What Happens To A Covenant Not To Compete Upon The Sale Of A Business?

Be careful with covenants not to compete when you buy or sell a business.  That's the lesson from Amerigas Propane, LP v. Coffey, 2014 NCBC 4, decided this week by Judge Jolly.

The Plaintiff had Defendant Coffey, an employee of the company which it was acquiring, sign a "Confidentiality and Post-Employment Agreement" after the acquisition.  The Agreement contained a non-solicitation provision and a section protecting the buyer's "confidential information." 

The Plaintiff fired Coffey a year later, and he went to work for a competing propane company.

Plaintiff moved for a preliminary injunction enforcing the restrictive covenants, which was denied by the Court.

You all know that there must be consideration for a covenant not to compete.  Those types of agreements ordinarily are entered into at the start of an employment relationship, and the new employment itself constitutes the consideration.  In North Carolina, continued employment can't satisfy the consideration requirement.

So did the acquisition work a termination of Coffey's employment with the selling company so that he had a new employment with the buyer?

Here's where it gets interesting.  The type of acquisition makes a difference. If it had been an asset purchase it might have been a new employment which could have served as consideration. Judge Jolly observed that:

an employment contract signed at the time of a business acquisition may only use employment with the acquiring company as consideration if the old employment relationship is deemed terminated as a result of the transaction. In this regard, North Carolina courts previously have stated that acquisition of another company by asset purchase will act as a termination of existing employment relationships, and existing employees of the acquired business do not necessarily become employees of the acquiring entity.

Op. 5 (relying on Calhoun v. WHA Med. Clinic, PLLC, 178 N.C. App. 585, 597 (2006) (citing
QSP v. Hair
, 152 N.C. App. 174 (2002)); and Better Bus. Forms & Prods., Inc. v. Craver, 2007 NCBC 34 (2007) ("[W]hen an employer sells its assets . . . the employment relationship has been terminated." Id. ¶38.).

But an acquisition via a stock purchase (or by purchasing membership interests, as happened in this case) doesn't have the same effect.  It does not automatically terminate existing employment relationships "and therefore ordinarily will not constitute new employment for purposes of consideration."  Op. 6.

So the Plaintiff was left to argue that there was other consideration for the restrictive covenants, like "new benefits" made available to Coffey, and a raise in salary shortly after the acquisition.  Judge Jolly didn't buy that.  He found the "new" benefits to be essentially the same as Coffey would have received with the selling employer.

 

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].

Nationwide Covenant Not To Compete Enforced By North Carolina Federal Court

It's hard to get an injunction enforcing a covenant not to compete that has a nationwide territory, but the Plaintiff was successful at that in the Middle District's decision last week in Philips Electronics North America Corp. v. Hope.  The injunction was also based on the North Carolina Trade Secrets Protection Act.

This was a thorough 44 page opinion addressing a number of non-compete and trade secrets issues, so this is a long post.  You'll have to read to near the end to see why the post gets a picture of, of all things, a sausage?

Background

Hope was the Executive Vice President of Sales for DLO, responsible for the company's sales of iPod accessories throughout the United States and Canada.  Hope had substantial interaction in that position with a $75 million customer, Best Buy, and other major DLO customers.

In December 2006, Hope signed a Letter Agreement containing a broad covenant not to compete.  It prevented him from working in the same or similar position for a DLO competitor anywhere that DLO conducted business, potentially throughout the entire world, for a two year period.

The stock of DLO was purchased by Phillips Electronics six months later.  Phillips operated DLO as a separate entity until January 2009, when DLO was merged into Phillips.  (This created an interesting standing issue regarding the right of a corporate acquirer to enforce a non-compete, discussed below under the heading "Standing").

In 2008, while still employed by DLO, Hope began planning to compete with the company.  He contacted others at DLO about the possibility;  began discussions with a manufacturer about making competing products; and used confidential DLO materials in his efforts, including DLO's business plan and internal financial information.

Hope resigned from DLO months later, the day after his new company obtained financing.  He misled his old employer about his intentions, saying he was going to work with his father.  The new company immediately began selling to some of DLO's customers, including Best Buy.  Several months later, DLO discovered Hope's involvement with the new competitor.

Irreparable Harm to DLO

Judge Schroeder found that DLO would suffer irreparable harm, as "loss of permanent relationships with customers and loss of proprietary information may constitute irreparable harm."  DLO had established that "Hope's alleged breach of the Non-Competition Agreement undermines its relationship with its customers, including its most significant -- Best Buy, and could result in the further loss of customer relationships and goodwill."

Likelihood of Harm to Hope

Hope argued that he would be deprived of a livelihood if the covenant were enforced, but the Court pointed to Hope's written acknowledgment in the Letter Agreement that it would "not prevent [him] from earning a livelihood or otherwise impose undue hardship on [him]."  Judge Schroeder said that the entry of an injunction would "only require Hope to do that which he agreed to do" in the Letter Agreement.

Standing

Judge Schroeder held that the covenant was enforceable by Philips, the acquirer of DLO's stock.  He ruled that "a non-competition agreement is enforceable by an entity acquiring the agreement through a stock purchase,"  and noted that Hope had consented in the Letter Agreement to its assignment.

The Court also observed that when there is a merger, "the surviving corporation succeeds to 'all real estate, and other property owned by each merging corporation' by operation of law, without the need for an express assignment."

(Note: There are two Business Court opinions on the right of an asset purchaser to enforce a non-compete, Better Business Forms and Covenant Equipment Corporation,  If this had been an asset purchase instead of a stock transaction, the covenant might not have been enforceable under those decisions).

Reasonableness of Territory

DLO's covenant prohibited Hope from competing where "(i) the Company carriers on or transacts its business, (ii) the Company sells or markets its products or services, or (iii) the Company's customers are located; including without limitation (A) the world, (B) the United States of America [and then a shrinking range of territories down to] (I) the territory within a 100 miles radius of each other office of the Company."

Plaintiff presented a list of thousands of specific locations throughout the country where its products were sold, including retail stores in every state and a store in the District of Columbia, as well as evidence of Hope's extensive involvement in its nationwide sales efforts.

The Court noted that "though certainly not the norm, North Carolina courts have upheld nationwide restrictions on former employees in at least three reported cases," and that a countrywide restriction was warranted "based on Hope's client contacts, his knowledge of DLO's business, the area assigned to Hope and the nature of his duties, and the fact that DLO competes nationally."

The Court wasn't troubled by the worldwide restriction in subsection (iii) of the non-compete.  It held that "under North Carolina law, the court may use its 'blue pencil' to excise subsection (iii) from the definition of territory, particularly where this provision is separated by the term 'or,' indicating that the three parts are distinctly separable."  The Court also observed that the Letter Agreement had a provision providing that the parties intended to sever any unenforceable provisions.

Reasonableness of Restriction as to Time

The Court found the two-year restriction to be reasonable, stating that "a non-competition agreement of two years is 'well within the range that the North Carolina courts have deemed reasonable.'"

Judge Schroeder further found that the two year period should be tolled for the eleven month period during which Hope had been in breach of the agreement, based on language in the agreement that "[t]he periods of protection . . . shall not be reduced by any period of time during which [Hope is] not in compliance therewith."

Legitimate Business Interest

The Court held that the covenant protected a legitimate business interest as it protected customer relations and goodwill against misappropriation," and that it "merely prevents Hope from working for a direct competitor in substantially the same or similar position as he held within the twelve months prior to his resignation from DLO."

Trade Secrets Protection Act

The Court also held that the Plaintiff had shown a likelihood of success on its claim under the North Carolina Trade Secrets Protection Act, ruling that Hope had access to a variety of trade secret information, including the DLO business plan, customer preferences, DLO's financial calculator to determine profitability (which was known internally for some reason as "the sausage"), new packaging plans, product costs, pricing information. and market share data that DLO had obtained from a third-party vendor. 

Judge Schroeder held that "customer pricing lists, cost information, confidential customer lists, and pricing and bidding formulas may constitute trade secrets," and that "special knowledge of customer needs and preferences is a trade secret."

The Hope opinion also contains a discussion of whether the holder of the trade secret had taken reasonable steps to protect the information.  Judge Schroeder held that Philips had taken such steps, although he said they were "not robust."  These included a training course titled "Ethics and Business," where Hope and other employees had been counseled about the need to protect business information against improper use and disclosure; Hope's execution of a confidentiality agreement; and independent steps taken by Philips to maintain secrecy of proprietary information within the company. 

A factor contributing to the trade secrets injunction was Hope's efforts to hide his competitive activities from his employer.  Judge Schroeder held that "injunctive relief may be appropriate where the departing employee is not forthright as to his intentions," or when "there is a showing of bad faith, underhanded dealing, or inferred misappropriation (justified by circumstances tending to show the new employer plainly lacks comparable technology."   He described the case as "a sad example of an overzealous employee's egregious disregard for his obligations to his current employer."

Public Interest

The Court found that the public interest would be served by the entry of an injunction, because Philips had "a legitimate interest in developing its customer relationships and being able to share confidential and proprietary information with its employees without fear it will end up in the hands of a competitor."

It determined also that the public interest would be served by "ensuring that contracts are enforced" and "preventing unethical business behavior."

Hiring Of Employee In Violation Of Covenant Not To Compete Subjected New Employer To Personal Jurisdiction

The Business Court held today in Armacell v. Bostic that it had personal jurisdiction over an Italian company, L'Isolante, which hired a scientist, Bostic, away from a competitor.

The Plaintiff claimed that the hiring violated Bostic's non-compete agreement, and that Bostic had also stolen "thousands of data files containing sensitive proprietary information and trade secrets."

The Business Court rejected the argument of L'Isolante that it was not subject to personal jurisdiction, finding that the Italian company had (1) pursued and offered employment to Bostic in North Carolina, (2) had obtained a legal opinion from its North Carolina counsel about the enforceability of Bostic's non-compete agreement, (3) tasked Bostic with supporting, from North Carolina, L'Isolante's research and development efforts, (4) worked directly with Bostic in North Carolina after he was hired, and (5) shipped samples of product to North Carolina.

The Court found these contacts to be "direct and strong," and that L'Isolante "had fair warning that these activities might subject it to the jurisdiction of North Carolina."  Judge Tennille also held that "North Carolina's interest in exercising jurisdiction over L'Isolante is substantial.  This case involves the alleged theft of a large amount of trade secrets from a North Carolina company, with injury felt in North Carolina."

At his deposition, Bostic pled the Fifth Amendment about his alleged theft.  In an earlier opinion, the Business Court drew an adverse inference from Bostic's refusal to testify, and entered a preliminary injunction.

Brief in Support of Motion to Dismiss

Reply Brief in Support of Motion to Dismiss

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. 

Zimbabwe, Ford Motor Company, And Covenants Not To Compete

The Court of Appeals for the Fourth Circuit invalidated a covenant not to compete today, in Lampman v. DeWolff Boberg & Associates, Inc. Along the way, the Court made allusions to Ford Motor Company and Zimbabwe to illustrate the overly broad scope of the agreement.

A couple of caveats first.  The opinion is unpublished, and it involves South Carolina law.  That said, the analysis is interesting, and potentially applicable to a North Carolina case given the similarity of South Carolina's law on the subject of non-competes.

The restriction, contained in a Shareholders' Agreement, said that the Plaintiff would "not, directly or indirectly, engage in Competition" with the Plaintiff.  The term "Competition" was defined as "serving in any capacity . . . for any Person that analyzes, designs, modifies and implements management systems to improve productivity, quality, service and capacity levels that generates quantifiable financial savings, and where such services are competitive with or similar to those that such Shareholder rendered during his or her employment with" the Defendant.

There was no geographic restriction in the covenant, which nevertheless had been upheld by the District Court.  It did so based on Defendant's argument that its business occupied a "unique, narrow niche" with "a very limited set of direct competitors."

The Fourth Circuit reversed, observing that the effect of the non-compete was to prohibit the Plaintiff from working for many entities that didn't compete at all with the Defendant.  It gave the example of Ford Motor Company, which it said was also engaged in "analyzing, designing, modifying and implementing management systems."  There was no valid reason to prevent the Plaintiff from working for Ford and providing those services, given that Ford and the Defendant weren't competitors. 

Since South Carolina -- like North Carolina -- doesn't blue pencil, that alone was enough of a basis to void this covenant.  But the Court pointed out another flaw in the covenant as well, that it would prevent the Plaintiff from providing competitive services anywhere in the world, even though the Defendant didn't do business throughout the world.  It held that "the non-competition clause. . . would prohibit [Plaintiff] from working for a 'competitor' in Zimbabwe, even though [the Defendant] does not provide services in that country and has no legitimate interest in prohibiting [the Plaintiff] from working there."

The photograph is of Victoria Falls, from Dragonwoman's photostream on Flickr.

 

Covenant Not To Compete Cases (Without More) Aren't Within The Business Court's Mandatory Jurisdiction

If a case involves only a breach of a covenant not to compete or a confidentiality agreement, it is not within the mandatory "unfair competition" jurisdiction of the North Carolina Business Court, based on two recent decisions.

The first case is Workplace Benefits, LLC v. Lifecare, Inc, decided by the Court on July 14, 2008In that case, which the Defendant designated to the Court, the Plaintiffs were a former employee of the Defendant and her new employer.

The Complaint asserted that the Defendant was improperly using a Confidentiality Agreement signed by the individual Plaintiff to threaten her so she wouldn't call on potential customers.  The Plaintiffs further alleged that potential customers had been impeded from doing business with the corporate Plaintiff as a result. 

The Complaint sought a declaratory judgment that the Confidentiality Agreement was invalid, and also made claims for tortious interference with contract and a breach of the duty of good faith and fair dealing.

The case was designated to the Business Court (by me) based on the Court's mandatory jurisdiction over cases involving "unfair competition law."  Judge Tennille disagreed that there was mandatory jurisdiction, and held:

every suit based upon a breach of a restrictive covenant or breach of a Confidentiality Agreement [will not] give rise to a mandatory business case based upon “unfair competition.” In order to raise a material issue of unfair competition, some additional factors must be alleged. For example, allegations of the theft of trade secrets which provide a competitive advantage to one party could give rise to a mandatory case. See e.g., Analog Devices v. Michalski, 157 N.C. App. 462, 579 S.E.2d 449 (2003). Also, actions designed to unfairly damage another’s business would give rise to an unfair competition claim. See, e.g., Sunbelt Rentals, Inc. v. Head & Engquist Equip., LLC, 174 N.C. App. 49, 620 S.E.2d 222 (2005).

The Court determined that those additional factors were lacking in the Workplace Benefits complaint. 

In the Order in the second case, decided yesterday, the Court remanded a lawsuit in which the plaintiff sought a declaratory judgment that a covenant not to compete was invalid. Judge Tennille remanded the case on his own motion, before any Answer had been filed, and referenced the Workplace Benefits decision.

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

A Notice Of Designation To The Business Court Is A General Appearance For Jurisdictional Purposes

Covenant Equipment Corp. v. Forklift Pro, Inc., 2008 NCBC 10 (N.C. Super. Ct. May 1, 2008)(Tennille)

A service of process issue and a covenant not to compete issue in one decision from the Business Court.  It doesn't get any more exciting than this.  But, seriously, this is a significant procedural decision from the Court, please read on.  (As always, there is a link to the full opinion above).

On the service issue, the delivery of the Complaint to one of the Defendants, Carnie, had not been made in precise compliance with Rule 4 of the North Carolina Rules of Civil Procedure.  The Sheriff had left the Summons and Complaint at Carnie's house in South Carolina, but had not delivered it personally to Carnie and had not left it with another person at the residence.  According to Carnie's Affidavit, the papers had been "left stuck in a crack between my doors" by a Deputy Sheriff with the last name of "Fudge."

The Court overruled the Motion to Dismiss for insufficiency of service of process because it found that Carnie had evaded service.  Looking at federal decisions, Judge Tennille ruled that leaving the Summons and Complaint at Carnie's residence was adequate service given Carnie's efforts to evade proper service.

But the groundbreaking part of the the decision on the service issue was the Court's ruling that Carnie had waived his objection to service because he had filed a Notice of Designation of the case to the North Carolina Business Court.  Judge Tennille held that "the filing of a Notice of Designation in an action constitutes a general appearance for the purpose of personal jurisdiction."  Thus, the objection to the sufficiency of service was waived.

The Court's decision goes beyond service of process.  Most significantly, if you are representing a Defendant planning to move to dismiss for lack of personal jurisdiction, you will waive that argument by filing a Notice of Designation to the Business Court.  To keep it alive, the Notice of Designation must contain an objection to personal jurisdiction.  Carnie's Notice did not.

In the non-compete portion of the opinion, 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."

Brief in Support of Motion to Dismiss

Brief in Opposition to Motion to Dismiss

Reply Brief in Support of Motion to Dismiss