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

The Court denied a Motion for a Temporary Restraining Order.  The Motion sought enforcement of covenants not to compete executed by the Defendants, who were loan officers with the Plaintiff, a mortgage broker.

The covenants stated that the Defendants:

will not directly or indirectly, in any capacity work for any company, entity or individual, including himself/herself, who originates or sells residential housing loans in any state in which LO has originated a loan in the six (6) months preceding the termination of LO’s employment with the Company [Integrity].

The Court found this to be too broad a restriction, holding:

the individual Defendants would not merely be prevented from working as loan officers for other mortgage brokers, but would also be prevented from doing even wholly unrelated work at any firm that competes with the Plaintiff.

The Court also noted that the Defendants contended that the Plaintiff had breached its agreement by failing to pay them, and held:

Our courts have held that “[i]njunctive relief to enforce the terms of a contract will not be granted a party who has himself breached the terms of the contract when his breach is substantial and material and goes to the heart of the agreement."

Full Opinion

Brief in Support of Motion for Temporary Restraining Order

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Service of process can be made by leaving the Summons and Complaint at the Defendant's residence, even though not in literal compliance with Rule 4, if the Defendant has evaded service.

The Defendant will waive an objection to service (and to jurisdiction) by filing a Notice of Designation to the North Carolina Business Court, because "the filing of a Notice of Designation in an action constitutes a general appearance for the purpose of personal jurisdiction."  To keep such objections alive, the Notice of Designation must contain an objection to personal jurisdiction. 

On a covenant not to compete issue, the Court followed the principle it set out in Better Bus. Forms & Prods., Inc. v. Craver, 2007 NCBC 34 (N.C. Super. Ct. Nov. 1, 2007) regarding the right of an asset purchaser to to enforce a non-compete entered into between the seller and an employee. The buyer has the option to enforce the noncompetition agreement or to enter into a new agreement. As the Court held: "a noncompetition agreement that has been sold as part of an asset sale, as opposed to the sale of a business, gives the buyer the right to enforce the noncompetition agreement as of the date of the sale but not to enforce the noncompetition agreement as if it had been entered into originally by the buyer."

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Brief in Support of Motion to Dismiss

Brief in Opposition to Motion to Dismiss

Reply Brief in Support of Motion to Dismiss

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The Court granted a preliminary injunction on a covenant not to compete even though defendant denied that he had signed the agreement and presented a handwriting expert who testified that his signature had been forged. The Court found that New York law applied to the covenant, that New York law permitted blue pencilling, and that it therefore could modify the scope of the restriction.

Full Opinion

Brief in Support of Motion for Preliminary Injunction

Brief in Opposition to Motion for Preliminary Injunction

Reply Brief in Support of Motion for Preliminary Injunction

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The Court discussed the consideration element of a post-employment covenant not to compete, nothing that an increase in compensation or a job promotion can be sufficient consideration.

The Court held the non-compete at issue invalid for other reasons, however, involving its temporal and geographic scope. First, the Court held that the covenant prevented the defendant from having even an indirect ownership in a competing company. It therefore did not protect a legitimate business interest of the former employer.

The Court futher found the time period of the restriction to be unreasonable, as the wording of the restriction required it to "look back" to a period of time when the employee began serving the customers as to which the restriction was sought.

The restriction also attempted, invalidly, to prevent the employee from dealing with "prospective customers," which the Court found to be "an undefined, and, therefore, unduly vague group."

Given that the covenant was customer based, as opposed to geographically based, the Court found the covenant to be invalid.

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Defendant had entered into a covenant not to compete with his employer, BBF. The assets of BBF, including its contract rights, were acquired by GDX. GDX then terminated defendant's employment per the agreement, and hired him directly. There was no new non-compete agreement entered into directly between GDX and defendant. Years later, GDX filed for bankruptcy, and its assets were purchased by the plaintiff.

The Court held that a covenant not to compete can be assigned as the part of the sale of a business. Therefore, GDX would have been entitled to enforce the covenant against defendant if defendant had left GDX at the time of the sale and begun to compete. The Court further held, however, that GDX was obligated to negotiate a new non-compete if it wished to continue the covenant in place. (The Court held that the answer would have been different if GDX had acquired the stock of BBF, as opposed to its assets). It stated "when an employer sells its assets, including its right to enforce a restrictive covenant in an employment contract, the period of the restrictive covenant begins to run because the employment relationship has been terminated. The former employee and the new employer have the choice of either not entering into a new agreement and having the old covenant enforceable or entering into a new agreement with a new restrictive covenant."

On the issue of the entitlement of a purchaser of assets at a bankrupty sale to enforce a covenant not to compete, the Court held "this Court is doubtful that the appellate courts of this state will sanction the purchase and enforcement of restrictive covenants by bidders for assets of the bankrupt employer."

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The Court denied a motion for preliminary injunction on two covenants not to compete.  It found that one covenant was overly broad, since it had no geographic scope whatsoever.  Another covenant was also overly broad, as it restrained the defendant from working for a competitor in any capacity at all, including as a security guard or a custodian.  The defendant had been plaintiff's Director of Software Engineering. The Court refused to blue-pencil the covenant. 

The covenant was also invalid becasue it unreasonably prevented the defendant from having an interest in a mutual fund which held shares in a publicly traded competitor, and because it attempted to prevent contact with future customers.  The Court found that a restriction on future customers did not protect any legitimate interest of any employer. 

At the conclusion of its opinion, the Court rejected plaintiff's argument that the Court was making a decision that was "bad for business," and therefore inconsistent with its mandate.  The Court held that "the North Carolina Business Court was created to provide judicial specialization in complex business litigation. This Court’s judges do not, however, decide cases based on the prevailing economic winds, nor do we consider how best to promote a litigant’s business interests. Our oath is the same as that of any judge of this state—to apply the law and decide cases without regard to the parties who are before us."

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Plaintiff's former employee was subject to restrictive covenants in an Amended Employment Agreement. He was also subject, however, to what he claimed were conflicting restrictions in a subsequently executed Stock Purchase Agreement. The former employee asserted that the claims under the Amended Employment Agreement should be dismissed.

The Court denied the Motion and struck the employee's defense on this basis. It held that the restrictive covenants, although not consistent, could be enforced concurrently, and that there was not a novation or a substitution of the contract. Nor did the merger clause in the subsequent agreement eliminate the restrictions in the earlier agreement.

The Court also addressed plaintiff's motion to disqualify defendant's counsel, who had represented him in connection with the Stock Purchase Agreement. It denied the Motion, holding that plaintiff had to meet a high standard of proof to obtain disqualification. The issue was whether the prior representation was "substantially related" to the matter before the Court. The Court found that it was not, since plaintiff's claims were lodged under the Amended Employment Agreement, not the Stock Purchase Agreement. The standard for whether a matter is substantially related to another is that there must be a "virtual congruence of issues."

Also, there was no risk that the law firm had obtained confidential information in its prior representation, which had occurred five years earlier, which would have materially advanced its new client's interest in the litigation. The Court contrasted cases in which there was a high risk of the lawyer having access to such information.

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Plaintiff, the former employer of the defendant insurance broker, sued to enforce his amended employment agreement. Defendant moved to dismiss, claiming that the agreement had been superceded by an exit agreement, that a later stock purchase agreement had served as a novation of the employment agreement, and finally that the non-competition provisions in the employment agreement were unenforceable.

The Court rejected the first argument, which was premised on the presence of a merger clause in the exit letter. The Court held that in order to determine the impact of the merger clause, it would have to make a fact intensive inquiry inappropriate on a motion to dismiss. On the novation argument, the Court found that the stock purchase agreement was not referenced in the pleadings and that it was inappropriate for it to consider that agreement on a motion to dismiss. The Court found, in any event, that whether a novation had occurred was a fact question.

The Court then discussed the general standards for the validity of non-competition agreement, and concluded that the plaintiff's claims for violation of that agreement would survive. It held the term, which was potentially as long as four years because of a "look back" provision, was reasonable. It further found that a client-based restriction, in lieu of a specific territorial restriction, can be valid.

It held this restriction invalid, however, because it created a conclusive presumption that if any client of plaintiff did business with defendant's new firm, even clients with whom defendant had not worked, that would be deemed to be a violation of the covenant. The Court blue penciled this provision of the restrictive covenant and let stand the claim on the remainder. (There was no claim before the Court for injunctive relief).

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Plaintiff sued a departed employee, alleging that she had violated her confidentiality agreement and her non-competition agreement. The Court found defendant's new employer had not tortiously interfered with her contract. It found the provision on which plaintiff relied, restricting its employees from providing services to any of its clients for 180 days following the termination of employment, to be invalid, because it attempted to restrict defendant from providing services to any client of her former employer, even those with whom she had no contact during her employment.

The Court found the non-compete to be invalid for other reasons as well. It found the three-year restriction on employment to be overly long. It found the geographic restriction -- which extended to the entire state of North Carolina -- to be overly broad, as defendant had only worked in four counties. It also found the covenant, which purported to prevent the defendant from competing "directly or indirectly, individually or as an employee, partner, officer, director or stockholder or in any other capacity whatsoever of any person, firm, partnership or corporation" to be unnecessarily restrictive.

Also, given that individual defendant was in the business of providing medical care to patients, the Court found that there were policy issues counselling against the enforcement of the covenant.

The Court did allow the plaintiff to proceed on a claim for unfair and deceptive practices against defendant's new employer. It found that defendant had copied some of plaintiff's human resources documents without its knowledge or consent. It held that even though defendant had not obtained a competitive advantage as a result, the misuse was an unfair and deceptive practice.

The defendants had counterclaimed. On their claim for defamation, the Court found that plaintiffs were not entitled to an absolute privilege simply because some of the allegedly defamatory statements had been made to governmental agencies. The Court found that the absolute privilege applied only to agencies exercising a judicial or quasi-judicial function. Although plaintiff might have been entitled to a qualified privilege, the Court found that there was an issue of fact whether the statements had been made with actual malice.

The Court also found there to be questions of fact with regard to defendants' counterclaim for tortious interference with prospective economic advantage.

Full Opinion

Brief in Support of Plaintiff's Motion for Summary Judgment

Brief in Opposition to Plaintiff's Motion for Summary Judgment

Reply Brief in Support of Plaintiff's Motion for Summary Judgment

Brief in Support of Defendant's Motion for Summary Judgment

Brief in Opposition to Defendant's Motion for Summary Judgment

Reply Brief in Support of Defendant's Motion for Summary Judgment

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