holding that a restrictive covenant with "directly or indirectly" language is reasonable in light of the limited activity constrainedSummary of this case from Superior Performers, Inc. v. Meaike
Filed 26 July 1990
Master and Servant 11.1 (NCI3d) — noncompetition agreement — reasonableness as to territory and time — preliminary injunction A noncompetition clause in an employment contract with a car rental business in which defendant agreed that he would not "solicit or attempt to procure the customers, accounts, or business" of the employer within the State of North Carolina for a period of two years following termination of his employment does not prohibit all competition by defendant throughout North Carolina but merely prohibits defendant from directly or indirectly soliciting the business of the employer's known customers in areas in which the employer operates. When so construed, the noncompetition clause is reasonable and enforceable as to both territory and time, and the trial court properly entered a preliminary injunction restraining defendant from soliciting the business of his former employer for two years. However, the contract did not support a provision of the injunction prohibiting defendant from becoming employed by a competing car rental company in any capacity within North Carolina for the same period of time.
Am Jur 2d, Master and Servant 106.
APPEAL by the plaintiff pursuant to N.C.G.S. 7A-30 (2) from the decision of a divided panel of the Court of Appeals, 96 N.C. App. 140, 385 S.E.2d 360 (1989), reversing the entry of a preliminary injunction by Allen, J., dated 31 October 1988 in the Superior Court of WAKE County. Heard in the Supreme Court 16 May 1990.
Kirby, Wallace, Creech, Sarda, Zaytoun Cashwell, by John R. Wallace and Cheryl M. Swart, for plaintiff-appellant.
Armstrong Armstrong, P.A., by L. Lamar Armstrong, Jr., for defendant-appellees.
Justice MEYER dissenting in part.
Chief Justice EXUM joins in this dissenting opinion.
Plaintiff Triangle Leasing Company, Inc. (hereinafter Triangle) is a North Carolina corporation whose primary business is renting automobiles, trucks, and vans in eastern and central North Carolina. Having opened its doors in the Raleigh area in 1979, the company was ready to expand to Wilmington by the fall of 1986 and in September of that year hired defendant Robert F. McMahon to manage their new office there. As part of the employment contract between Triangle and Mr. McMahon, the parties agreed that if Mr. McMahon's employment with Triangle was terminated for any reason, he would not "solicit or attempt to procure the customers, accounts, or business of [Triangle]" for a period of two years following his termination. In November of 1986, Triangle also hired Mr. McMahon's wife, defendant Marilynne McMahon, at the Wilmington location. On Friday, 30 September 1988, both Mr. and Mrs. McMahon informed Triangle that they were terminating their employment and would be establishing a competing car rental business, Wilmington Auto Rental, Inc., which would operate under the Thrifty Car Rental franchise a few blocks from the Wilmington office of Triangle.
During the next two weeks, a number of Triangle's customers were contacted by the McMahons who attempted to solicit their business for the McMahons' new company, Wilmington Auto Rental. In an effort to enforce the no-solicitation clause of its employment contract with defendant Robert F. McMahon, Triangle sought a temporary restraining order prohibiting such action on the part of the McMahons. A temporary restraining order was filed on 11 October 1988 and renewed by consent of the parties on 21 October 1988. Following an evidentiary hearing, a preliminary injunction was granted on 31 October 1988 which enjoined defendants Robert F. and Marilynne McMahon from (1) using or retaining plaintiff's records, customer lists or price lists; (2) soliciting plaintiff's customers or accounts within the State of North Carolina for two years; (3) encouraging plaintiff's employees to work for a different rental company; and (4) working with co-defendant Wilmington Auto Rental, Inc. in the rental and sales business in North Carolina for two years from the date of termination of defendants' employment with Triangle. Defendants appealed the issuance of this injunction.
In a divided opinion, the Court of Appeals determined that the injunction was invalid because the noncompetition clause of the underlying employment contract was overbroad as to the territorial and time restrictions it imposed on Mr. McMahon and, hence, was unenforceable. Since the contract itself was unenforceable, the majority concluded that the injunction should not have been issued. The majority reached this conclusion based on its understanding that the employment agreement between the parties prohibited Mr. McMahon from working anywhere within the State of North Carolina in the car rental business, although Mr. McMahon's employment contacts were in actuality restricted to the Wilmington area. In his dissent, Judge Cozort adopts the same reading of the employment contract, but concludes that it was reasonable to restrict Mr. McMahon's employment throughout the state despite his exclusive assignment to Wilmington. Hence, from the dissent's point of view, the contract was enforceable and issuance of the preliminary injunction was proper.
Upon examining the record, we have a different view of the employment contract between the parties and conclude that the injunction as written is only partially correct. We find that the employment contract does not restrict all competition between Mr. McMahon and Triangle throughout the State of North Carolina but rather only prohibits the direct or indirect solicitation of Triangle's customers and accounts for the specified two year period. As such, we find the noncompetition clause reasonable as to both time and territory and conclude that its terms are enforceable. Since the no-solicitation clause of the contract is enforceable and no other questions regarding the propriety of the issuance of the preliminary injunction are before this Court, we hold that the trial court's order was properly entered. However, we note also that in addition to enjoining solicitation of Triangle's business, the injunction as written also enjoins the McMahons from becoming employed by Wilmington Auto Rental, Inc. in any capacity within the State of North Carolina for two years from the issuance of the injunction. Because this portion of the injunction goes beyond the four corners of the contract it was designed to enforce, we affirm the decision of the Court of Appeals reversing the issuance of the injunction as to this prohibition only. We remand to the Court of Appeals for further remand to the trial court with instructions to strike the fourth clause of the existing order. As to the remainder of the injunction, we reverse the Court of Appeals and hold that its issuance was proper.
Concerning the issuance of a preliminary injunction, this Court has stated:
A preliminary injunction . . . is an extraordinary measure taken by a court to preserve the status quo of the parties during litigation. It will be issued only (1) if a plaintiff is able to show likelihood of success on the merits of his case and (2) if a plaintiff is likely to sustain irreparable loss unless the injunction is issued, or if, in the opinion of the Court, issuance is necessary for the protection of a plaintiff's rights during the course of litigation. Waff Bros., Inc. v. Bank, 289 N.C. 198, 221 S.E.2d 273; Pruitt v. Williams, 288 N.C. 368, 218 S.E.2d 348; Conference v. Creech, 256 N.C. 128, 123 S.E.2d 619.
Investors, Inc. v. Berry, 293 N.C. 688, 701, 239 S.E.2d 566, 574 (1977). The question on appeal in this case concerns the first prong of this test, the plaintiff's likelihood of prevailing on the merits, rather than the second prong of the test, the necessity for the injunction. Where a preliminary injunction is sought to enforce a noncompetition clause in an employment contract, this Court has held that the employment agreement itself must be valid and enforceable in order for the employer to be able to show the requisite likelihood of success on the merits. A.E.P. Industries, Inc. v. McClure, 308 N.C. 393, 302 S.E.2d 754 (1983). Determination of the enforceability of the contract, in turn, rests on the likelihood that the plaintiff will be able to show that the covenant is (1) in writing; (2) reasonable as to terms, time, and territory; (3) made a part of the employment contract; (4) based on valuable consideration; and (5) not against public policy. See, e.g., Whittaker General Medical Corp. v. Daniel, 324 N.C. 523, 379 S.E.2d 824 (1989); United Laboratories, Inc. v. Kuykendall, 322 N.C. 643, 370 S.E.2d 375 (1988); Greene Co. v. Kelley, 261 N.C. 166, 134 S.E.2d 166 (1964). Because the sole question raised in Judge Cozort's dissent concerns the reasonableness of the contract as to time and territory, the plaintiff's likelihood of meeting its burden of proof on the remaining criteria for determining the enforceability of this contract is not before this Court. N.C.G.S. 7A-30 (2). Rather, we need only examine whether this contract's terms which restrict Mr. McMahon's competition with his former employer for a specified period of time and for a specified location are reasonable.
The applicable territorial restriction contained in the parties' employment agreement states the following:
Employee will not . . . within the State of North Carolina or any other state or territory in which the company conducts business, directly or indirectly solicit or attempt to procure the customers, accounts, or business of Company, or directly or indirectly make or attempt to make car or truck-van rental sales to the customers of Company.
In analyzing the employment agreement, the Court of Appeals concluded that the contract prohibited Mr. McMahon from competing with Triangle in any capacity anywhere in the State of North Carolina for two years. Based on this conclusion, the majority opinion framed the legal question in the case as follows:
. . . whether the Company can bar Employee from competing with the Company's business throughout North Carolina for two years, when Employee's confidential information and customer contracts derive from only one city in the state. The answer to this issue resolves the ultimate issue of whether the trial court properly granted a preliminary injunction against Employee.
We disagree with the Court of Appeals' reading of this employment contract, and conclude that the pertinent clause of the contract does not prohibit all competition by Mr. McMahon throughout North Carolina, but rather merely restrains him from soliciting the business of plaintiff's known customers in areas in which the company operates. We therefore find it unnecessary to address the question of whether it would have been reasonable for the plaintiff to have attempted to prohibit all competition by the defendant Robert F. McMahon within the State of North Carolina for two years. In determining whether this preliminary injunction was properly issued, we must instead decide whether the terms and conditions of this contract clause were reasonably necessary to protect the employer's legitimate business interests. See, e.g., Greene Co. v. Arnold, 266 N.C. 85, 145 S.E.2d 304 (1965); Greene Co. v. Kelley, 261 N.C. 166, 134 S.E.2d 166; Asheville Associates v. Miller, 255 N.C. 400, 121 S.E.2d 593 (1961). Upon reviewing the record, we find there is ample evidence to support plaintiff's contention that defendant McMahon's access to customer lists, price sheets, and policies affecting company business outside of the Wilmington area would warrant a contractual prohibition against solicitation of Triangle's customers regardless of their location. Because we find sufficient evidence to support a conclusion that defendant McMahon could properly be restricted from soliciting Triangle's customers where it does business, we conclude that the territorial restriction in the noncompetition clause of the parties' contract was reasonable and enforceable.
Turning next to the question of the reasonableness of the time restriction, we note simply that where the activity prohibited is as narrowly confined as in the case before us, a two year time restriction is not improper. See, e.g., Whittaker Gen. Medical Corp. v. Daniel, 324 N.C. 523, 379 S.E.2d 824; Enterprises, Inc. v. Heim, 276 N.C. 475, 173 S.E.2d 316 (1970); Greene Co. v. Arnold, 266 N.C. 85, 145 S.E.2d 304; Exterminating Co. v. Griffin, 258 N.C. 179, 128 S.E.2d 139 (1962).
In conclusion, we hold that the territory and time restrictions of the parties' contract are reasonable in light of the activity constrained, that the contract is enforceable as to the noncompetition clause, and that the Court of Appeals erred in reversing the trial court's issuance of a preliminary injunction designed to enforce the employment agreement. However, as above noted, the fourth clause of the trial court's order improperly enjoins conduct beyond the scope of the parties' own agreement. That clause states that the defendants are enjoined and restrained from:
4. Becoming employed with, consulting with, or participating in the management of the Defendant Wilmington Auto Rental, Inc. and further from being employed by or consulting with the Defendant Joseph G. Priest [a co-owner of Wilmington Auto Rental, Inc.] in the automobile, van and truck rental and sales business in North Carolina for a period of two years from September 30, 1988.
While defendants may properly be restrained from soliciting the business of their former employer under the terms of their employment agreement for two years from the date of issuance of the temporary restraining order, their own contract does not support an injunction against all competition throughout the state for the same period of time. We therefore remand to the Court of Appeals for further remand to the trial court with directions that the injunction remain in effect with proper amendments consistent with this opinion.
Affirmed in part, reversed in part, and remanded.