  Judge Gale dismissed almost all of the tort based claims (tortious interference with contract and tortious interference with prospective advantage) because the claims were based on breaches of contract.  There was no duty "separate and apart" from those contained in the contracts and therefore no basis for tort claims. Most of the unfair and deceptive practices claims were dismissed as well, along with the claim for punitive damages.  Judge Gale hesitated a bit on dismissing a UDPA claim that Rogers had misrepresented the nature of his involvement with an Akzo competitor, which he found to be the basis for an unfair practices claim,  but found the Complaint lacking any allegation of actual injury to Akzo as a proximate result of the misrepresentation.  Akzo's argument that it had refrained from taking legal action against Rogers due to his alleged untruths was "not sufficient to establish the actual injury requirement of Chapter 75." Op. ¶117

Trade Secrets Claims.  Akzo's trade secrets claims were severely winnowed down because they hadn't been described with sufficient particularity to enable the Defendants to identify what had been alleged to be misappropriated.  The description of trade secrets as the Plaintiff's "proprietary formulas, methodologies, customer and pricing data and other confidential information . . . deriv[ing] independent actual or potential commercial value from not being generally known or readily ascertainable" was too "broad and vague" to meet the standard of particularity. Op. ¶127

Whew.  This opinion is stuffed with law about non-compete claims against former employees.  It's a definite read if you've got that type of claim before Judge Gale.  He's way up to speed on this subject.  Don't lag behind.

 

 

 

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