MESSAGE FROM ASSOC PROF PAMELA S EVERS ATTORNEY AT LAW This article has been offered by web posting to UNCW students for educational purposes only Articles posted may have been edited for clarity and format by Pamela S Evers http www ncbusinesslitigationreport com Courts Shouldn t Question The Adequacy Of Consideration For Covenants Not To Compete Rules NC Court Of Appeals Posted on April 7 2009 by Mack Sperling 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 North Carolina Business Court Dismisses Claim That Confidentiality Agreement Was Invalid Because It Was Overly Broad Posted on December 28 2008 by Mack Sperling Can a confidentiality agreement be too broad to be enforced The North Carolina Business Court said it can be under some circumstances in Covenant Equipment Corp v Forklift Pro Inc Before you keep reading know that the case involved South Carolina not North Carolina law North Carolina law on this point looks to be pretty different as discussed at the very end of this post but the case is still worth a look The facts are typical for a lawsuit against a former employee Caldwell had sold his forklift business to the Plaintiff and became Plaintiff s employee As a part of the sale Caldwell agreed that he w ould not directly or indirectly disclose or furnish any non public proprietary or confidential information obtained from or relating to the Business Caldwell left the Plaintiff and started a new competitive business The Plaintiff sued arguing that Caldwell had breached his confidentiality obligations Caldwell moved to dismiss this claim arguing that under South Carolina law the confidentiality provision was overly broad and unenforceable The motion to dismiss was based on the South Carolina Supreme Court s 1996 decision in Carolina Chemical Equipment Co v Muckenfuss 471 S E 2d 721 S C 1996 where it held that a broad confidentiality agreement which would have the effect of a covenant not to compete will be subject to the same scrutiny as a covenant not to compete The confidentiality agreement at issue in Muckenfuss prohibited the use of virtually all of the knowledge which Muckenfuss had gained during his employment with the plaintiff The South Carolina Supreme Court held that this broad provision was tantamount to a covenant not to compete and that it was invalid because it contained no restrictions as to time or territory The following year however the South Carolina Legislature overruled Muckenfuss at least in part by enacting the South Carolina Trade Secrets Act A provision of that statute provides that a contractual duty not to disclose or divulge a trade secret to maintain the secrecy of a trade secret or to limit the use of a trade secret must not be considered void or unenforceable or against public policy for lack of a durational or geographical limitation S C Code Ann 39 130 D 2007 There is no counterpart to this provision in the North Carolina Trade Secrets Protection Act Judge Tennille finding no definitive guidance from South Carolina s courts on the interplay between the court decision and the statute interpreted South Carolina law to be as follows South Carolina law as it applies to this case prohibits an employer or business purchaser from enforcing a restriction on the use of information that would amount to an unlawfully broad restrictive covenant preventing a person from using the general skills and knowledge acquired as an owner or employee of a business On the other hand expiration of a restrictive covenant does not permit a former employee or business owner
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