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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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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Trade Secrets Misappropriation Claims Against Non-Employees Survive Motion to Dismiss

By:  John Bloss, Member, Higgins Benjamin, PLLC

The North Carolina Business Court continues to be a battleground for disputes involving alleged misappropriations of trade secrets.  These lawsuits typically target disloyal former employees, but in a recent opinion, the Business Court allowed claims against non-employee defendants to move forward.

The plaintiff in Koch Measurement Devices, Inc. v. Armke, 2013 NCBC 48 (Oct. 14, 2013), is a wholesaler of high-end “beer growlers”—collectible glass jugs typically used to transport draft beer out of craft breweries. Koch sued its former web designer and web host, Michael Walsak, and Tote Glass, Inc., a company in which Walsak held an interest, alleging that Walsak and Tote had conspired with Koch’s former (and now-deceased) President to divert Koch’s assets, business opportunities, and trade secrets to Tote.  In particular, Koch’s complaint alleged that Walsak and Tote misappropriated confidential information including Koch’s customer lists, the ordering habits and history of Koch’s customers, and Koch’s pricing and inventory management strategies; diverted Koch’s inventory to Tote; imported growlers from Koch’s German supplier; used Koch’s glass decorator; used the same pricing schedule as Koch; stole Koch’s largest client; and removed Koch’s website from the web.

Business Court Chief Judge Jolly first ruled that the absence of any former employee of Koch as a defendant did not prevent Koch from maintaining the action, since Koch made “sufficient allegations . . . concerning the coordinated efforts of [Koch’s former President], Walsak, and Tote to, in essence, steal Koch’s business to allow this action to continue without the presence of [the former President].”  Judge Jolly then evaluated each of the causes of action asserted by Koch—misappropriation of trade secrets, unfair and deceptive trade practices, constructive trust, unjust enrichment, conversion, breach of contract, and civil conspiracy—and determined that each stated a claim for which relief could be granted.  The Court held that Koch had identified its allegedly misappropriated trade secrets with sufficient specificity, distinguishing Washburn v. Yadkin Valley Bank & Trust Co., 190 N.C. App. 315 (2008), in which the Court of Appeals upheld dismissal of a complaint that generally described the trade secret at issue at “business methods; clients, their specific requirements and needs and other confidential information pertaining to Yadkin’s business.”

If you would like to discuss a trade-secret misappropriation issue contact John Bloss at (336) 273-1600 or jbloss@greensborolaw.com.
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Lawsuit Challenging Mission Hospital’s Billing Practices for Uninsured Emergency Room Patients Allowed to Proceed

It may seem counterintuitive, but many non-profit hospitals around the country charge their uninsured patients substantially more–often several times as much–for emergency room services as compared to amounts paid by all other categories of patients, including patients with medical insurance and Medicare and Medicaid patients, for the same care.  A putative class action lawsuit against the Mission Hospital system in Western North Carolina (which includes the Angel Medical Center, Blue Ridge Regional Hospital, McDowell Hospital, and Transylvania Regional Hospital), which challenges this practice, recently survived the hospital’s motion to dismiss in the North Carolina Business Court.
The lawsuit, Stephen Hefner v. Mission Hospital, Inc., et al., 12 CvS 03088 (Buncombe County, N.C.), alleges that Mission maintains, but does not make publicly available, spreadsheets that list its gross billing charges for each product and service provided.  Within the hospital industry, such lists of gross billing charges are called “Chargemasters” or “gross charges.”  The lawsuit contends that these Chargemasters, listed on an item-by-item basis, form a reference point for Mission to negotiate with insurance carriers, but are not pricing schedules for which Mission expects payment.  According to the lawsuit, hospitals like Mission have every incentive to artificially inflate their Chargemasters so they can maximize the rates they charge to insurers.  See “In N.C., Hospitals’ Rack Rate Hits the Uninsured Hard,” RALEIGH NEWS & OBSERVER (Apr. 22, 2012) (“Every incentive is for the hospitals to charge as much as possible for these procedures . . . . Hence the prices are as arbitrary as can be”).  In fact, only a small percentage of Mission’s patients actually pay these Chargemaster rates, which, according to the Complaint, are substantially more than any other class of patient is required to pay.
Following media attention on hospitals’ imposition of their highest charges on uninsured and under-insured patients accompanied by aggressive collection actions, not-for-profit hospitals came under increasing congressional and IRS scrutiny.   Congress took action to prohibit the practice by not-for-profit hospitals when it enacted the Patient Protection and Affordable Care Act, commonly known as “Obamacare.”  The Act instructs that a hospital will not be treated as not-for-profit unless it “prohibits the use of gross charges.”  The Complaint alleges that this provision became effective as to Mission on January 1, 2011.
The contract Mr. Hefner signed when he was admitted to the Mission emergency room required him to make payment in accordance with the hospital’s “regular rates and terms,” but failed to identify what the phrase “regular rates and terms” meant, or where any such “regular rates and terms” might be found.  Mr. Hefner’s lawsuit, in which he seeks to represent a class of other self-pay Mission emergency room patients, asserts causes of action of (1) breach of contract; (2) breach of the covenant of good faith and fair dealing; (3) constructive trust; (4) declaratory judgment; (5) restitution; and (6) injunction.  His lawsuit alleges that the Chargemaster rates at which he and other emergency room patients were billed were not Mission’s “regular payment rates.”
In an opinion dated April 18, 2013, the Honorable Calvin E. Murphy, North Carolina Business Court Judge, denied Mission’s motion to dismiss with respect to each of the causes of action.  Judge Murphy ruled that Mr. Hefner’s allegations–that Mission (1) failed to specify what rates it would use in billing for the treatment and services rendered, (2) charged Hefner its Chargemaster rates instead of its regular rates, (3) charged Hefner, as a self-pay emergency care patient, a higher rate than other patients for similar services, and (4) charged Hefner at rates which were unreasonable and unconscionable for the services provided—were sufficient to state claims for which relief could be granted, and allowed the lawsuit to proceed to discovery.
For more information contact John Bloss, co-counsel for Mr. Hefner and the putative class, at (336) 273-1600 or jbloss@greensborolaw.com.

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