North Carolina Business Litigation Report : North Carolina Business Litigation Lawyer & Attorney : Mack Sperling : Brooks Pierce Law Firm : Greensboro, Raleigh, Winston-Salem, Charlotte

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. 

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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.

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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.

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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.

Brief in Support of Motion for Summary Judgment

Brief in Opposition to Motion for Summary Judgment

Brief in Support of Motion to Amend Summons

Brief in Opposition to Motion to Amend Summons

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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." 

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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). 

Defendant's Brief In Support Of Motion To Dismiss

Plaintiff's Brief In Opposition To Motion To Dismiss

Defendant's Reply Brief In Support Of Motion To Dismiss

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Warren v. Eli Research, Inc., April 28, 2008 (Diaz)(unpublished)

Inconsistent allegations in the Complaint doomed the claim for fraudulent inducement by one of the Plaintiffs in this case. 

That Plaintiff, Hittle, alleged that the Defendant had promised her an annual salary of $150,000, guaranteed for 12 months, but that it had no intention of fulfilling this promise when made.  The Defendant booted Hittle only a few months after she began employment.

What led to the granting of Defendant's Motion to Dismiss were Hittle's allegations in the Complaint that she had begun her employment, worked for three months, been paid for that work, and that she was terminated for "financial reasons."

The Court held "it is patently inconsistent for Hittle to allege, on the one hand, that Defendant never intended to pay the wages promised, and on the other, that Defendant in fact performed in part and that it failed to complete performance for reasons unrelated to its intent."  The Court held that partial performance of a contract demonstrates a party's intention to fulfill the promise at the time it was made, undermining Hittle's claim on its face.

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