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

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, 2008.  In 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.

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Today, in its Order and Opinion in Bolick v. Sipe, the North Carolina Business Court rejected a novel argument regarding the validity of post-employment consideration for a covenant not to compete.  It also dealt with the issue of the validity of a summons issued in the wrong name.

On the non-compete side, Plaintiff signed the non-compete with the cleaning company for which she had worked three years after she began employment.  Defendant argued that it had held off from firing the Plaintiff in exchange for her execution of the agreement, and that this was valid consideration.

Judge Tennille disagreed, holding:

"The Court is not aware of any prior decisions holding that a decision not to fire someone is adequate consideration for a non-compete. Instead, this state has found that '[w]hen the relationship of employer and employee is established before the covenant not to compete is signed there must be consideration for the covenant such as a raise in pay or a new job assignment.' Whittaker Gen. Med. Corp. v. Daniel, 324 N.C. 523, 527, 379 S.E.2d 824, 827 (1989) (citing Chemical Corp. v. Freeman, 261 N.C. 780, 136 S.E.2d 118 (1964)). That consideration can NOT be the continuation of employment. Mach. Co. v. Miholen, 27 N.C. App. 678, 686–87, 220 S.E.2d 190, 196 (1975). Indeed, under Defendants’ theory, every employer could offer an employee the option of being fired or signing a non-competition agreement and argue that 'consideration' had been paid. That is not the law in North Carolina. The restrictive covenant in this case was invalid."

The issue involving the validity of the summons arose because Plaintiff had sued a company called Molly Mops, LLC, but had meant to sue a different company, Molly Mops Cleaning Service, LLC.  Plaintiff discovered the error promptly, and amended her complaint before any responsive pleading was filed, but never had a new summons issued.

Plaintiff sought leave to amend the original summons to properly name Molly Mops Cleaning Service, LLC.  Judge Tennille denied the Motion, even though the right party had notice of the lawsuit, holding:

This is not a case of misnomer. The wrong entity was named in the summons which was never amended. There is no doubt that MMCS had notice; however, that does not cure the defect. It may well be that plaintiff intended to sue MMCS and was confused; however, that does not cure the defect. Plaintiff did file an amended complaint; however, that did not cure the defect. A proper summons was never served on MMCS and thus no action has been commenced against it.

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In this case, Plaintiff made a substantive mistake and sued the wrong entity. That mistake was fatal. The court does not have jurisdiction over MMCS because no valid summons was issued and served on MMCS.

Brief in Support of Motion for Summary Judgment

Brief in Opposition to Motion for Summary Judgment

Brief in Support of Motion to Amend Summons

Brief in Opposition to Motion to Amend Summons

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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.

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