Opinion
No. 06-944.
Filed July 3, 2007.
Pitt County No. 05 CVS 1997.
Appeal by plaintiff from judgment entered 15 March 2006 by Judge William C. Griffin, Jr. in Pitt County Superior Court. Heard in the Court of Appeals 21 February 2007.
Shumaker, Loop Kendrick, LLP, by William H. Sturges and Patricia Wilson Magee, for defendant-appellee Southern Elevator Company, Inc. Ward and Davis, LLP, by I. Clark Wright, Jr., for defendant-appellant Abell International of North Carolina, Inc. Voerman and Gurganus, by David E. Gurganus, for plaintiff-appellee.
Appellant David Lloyd (Lloyd) appeals from a preliminary injunction granted on 15 March 2006, enjoining him from competing with appellee Southern Elevator Company, Inc. (Southern) until 1 July 2007 within certain geographic regions.
Lloyd began work for Southern on 2 March 2001. On 26 January 2001, before beginning his employment, Lloyd signed a covenant not to compete, which includes the following provision:
(a) Restrictions on Competition. Employee agrees that during the term of his employment hereunder and for a period of two (2) years after the termination of his employment, he will not, directly or indirectly, as an individual, under contract for, or on behalf of or as an owner, agent, consultant, employee, officer, director, stockholder, or partner of any business organization, compete with Southern Elevator Company, Inc. (hereinafter called "the Company") in any of the following territories:
(i) Any county in which he either is working at the time or has performed substantial work within two (2) years prior thereto; and
(ii) Any location or locations within one hundred (100) miles of the boundaries of the county in which any office in or out of which he is working or has worked during his employment by the Company.
Lloyd left his job at Southern on 30 June 2005. Although the parties disagree as to the underlying reason for Lloyd's departure. Lloyd states that he "left his employment because he was asked to lie to medical providers in connection with an employee's on-the-job injury and subsequent workers['] compensation claim." Southern disagrees, stating that "[a]fter Lloyd left Southern, he immediately started Abell, despite contrary representations." Lloyd began employment with Abell Elevator International of North Carolina, LLC (Abell) in July of 2005. Abell is owned by Lloyd's father and two brothers. Lloyd, himself, has no ownership interest in the company. Lloyd's father is the sole owner of Abell Elevator International (Abell International), which "is engaged . . . in new installations and select modernizations of elevators in Ohio, Kentucky, Indiana, Tennessee, and Dallas, Texas."
Before working at Southern, Lloyd worked for his father's company "in many capacities (service, installations, sales, management) for over 15 years. . . ." Lloyd resigned from his position as the branch manager for the Indianapolis office of Abell International in order to take a regional manager position at Southern. Lloyd's title at Southern evolved from "Wilson Regional Manager" to "Eastern Regional Manager" in June, 2002, when Southern renamed its regions. In an affidavit, Southern's president, M. Bryant Aydelette, stated:
19. As Regional Manager, David Lloyd learned about the customers of Southern Elevator and learned about their elevator needs and preferences in the Eastern Region and throughout Southern Elevator's service area. . . . Prior to David Lloyd's employment at Southern Elevator, he knew nothing about the elevator business market or customers in eastern North Carolina.
20. As Regional Manager, David Lloyd received monthly profit and loss statements for the Eastern Region. . . .
21. As Regional Manager, David Lloyd was responsible for hiring employees for the Eastern Region. As a result of this, he obtained knowledge of and knows the wages and benefits of these employees, their skill levels, and other information about their employment activity in the eastern North Carolina elevator market. . . .
22. As Regional Manager, David Lloyd had access to all contracts with Southern Elevator's customers. The terms of the contracts are confidential information and are trade secrets of Southern Elevator. The contract expiration date is part of this confidential information, is very valuable protecting Southern Elevator's customer base, and would be very helpful information for a competitor seeking to solicit Southern Elevator's customers.
23. Based upon David Lloyd's service as Regional Manager for Southern Elevator, he learned Southern Elevator's pricing formulas, margins for various types of contracts, margins for various customers, pricing information, and sources for elevator parts and supplies as they relate to the Eastern Region and as to Southern Elevator's entire service area. . . .
On 11 August 2005, Lloyd filed a complaint against Southern requesting that the trial court "declare the rights and obligations of the parties" and declare the "[a]greement invalid and unenforceable." On 9 September 2005, Southern answered and counterclaimed, suing Lloyd for breach of contract and misappropriation of trade secrets. Southern also asserted a counterclaim against Abell, suing it for tortious interference with contract. Both Lloyd and Abell were sued for unfair and deceptive trade practices. Lloyd replied to Southern's counterclaim on 7 October 2005, asserting fourteen affirmative defenses. These affirmative defenses primarily focus on the covenant not to compete, arguing that it is void and unenforceable. On 7 October 2005, Lloyd also filed a motion to dismiss Southern's counterclaims. On 19 October 2005, Abell filed its answer to Southern's counterclaims, and also asserted fourteen affirmative defenses. Abell then counterclaimed against Southern for tortious interference with contract, libel/slander per se, unfair competition, and unfair and deceptive trade practices. These claims arose from a contract with the U.S. Army at Fort Bragg.
In February, 2006, Southern moved for a preliminary injunction against Lloyd. Southern requested that the trial court enjoin Lloyd for a period of two years from the termination of Lloyd's employment from: (1) competing with Southern Elevator, either individually or as an employee of Abell . . . or of any other elevator service company, within any county in which Lloyd was performing work at the time of his employment; (2) competing with Southern Elevator, either individually or as an employee of Abell North Carolina, or of any other elevator service company within any county in which Lloyd performed substantial work within the previous two years, and as identified in Exhibit A attached hereto; and (3) competing with Southern Elevator, either individually or as an employee of Abell North Carolina, or of any other elevator service company, within 100 miles of Pitt County and Wilson County, which are the counties where Lloyd worked in Southern Elevator's Eastern Regional offices. In addition, Southern Elevator requests this Court to exercise its equitable powers to deviate from the time period specified in the Non-Compete Agreement and issue an injunction applicable for two years from the date the Court issues its Order so as to give Southern Elevator the full benefit of its agreement with Lloyd.
The trial court granted Southern's motion for preliminary injunction on 15 March 2006. It concluded that Southern "will likely prevail on its claims against David Lloyd . . . to enforce Sections 1(a)(i) and 1(a)(ii) of the Non-Compete Agreement, which are the only Sections of the Non-Compete Agreement before the Court at this time." The trial court enjoined Lloyd from competing with Southern in forty-two counties until 1 July 2007, and competing with Southern within 100 miles of the borders of Pitt and Wilson counties until 1 July 2007. Lloyd and Abell filed a joint motion to stay enforcement of the preliminary injunction, which was denied.
These counties are all located within North Carolina.
Lloyd and Abell appeal the preliminary injunction and the order denying their joint motion to stay enforcement of the preliminary injunction. A 16 March 2006 notice of appeal states that appellants "immediately will seek a temporary stay and writ of supersede as from the North Carolina Court of Appeals" by separate filing. That petition was denied by this Court on 11 April 2006. The issue was appealed to the Supreme Court, which also denied the petition.
We first note that "[a] preliminary injunction is interlocutory in nature. As a result, issuance of a preliminary injunction cannot be appealed prior to final judgment absent a showing that the appellant has been deprived of a substantial right which will be lost should the order escape appellate review before final judgment." Clark v. Craven Regional Medical Authority, 326 N.C. 15, 23, 387 S.E.2d 168, 173 (1990) (citations and quotations omitted); see also N.C. Gen. Stat. § 7A-27(d) (2005) (granting appeal of right "[f]rom any interlocutory order or judgment of a superior court or district court in a civil action or proceeding which . . . [a]ffects a substantial right. . . ."). However, "[i]n cases involving an alleged breach of a non-competition agreement and an agreement prohibiting disclosure of confidential information, North Carolina appellate courts have routinely reviewed interlocutory court orders both granting and denying preliminary injunctions, holding that substantial rights have been affected." QSP, Inc. v. Hair, 152 N.C. App. 174, 175, 566 S.E.2d 851, 852 (2002). Therefore, we review this interlocutory order.
"On appellate review of a preliminary injunction, this Court is not bound by the trial court's findings of fact. Rather, the appellate court reviews the evidence de novo and makes its own findings of fact and conclusions of law." Szymczyk v. Signs Now Corp., 168 N.C. App. 182, 184, 606 S.E.2d 728, 731 (2005).
In considering the propriety of a preliminary injunction, this Court does not determine whether a confidentiality, no-solicitation, and non-competition agreement is in fact enforceable, but reviews the evidence and determines (1) whether plaintiff has met its burden of showing a likelihood of success on the merits and (2) whether plaintiff is likely to sustain irreparable loss unless the injunction is issued.
QSP, 152 N.C. App. at 176, 566 S.E.2d at 853 (citing A.E.P. Industries v. McClure, 308 N.C. 393, 401, 302 S.E.2d 754, 759 (1983)).
Accordingly, we first determine whether Southern met its burden of showing a likelihood of success on the merits. We hold that it did. Although appellants present several arguments that the covenant is unenforceable, and therefore Southern cannot succeed on the merits, these arguments are without merit. "Under North Carolina law, a covenant not to compete is valid and enforceable if it is (1) in writing; (2) made a part of the employment contract; (3) based on valuable consideration; (4) reasonable as to time and territory; and, (5) designed to protect a legitimate business interest of the employer." Okuma America Corp. v. Bowers, ___ N.C. App. ___, ___, 638 S.E.2d 617, 620 (2007) (citing Farr Assocs. v. Baskin, 138 N.C. App. 276, 279, 530 S.E.2d 878, 881 (2000)). Appellants contend that the agreement containing the covenant not to compete had expired at the time of Lloyd's departure from Southern and that the consideration for the covenant not to compete "vanished" on 1 March 2003. They further argue that the covenant is unreasonable as to time and territory. We disagree.
Appellants allege that the covenant not to compete expired on 1 March 2003, two years after the start of Lloyd's employment at Southern. At the start of his employment, Lloyd signed not only the covenant not to compete, but also a separate employment agreement. Under Lloyd's written employment agreement, Lloyd was employed for a period of two years, commencing 1 March 2001. The employment agreement was effective for a term of two years, and states that "[u]pon termination . . . or at anytime during the Employee[']s employment the covenant Not to Compete Agreement signed January 26, 2001 shall apply." Appellants interpret this language as limiting the term of the covenant not to compete agreement to the same two years as the employment agreement. They are incorrect. Although the two agreements were signed at the same time, the terms of one do not govern the terms of the other. The covenant clearly sets forth its effective term as the period of time Lloyd was employed at Southern, and for two years thereafter. Moreover, the fourth section states that "[t]his Agreement sets forth the entire understanding between the parties. . . ." and "[t]his Agreement cannot be amended except by a writing signed by both parties."
We turn now to appellants' "vanishing consideration" claim. Appellants concede that there was consideration for the execution of the covenant, but then argue that this consideration vanished upon expiration of the two-year term of the employment agreement. Appellants argue that the transition from contract employee to at-will employee required Southern to give new consideration in exchange for the continued viability of the covenant not to compete. Appellants offer no legal authority supporting their position, and their other analysis is likewise unconvincing. "It is well established in North Carolina that `the promise of new employment is valuable consideration and will support an otherwise valid covenant not to compete contained in the initial employment contract.'" Milner Airco, Inc. v. Morris, 111 N.C. App. 866, 869, 433 S.E.2d 811, 813 (1993) (quoting Wilmar, Inc. v. Corsillo, 24 N.C. App. 271, 273, 210 S.E.2d 427, 429 (1974) (citations omitted)). Southern's promise of employment to Lloyd, regardless of his separate employment contract, was sufficient consideration for the covenant, and remained so after the expiration of his initial employment contract. We move now to appellants' argument that the covenant is unreasonable as to time and territory. When evaluating the reasonableness of a covenant's time and territory requirements, we consider the following six factors:
(1) the area, or scope, of the restriction; (2) the area assigned to the employee; (3) the area where the employee actually worked or was subject to work; (4) the area in which the employer operated; (5) the nature of the business involved; and (6) the nature of the employee's duty and his knowledge of the employer's business operation.
Okuma America, ___ N.C. App. at ___, 638 S.E.2d at 620 (quoting Hartman v. W.H. Odell Assocs., Inc., 117 N.C. App. 307, 312, 450 S.E.2d 912, 917 (1994). In addition, we must consider the covenant's time and territory requirements in tandem, "such that `[a] longer period of time is acceptable where the geographic restriction is relatively small, and vice versa.'" Id. (quoting Farr, 138 N.C. App. at 280, 530 S.E.2d at 881 (citations omitted)). "Nevertheless, the scope of the geographic restriction must not be any wider than is necessary to protect the employer's reasonable business interests." Id. (citing Precision Walls, Inc. v. Servie, 152 N.C. App. 630, 638, 568 S.E.2d 267, 273 (2002)).
The covenant at issue has a term of two years, which is not unreasonable per se. See, e.g., Farr, 138 N.C. App. at 280, 530 S.E.2d at 881 ("A five-year time restriction is the outer boundary which our courts have considered reasonable. . . ."). Appellants suggest that the covenant also includes a "look-back" provision that extends the term of the covenant at least another two years. We disagree; there is no "look-back" provision extending the term of the covenant. The term of two years is clearly stated, and no "look-back" provision is implied by the language of the contract.
The covenant's geographic restriction is determined by two different factors: Lloyd may not compete with Southern (1) in any county "in which he either is working at the time [of his departure] or has performed substantial work within two (2) years prior thereto"; and (2) "within one hundred (100) miles of the boundaries of the county in which any office in or out of which he is working or has worked during his employment by the Company." During his tenure with Southern, Lloyd worked out of Southern's offices in Wilson and Pitt counties.
This Court has held that "[t]he protection of customer relations against misappropriation by a departing employee is well recognized as a legitimate interest of an employer." Okuma America, ___ N.C. App. at ___, 638 S.E.2d at 621 (quoting Farr, 138 N.C. App. at 280, 530 S.E.2d at 881).
[A] covenant is reasonably necessary for the protection of a legitimate business interest "if the nature of the employment is such as will bring the employee in personal contact with patrons or customers of the employer, or enable him to acquire valuable information as to the nature and character of the business and the names and requirements of the patrons or customers."
Id. (quoting United Laboratories, Inc. v. Kuykendall, 322 N.C. 643, 650, 370 S.E.2d 375, 380 (1988)).
This Court has also held that covenants restricting employees "from working in an identical position for a direct competitor are valid and enforceable." Id.; see Precision Walls, 152 N.C. App. at 638-39, 568 S.E.2d at 273 (finding a one-year, two-state restriction against employment with a direct competitor to be reasonable and within a legitimate business interest); but see Vision AIR, Inc. v. James, 167 N.C. App. 504, 508-09, 606 S.E.2d 359, 362-63 (2004) (finding a two-year restriction against employment with "similar businesses" throughout the Southeast to be unreasonable).
The facts in the instant case are significantly similar to the facts in the case recently decided by this Court in Okuma America. In Okuma America, the employee, Phillip Bowers, was the Vice President of Customer Service, making him one of the six top executives in the company. Okuma America, ___ N.C. App. at ___, 638 S.E.2d at 621. The company stated that in that role, the employee "`participated . . . in the most critical and strategic decisions made by the company,' in addition to becoming familiar with and administering the company's customer service blueprint and organization. . . ." Id. After leaving the company, the employee took an identical position, as Head of Customer Service, with a competitor. Id.
Bowers' covenant differed from Lloyd's in that Bowers was allowed to work for a direct competitor in any area that did not directly compete with Okuma America. Id. at ___, 638 S.E.2d at 621-22. Bowers' covenant defined a competitor of Okuma America as "any entity operating as a manufacturer, distributor, or seller of machine tools that are substantially similar to machine tools manufactured, distributed or sold by [Okuma America]." Id. at ___,638 S.E.2d at 619. In holding the terms of the Okuma America covenant valid and enforceable, this Court considered "Bowers' actual contacts with customers, the nature of his duties, the level of his responsibilities, the scope of his knowledge, and other issues relating to how closely the geographic limits fit with Mr. Bowers's work for Okuma America." Id. at ___, 638 S.E.2d at 622. We specifically examined the time and geographic restrictions "[i]n light of our ruling in Hartman, to consider `the nature of the employee's duty and his knowledge of the employer's business operation.'" Id. at ___, S.E.2d at 622 (quoting Hartman, 117 N.C. App. at 312, 450 S.E.2d at 917). Here, Lloyd was a senior manager who had extensive knowledge of his employer's business operation, close contact with numerous customers and potential customers, and a thorough knowledge of the North Carolina elevator market, all acquired through his employment with Southern. We therefore hold that the covenant not to compete is reasonable as to time and territory. By its terms, the covenant is enforceable and remains in effect until its expiration on 1 July 2007.
Because the covenant not to compete is enforceable and Southern has demonstrated that Lloyd violated that covenant, we hold that Southern has met the burden of showing a likelihood of success on the merits.
We turn now to "whether plaintiff is likely to sustain irreparable loss unless the injunction is issued." QSP, 152 N.C. App. at 176, 566 S.E.2d at 853 (citing A.E.P. Industries, 308 N.C. at 401, 302 S.E.2d at 759). "[I]ntimate knowledge of the business operations or personal association with customers provides an opportunity to [a] . . . former employee . . . to injure the business of the covenantee." Id. at 178 (quoting Kuykendall, 322 N.C. at 649, 370 S.E.2d at 380). Our Supreme Court has previously stated that
if the nature of the employment is such as will bring the employee in personal contact with patrons or customers of the employer, or enable him to acquire valuable information as to the nature and character of the business and the names and requirements of the patrons or customers, enabling him by engaging in a competing business in his own behalf, or for another, to take advantage of such knowledge of or acquaintance with the patrons and customers of his former employer, and thereby gain an unfair advantage, equity will interpose in behalf of the employer and restrain the breach. . . .
A.E.P. Industries, 308 N.C. at 408, 302 S.E.2d at 763 (citation omitted).
Here, Lloyd's position with Abell and the nature of Abell's business were such as to enable Lloyd to take unfair advantage of the contacts, expertise, inside information, and goodwill he acquired while working for Southern to benefit Abell, a company owned by Lloyd's family, which directly competes with Southern. Accordingly, we hold that Southern is likely to sustain irreparable loss without a preliminary injunction.
Affirmed.
Judges TYSON and GEER concur.
Report per 30(e).