Noncompetition Agreements: New Case Highlights Need for Legislative Solution

By Jon Wall, Member, Higgins Benjamin, PLLC

The North Carolina Court of Appeals recently affirmed a long line of North Carolina cases refusing to enforce overly broad noncompetition agreements.  Noncompetition agreements, also called “noncompete clauses” and “covenants not to compete,” are contract clauses used to prevent an employee (or former business owner) from leaving employment and going into competition with a different employer.  They generally purport to restrict the future employment of the employee for a length of time in a particular territory or region.

 

 

In Copypro, Inc., v. Musgrove, No. COA 13-297, 2014 N.C. App. LEXIS 120 (N.C. Ct. App. Feb. 4, 2014),  Judge Ervin of the North Carolina Court of Appeals refused to enforce a noncompetition agreement on the ground that it was overly broad.  There, an office equipment salesman agreed not to own or to work for any business like the employer’s in 33 counties for a period of three years.  The trial court granted a preliminary injunction against the employee, prohibiting him from (1) divulging or utilizing certain information and (2) working for a competitor, including his then-current employer.
 
Reversing, the Court of Appeals observed that the noncompetition agreement prohibited the employee from working for, or “being connected in any manner with,” a competitor in any capacity.  As such, the agreement would purportedly estop the employee from janitorial work for a competitor, even though such work never formed any part of

the employee’s work for the plaintiff business.  The court explained, “As our decisions reflect, we have held on numerous occasions that covenants restricting an employee from working in a capacity unrelated to that in which he or she worked for the employer are generally overbroad and unenforceable.”  Id.

The court distinguished Precision Walls, Inc. v. Servie, 152 N.C. App. 630, 568 S.E.2d 267 (2002).  In that case, the defendant employee was a project manager with access to sensitive information in a number of areas.  In Copypro, however, the record did not reflect that the employee had such far-reaching knowledge of sensitive information.  Thus, the court found the covenant overbroad in prohibiting the defendant employee from any type of work with a competitor and reversed the trial court’s issuance of the preliminary injunction in regard to the noncompetition agreement [the court left intact the injunction prohibiting certain disclosures, which had not been challenged on appeal].
Copypro is important for two reasons.  First, it affirms that noncompetition provisions crafted in an overly broad fashion will not be enforced.  Thus, in drafting, any limitation should be specifically tailored to that employee’s position.  Second, proper development of the record is paramount in any litigation involving noncompetition agreements.  While here it does not appear that the employer could have overcome the over breadth of its noncompetition clause, the court hinted that it would have had a more difficult decision if the record had indicated that the employee had greater responsibilities and more access to sensitive information.
The time may be ripe to ban or severely curtail noncompetition agreements.  Other states have recognized that trade secrets laws, like the North Carolina Trade Secrets Protection Act, N.C. Gen. Stat. § 66-152 et seq., already protect against use or disclosure of truly sensitive information.  Noncompetition agreements substantially and unfairly hinder fluidity in the key entrepreneurial labor force.  Thus, forward-thinking, business-friendly states have advocated for the “the outright elimination of enforceability of non-competition agreements.”  Testimony of Gregory Bialecki, Secretary of Executive Office of Housing & Economic Development, before Massachusetts legislature (Sept. 13, 2013).
Both the Triangle and Triad have attempted to foster research and innovative economies.  Securing the talent necessary for these industries “is considerably more difficult if employees are legally unable to move between jobs…”  Id. If North Carolina wants to compete with Boston and Silicon Valley, it needs to address noncompetition agreements, which too often are (1) of uncertain enforceability, (2) costly to litigate, and (3) too often used as a sword rather than a shield, trapping employees at their current job.  Like Massachusetts, we should give serious consideration to eliminating them.
 If you would like to discuss an issue involving Noncompetition Agreements, contact Jon Wall at (336) 273-1600, ext. 134, or jwall@greensborolaw.com.
 

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This Order Will Be Reversed on Appeal, but I’ll Enter It Anyway

 By:  Stephen Robertson, Member, Higgins Benjamin, PLLC

The common wisdom among trial lawyers is that judges will try their best to get it right. Our best judges are keen legal scholars, ethically and morally upright, and with solid judicial temperament. But, even if these loftier attributes, goals and motives do not steer the court in the right direction, judges at least want to get it right because they hate to have a decision reversed by the Court of Appeals.

Last March, Carteret County Judge Paul M. Quinn, went “off the grill” to “advocate a little” for Defendant/child support obligor, Gregory Kendall. Judge Quinn refused to register a Colorado child support order despite that Kendall offered none of the required statutory defenses to registration. Under North Carolina Statute § 52C-6-607, the court “shall” register a foreign order unless the Defendant can prove an irregularity in the underlying order or a defense under North Carolina law.
The defense Kendall offered was his purported inability to earn wages due to the fact that he had been improperly required to register as a sex offender—a purely equitable defense, as the trial court acknowledged in its order. There is no authority allowing that an equitable defense may be raised to defend against registration and enforcement of an out-of-state child support order.
At trial the judge told Mr. Kendall, “they’re going to appeal this so I feel for your position. I’m going to buy you a little more time on this but eventually this is going to come down on you, okay?”  The Court of Appeals recently reversed, just as Judge Quinn forecast.  Carteret County v. Kendall, 2014 N.C. App. LEXIS 24, 2014 WL 44036 (Jan. 7, 2014).
If you would like to discuss child support, out-of state family law, or any other North Carolina family law issue, contact Steve Robertson, NC State Bar certified in Family Law, at (336) 273-1600 or srobertson@greensborolaw.com.

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Business Court Dismisses LLC Member vs. Member Claims; Derivative Claim Against Managing Member Survives

By John Bloss, Member, Higgins Benjamin PLLC

Trust your fellow LLC member at your peril, a new North Carolina Business Court opinion instructs.  
Glenn Crossing, LLC, one of the defendants in Island Beyond, LLC v. Prime Capital Group, LLC, 2013 NCBC 51 (Oct. 30, 2013),was formed for the purpose of purchasing and owning 30 acres of investment property near Kernersville.  One of Glenn Crossing’s two members (which was itself an LLC and will be referred to for simplicity as the “Managing Member”) provided capital to Glenn Crossing.  Glenn Crossing’s Operating Agreement delegated responsibility for acquiring the 30 acres to a company owned by the Managing Member’s principal, Raymond Kraweic.
The Complaint filed by Glenn Crossing’s second member (the “Plaintiff”) alleged that Plaintiff assumed, but did not independently verify, that Kraweic had caused Glenn Crossing to purchase the entire 30 acres as contemplated by the parties’ agreement.  Unbeknownst to the Plaintiff, however, the Managing Member acquired only 10 acres of the property for Glenn Crossing, while two companies owned by Kraweic acquired the remaining 20 acres.  Seven years after Glenn Crossing was formed, Plaintiff learned that NCDOT had condemned a portion of those 20 acres, resulting in a payment of a condemnation award to Kraweic’s companies only, and leaving Glenn Crossing with no income-producing property.
Business Court Judge Gale dismissed the Plaintiff’s claims for breach of fiduciary duty and fraud against the Managing Member and Kraweic.  While a managing member of an LLC may “in some instances” owe the other members a fiduciary duty, no such duty arose under these circumstances where the Operating Agreement bestowed on the Managing Member “full and complete authority to manage and control . . . the properties of the Company.”  The Plaintiff’s fraud-by-omission claim failed due to a failure of reasonable reliance, since the Plaintiff could have searched the public records to verify that Glenn Crossing had, in fact, purchased the 30 acres for itself.
Plaintiff’s derivative claim (that is, a claim brought by Plaintiff on behalf of Glenn Crossing) against the Managing Member for breach of fiduciary duty survived the motion to dismiss, however.  Plaintiff alleged that the Managing Member had acquired the 20 acres and misdirected Glenn Crossing’s opportunities for an improper personal benefit; the Court ruled that these allegations of a breach of fiduciary duty were adequately pleaded.  The Court rejected the Managing Member’s argument that the Operating Agreement eliminated any fiduciary obligation from the Managing Member to Glenn Crossing since, under North Carolina statutes governing LLCs, there can be no contractual waiver of a member’s duty to refrain from taking actions that conflict with the interest of the LLC or causing the LLC to enter into transactions in which the managing member derives an improper personal benefit.
If you would like to discuss a dispute arising in the context of a limited liability company or other business entity please contact John Bloss at (336) 273-1600 or jbloss@greensborolaw.com.

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