The NC Business Court On Non-Solicitation And Non-Inducement Provisions

There is more discussion of non-solicitation clauses and non-inducement clauses in Judge McGuire's opinion last week in Sandhills Home Care, LLC v. Companion Home Care-Unimed, Inc., 2016 NCBC 59, than I think that I've ever seen before in a North Carolina court decision.  Non-solicitation clauses prohibit a former employee from trying to get business from his former employer's clients.  Non-inducement clauses prevent a former employee from encouraging other employees of the former employer from leaving to join him in his new employment.

Yesterday's post covered the non-competition restrictions in the Sandhills agreement.

Let's start with the non-inducement provisions of the Sandhills agreement:

Non-Inducement Provisions Are Enforceable

Non-inducement provisions are enforceable in North Carolina and they receive the same analysis as non-solicitation provisions (Op. ¶42).  More about that standard for analysis is below.

The Defendants in the Sandhills case raised a novel (and completely unsupported) argument about why the non-inducement provisions before the Court were invalid.  They said that the restrictions violated their right to engage in concerted activity under the National Labor Relations Act, and that they suppressed competition in "North Carolina's home healthcare market." 

Judge McGuire shot down that argument, stating that "North Carolina's appellate courts have held that such restrictions on inducing a former employer's employees can be enforceable" and that the Defendants had "cited to no source for the contention that there is a North Carolina public policy in favor of protecting employee concerted activity."  Op. ¶47

Non-Solicitation And Non-Inducement Provisions Are Subject To The Same Analysis As Non-Competition Provisions

I think that I had been successful in the past in persuading a North Carolina Judge that a provision preventing a former employee from soliciting his former employer's customers did not have to satisfy the same standard as a non-compete.

That argument won't work any longer, if it ever did.  A valid non-solicitation provision, like a provision restricting competition, must be:

(1) in writing, (2) entered into at the time and as part of the contract of employment, (3) based on valuable consideration, (4) reasonable both as to the time and territory embraced in the restrictions, (5) fair to the parties, and (6) not against public policy.

Op. ¶29.

But the standard for reviewing the validity of a non-solicitation provision is more liberal than the standard applied to a covenant not to compete.  Judge McGuire said that:

North Carolina courts are more willing to enforce non-solicitation provisions targeted to the former employer's customers or prospective customers than provisions prohibiting entirely the former employee from working for certain employers or in certain regions.

Op. ¶31.

A Non-Solicitation Agreement Doesn't Need To Be Tied To A Specific Territory

The Sandhills non--solicitation provision was not limited to a specific territory.  It was limited instead to the "book of business" of the Plaintiff.

Judge McGuire said that an argument  made by the Defendants --- that a non-solicitation restriction could not be enforced if it was not tied to a specific geographical description -- had been rejected by the NC Court of Appeals.   Op. ¶33 (citing Farr Associates, Inc. v. Baskin, 138 N.C.App. 276, 281, 530 S.E.2d 878, 882 (2000)).  So, he held that:

North Carolina's courts will enforce a covenant prohibiting a former employee from soliciting his former employer's customers even when not tied to a specific geographic region where 'the terms and conditions of this contract clause were reasonably necessary to protect the employer's legitimate business interests.'

Op. ¶33.

You are more likely to have a customer based restriction enforced if the time period of the restriction is not long.  Time and territory restrictions are evaluated "in tandem."  Op. ¶18.  In the case before Judge McGuire, it was limited to one year, short enough that a geographic restriction was not necessary.

Can A Non-Solicitation Provision Extend To Clients With Which The Employee Had No Contact?

It seems to be an open question whether a non-solicitation covenant can prohibit contact with all of a former employer's customers, or just those customers or prospective customers with whom the employee had personal contact." Op. ¶34

Judge McGuire avoided having to resolve that issue saying that he could not rule the restriction covering all of the former employer's clients to be unreasonable at "this very early stage of the case."  Op. ¶35.

A Non-Solicitation Provision Cannot Cover Prospective Customers Of The Former Employer

Judge McGuire didn't need to break new ground in ruling that language in the restriction prohibiting the solicitation of prospective customers was "unreasonably broad." Op. ¶37.

The NC Court of Appeals reached that conclusion several years ago, in Hejl v. Hood, Hargett & Assocs., 196 N.C. App. 299, 674 S.E.2d 425 (2009).  It held there that:

Defendant's attempt to prevent Plaintiff from obtaining clients where Defendant had failed to do so, is an impermissible restraint on Plaintiff.

Id. at 307, 674 S.E.2d at 430.

Don't include prospective clients in your non-solicitation agreements. This Plaintiff was lucky that the inclusion of prospective customers didn't invalidate its entire non-solicitation provision.  Since that "provision [was] a separate and divisible obligation contained in a separate sentence of the covenant, the Court was able to "blue pencil" it out and leave the remaining restriction on solicitation standing. Op. ¶37.



A Few Things To Avoid When Drafting A North Carolina Covenant Not To Compete

The Business Court closely examined a set of restrictive covenants last week in Sandhills Home Care,, LLC v. Companion Home Care-Unimed, Inc., 2016 NCBC 59. This decision collects a number of North Carolina Court of Appeals decisions assessing the validity of covenants not to compete (and non-solicitation and non-inducement covenants) and highlights language contained in many restrictions which is probably invalid.

Don''t Overreach In Describing The Activities That Will Be Restricted

The Plaintiff's covenant against competition said that its former employee could not "work for, provide services for, consult with, or otherwise assist any individual or entity who is in the home health or personal care business competing with the Employer" in the North Carolina counties in which the Plaintiff was providing services at the time of the employee's separation.

This restriction could be read to prohibit the employee from providing any type of service to or for a competitor, entirely different from the type of work the former employee had done for the Plaintiff.  That was unreasonably broad, ruled Judge McGuire.  He held that:

Covenants that restrict an employee from working for in any capacity or providing services of any type to competitors, and are not restricted to prohibiting the employee from performing the same type of work or services, are unreasonable. 

Op. ¶21.


Don't Include  "Advising" Or "Holding Any Ownership Interest" In A Similar Business In Your Definition Of "Compete"

Judge McGuire ruled that the Plaintiff's prohibition of its employee from "advising" or "holding any ownership interest in" any home health care business was unreasonable and unenforceable. Op. ¶28.

The word "advising" was

broad enough to sweep within it all sorts of employment and other services that would not impinge on Plaintiff's interests in any way.

Op. ¶28. Judge McGuire gave this example:

an employee might become employed by an interior design or decorating business that advises a home health care provider on decorating its corporate offices, or a technology company providing consulting services to a home health care provider regarding its computer network needs.

Op. ¶28.  Restricting a former employee from employment with a competitor which is unrelated to the job performed for the former employer went beyond a protection of the Plaintiff's legitimate interests.

As for the restriction on "holding any ownership interest in a competitor, Judge McGuire said that this language, "read literally, would prohibit the employee from owning shares of a mutual fund that had a tiny holding in a publicly-traded home health care company." Op. ¶28.

Judge McGuire found that there were no facts to support such a "broad prohibition."  Op. ¶28.

Don't Prohibit The Employee From Providing "Any Work Or Services" For  Any Client Of Her Former Employer

Many covenants not to compete bar the former employee from doing any work at all for an existing client of the employer, even if the employee had no contact with that client.  The Sandhills covenant said that the former employee would not do "any work or services for any customer or account" which the employer (not the employee) had serviced in the six months prior to termination of employment.

A covenant prohibiting the former employee for performing any type of service for a client of his employer, regardless of whether that employee had any contact with that client, is unreasonably broad.  Op. ¶29.

So is a restriction prohibiting the former employee from providing "any work or services" for the clients with whom she did have contact valid?  Probably not.  See above.


There was so much worth writing about in this Opinion (39 pages!) that I've divided this post into two parts, today's post dealing with non-competition provisions, and a second part (coming tomorrow) on non-solicitation and non-inducement provisions.

By the way, I have never drafted a covenant not to compete, though I have pursued the enforcement of many of them.  You don't want a covenant not to compete drafted by your partner to be ruled to be unreasonably broad.  (I've dreaded having to tell a partner that, but never had to actually deliver that bad news). Tell them to avoid using language like that contained in the Sandhills covenant.

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.




Fourth Circuit Authorizes Retaliation By Prospective Employers Against FLSA Claimants

in a significant employment law case, the Fourth Circuit ruled last Friday that an employer may decline employment to a prospective employees due to her having made FLSA charges against a previous employer. The case, decided 2-1 over a strong dissent from Judge King, is Dellinger v. Science Applications International Corp.

Dellinger had sued her then current employer for a Fair Labor Standards Act violation, and applied to the Plaintiff, Science, during the lawsuit proceedings for a new position.  Science offered Dellinger a job, and requested that she inform it of any civil actions to which she was a party as a condition of her security clearance. Upon learning of the FLSA charges, Science withdrew its offer.  Dellinger sued, alleging that Science had taken its action in retaliation to her FLSA charge.

Her case was dismissed by the district court, and the Fourth Circuit affirmed.

The FLSA prohibits retaliation "against any employee" who has sued to enforce the Act.  The Act defines an "employee" as "any individual employed by an employer."  Judge Niemeyer, after wading through other provisions of the FLSA, held that "Dellinger could only sue Science Applications if she could show that she was an employee and that Science Applications was her employer."  According to the majority, no court has extended FLSA's anti-retaliation protections to prospective employees.

Dellinger argued that a ruling against her would give prospective employers the license to discriminate against prospective employees for having made FLSA claims in the past.  Judge Niemeyer said that he was "sympathetic" to this argument, but that:

The notion. . . that any person who once in the past sued an employer could then sue any prospective employer claiming that she was denied employment because of her past litigation would clearly broaden the scope of the FLSA beyond its explicit purpose of fixing minimum wages and maximum hours between employees and employers. We are, of course, not free to broaden the scope of a statute whose scope is defined in plain terms, even when "morally unacceptable retaliatory conduct" may be involved. Ball v. Memphis Bar-B-Q Co., 228 F.3d 360, 364 (4th Cir. 2000). 

Op. at p.9.

The holding was "that the FLSA gives an employee the right to sue only his or her current or former employer and that a prospective employee cannot sue a prospective employer for retaliation."




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Frayed Yarn: Business Court Grants Summary Judgment Against Former CEO on Severance Claims

The Business Court granted summary judgment last week to a company and dismissed claims brought by its former CEO for breach of a severance agreement, fraud, and unfair and deceptive trade practices.

In McKinnon v. CV Industries, Inc., the defendant (CVI) owned a number of subsidiaries which manufactured, among other things, high-end residential furniture (Century) and mid- to high-end jacquard fabric (Valdese Weavers).  Plaintiff was an employee of the defendant or its subsidiaries for over twenty years, including five years as CVI's president and CEO.  In 2000, Plaintiff went to work for Mastercraft, a direct competitor of Valdese Weavers.

Plaintiff and Defendant entered into a severance agreement to modify certain incentive plans and benefit agreements.  Under that agreement, Plaintiff would not qualify for certain benefits (the "shadow equity plan") until he stopped directly competing with Valdese Weavers.  In addition, those benefits would not accrue if the company's ESOP stock price on the December 31 immediately preceding Plaintiff's cessation of competition was less than the ESOP stock price on December 31, 1999.

At some point in 2001 or 2002, Plaintiff stopped working for Mastercraft and started working for another company.  The stock price at that point was below the 1999 price, which would eliminate any benefits.  Plaintiff, however, contended that he continued to compete through 2007, at the end of which the stock price would have triggered benefits.

Judge Tennille granted summary judgment on each of Plaintiff's claims.  First, on Plaintiff's damages and specific performance claims for breach of contract, the Court held that Plaintiff's post-2001 employer (Basofil) was not a competitor of CVI.  On resigning from Mastercraft, Plaintiff entered into another noncompete agreement, one that expressly permitted Plaintiff to work for a company in Basofil's field -- supporting the conclusion that Basofil was not a competitor of Mastercraft or Mastercraft's competitors, i.e. CVI.  Plaintiff likewise admitted that his noncompete agreement with Basofil would not have prevented him from working for CVI.  Thus, competition with CVI was terminated on a date on which Plaintiff was ineligible for benefits under his CVI severance agreement.

Second, the Court dismissed Plaintiff's fraud claim, holding that he showed at best an unfulfilled promise, but failed to produce evidence that CVI intended at the time it signed the severance agreement that it would never perform.  CVI's intent to perform was demonstrated by its performance under other portions of the agreement and by the fact that it carried the disputed benefits as a liability on its books until 2002.

Third, the Court dismissed Plaintiff's unfair and deceptive trade practices claim.  The Court, again enforcing the "in or affecting commerce" limitation of the reach of N.C.G.S. § 75-1.1, cited its decision in Schlieper v. Johnson that "“[m]ost disputes between employers and employees are internal to the business organization and simply do not have an effect on commerce in the way required by section 75-1.1."  In this case, "the payment (or lack thereof) of these employment benefits would not be a practice that impacts commerce or the marketplace, nor would it be part of the day-to-day activities for which CVI was organized."

Full Order and Opinion


Business Court Awards Nominal Damages After Noncompete Bench Trial

An award of damages for breach of a noncompete agreement, like any other damages award, requires evidentiary support.  In a judgment issued yesterday after a bench trial, the Business Court awarded the plaintiffs nominal damages absent such evidence.

In HILB Rogal & Hobbs Co. v. Sellars, the Court faced a common factual scenario:  a former vice president of the plaintiffs resigned and went to work for a direct competitor.  The businesses in question were insurance companies targeting building materials suppliers.  The plaintiff and defendant executed an employment agreement that contained standard restrictions on post-employment competition and on the use of confidential business information.

Two days after interviewing for the competitor's job, the defendant

copied the entire hard drive of his work computer, which contained, among other things, confidential and proprietary information about [plaintiffs'] Lumber Program accounts and business strategies, including account files and lists, policy expiration dates, policy terms, conditions and rates, internal and external pricing and profit margins, information relating to accounts’ risk characteristics, and carrier information.

He resigned two weeks later and went to work for the competitor, taking the confidential information with him.  (The Court ordered him to return the confidential information in 2008).

Plaintiffs asserted claims for breach of fiduciary duty, breach of contract, and unfair & deceptive trade practices, and defendant counterclaimed for breach of contract for unpaid salary.  Judge Diaz applied New York law to the claims.

During the lawsuit, the defendant took two Rule 30(b)(6) depositions of the plaintiffs concerning their claimed damages.  At those depositions, the witness, another vice president of plaintiffs, disclaimed lost profits, as did counsel for the plaintiffs.  The witness did not know of the origin or calculation of two summary exhibits that plaintiffs attempted to use at the bench trial -- those exhibits were prepared by other employees, none of whom testified at trial.  Judge Diaz noted at least eleven unexplained discrepancies between the two exhibits.  Moreover, the Rule 30(b)(6) witness "could not rule out the possibility that the damages exhibits contained amounts for lost revenues for business that Plaintiffs could not underwrite, irrespective of [defendant's] alleged breach of the Employment Agreement."

The damages witness suddenly became unavailable for trial due to the pre-trial but post-discovery termination of his employment -- he declined to appear voluntarily, and he was outside the Court's subpoena power.  The plaintiffs attempted to notice a de bene esse deposition less than one month before trial.  The Court quashed the notice of deposition based on a month-long delay between plaintiffs' awareness of the witness's unavailability and the issuance of the notice, as well as the fact that the Court already had continued the trial once to allow de bene esse depositions to occur.  Thus, plaintiffs had to rely upon his deposition testimony.

Although the plaintiffs proved that the defendant breached his fiduciary duty and breached the employment agreement by copying the contents of his hard drive before resigning, the Court held that there was insufficient evidence of damages.  Under New York law, breach of fiduciary duty damages "are limited to profits lost from the actual diversion of customers," a damages theory that the plaintiffs waived. The Court awarded $1 in damages for the breach of contract claim.

Although the plaintiffs attempted to rely on a liquidated damages formula in the employment agreement, the Court similarly held that they had not provided sufficient evidence of the components of that formula.  Specifically, the Court rejected the argument that the summary exhibits were admissible business records under Rule 803(6) because the Rule 30(b)(6) witness did not lay any foundation for admissibility or for the reliability of the figures contained in the exhibits.  The Court awarded $1 in damages for the breach of contract claim.

The Court rejected the unfair and deceptive trade practices claim, holding that North Carolina's Chapter 75 was inapplicable under the "most significant relationship test" and that, even if it applied, the lack of actual damages was fatal to a UDTP claim.  Likewise, the Court found no basis to award punitive damages or attorneys' fees.

As for the counterclaim, the employee asserted that he was entitled to over $94,000 in unpaid salary.  The plaintiffs responded that an interim $50,000 payment constituted an accord and satisfaction.  The Court rejected plaintiffs' defense on the grounds that they failed to prove that the $50,000 was intended to settle all compensation claims or that the defendant was informed of that intention before he accepted the check.  Instead, the Court offset the $50,000 payment from the employee's salary claim and awarded him the balance.

Although the claims on both sides arose under New York law, there is no apparent reason why the result would be different under North Carolina law.  In either event, enforcement of a noncompete provision can prove to be an expensive proposition (here, two and a half years of litigation), particularly where the former employee has counterclaims.

Full Order and Judgment

[UPDATE:  In an Order dated July 6, 2010, Judge Diaz denied the company's motion to reconsider the ruling on the employee's counterclaim].

Courts Shouldn't Question The Adequacy Of Consideration For Covenants Not To Compete, Rules NC Court Of Appeals

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

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.

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.





Covenant Not To Compete, And Summons, Held Invalid

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

Court Of Appeals Rules That NC Wage And Hour Act Has No Application Outside North Carolina

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

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


Fraud In The Inducement Claim Dismissed Due To "Patent Inconsistency" In Complaint

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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