Summary
noting that an attempt to impose a geographical limitation based on marketing to a manufacturing employee is "like trying to fit a piece of a jigsaw puzzle into the wrong puzzle — even if, by chance, it does fit, it does not look right"
Summary of this case from Static Control Components v. Darkprint ImagingOpinion
1:00CV284-C
December 21, 2001
MEMORANDUM OF DECISION
THIS MATTER is before the court, in accordance with 28, United States Code, Section 636(c), upon defendants' Motion for Summary Judgment. This court has jurisdiction over the subject matter of the action, inasmuch as the amount in controversy exceeds $75,000 and complete diversity existed between the parties at the time of removal. Hensgens v. Deer Co., 833 F.2d 1179, 1181 (5th Cir. 1987) (change in citizenship of a party after removal does not divest court of jurisdiction).
Plaintiff contends that the individual defendants have violated their noncompete agreements by accepting subsequent employment with defendant Rug Barn. The individual defendants contend that they are not in violation of the agreements and that such agreements are unenforceable as a matter of well-settled North Carolina law.
Plaintiff has moved for voluntary dismissal of the corporate defendant, to which defendants have consented. The court will, herein, grant such motion.
I.Factual Background
Plaintiff is a North Carolina based business that produces textiles for sale in the gift market, with image throws (afghans) and image products being its main product lines. Rug Barn is a South Carolina based textile manufacturer which, at one time, but no longer, manufactured products similar to those made by plaintiff. The individual defendants are former salaried employees of plaintiff who were hired by Rug Barn after they left plaintiff's employ. It is undisputed that both signed the agreements, which provided, in relevant part, as follows:
7. Covenants Against Competition.
(a) Following termination of Employee's employment with Employer, whether voluntary or otherwise, Employee shall not engage in any business, either alone, with another, or on behalf of another, that competes with any product being designed, manufactured, distributed, retailed, planned or proposed by Employer at the time Employee's employment terminates; and Employee shall not provide any services or advice to any person or entity that competes with any product being designed, manufactured, distributed, retailed, planned or proposed by Employer at the time Employee's employment terminates. However, this subparagraph 7(a) shall have force and effect only with respect to those products for which Employee had duties, responsibilities, or access to information during his or her employment with Employer;
(c) The covenants set forth in this Paragraph Seven (7) shall have force and effect only for a period of three (3) years following Employee's termination of employment with Employer; and
(d) Except as expressly stated in Paragraph 7(b), the covenants set forth in this Paragraph Seven (7) shall have force and effect only in the following areas:
(1) In the following countries: the United States of America; Virgin Islands; Grand Cayman Islands; Canada; Japan; Singapore; Italy; Finland; Sweden; Norway; Germany; Belgium; France; Great Britain; Puerto Rico; Australia; New Zealand; Austria; South Korea; Spain; India; or Saudi Arabia;
(2) In the following areas of the United States: Florida; Georgia; South Carolina; North Carolina; Virginia; West Virginia; District of Columbia; Maryland; Delaware; New Jersey; New York; Connecticut; New Hampshire; Rhode Island; Massachusetts; Maine; Vermont; Pennsylvania; Ohio; Kentucky; Tennessee; Alabama; Mississippi; Louisiana; Arkansas; Missouri; Illinois; Indiana; Michigan; Wisconsin; Iowa; Minnesota; North Dakota; South Dakota; Nebraska; Kansas; Oklahoma; Texas; New Mexico; Colorado; Wyoming; Montana; Idaho; Utah; Arizona; Nevada; California; Oregon; Washington; Alaska; or Hawaii; or
(3) In the following areas of Canada: Yukon; Northwestern Territory; British Columbia; Alberta; Saskatchewan; Manitoba; Ontario; Quebec; Newfoundland; New Brunswick; Nova Scotia; or Prince Edward Island.
For purposes of the pending motion, it is undisputed that Rug Barn was at all times relevant a competitor with plaintiff and that defendants' employment by such competitor would violate the terms of the non-compete. The only issue before the court is whether the above-quoted non-compete agreement is unenforceable as a matter of law.
Inter alia, defendants have argued that their work for Rug Barn involved no disclosure of information or processes proprietary to plaintiff. On summary judgment, the court has resolved all factual disputes in favor of plaintiff. Defendants no longer work for Rug Barn, and their present employment is not at issue in this action.
II. Standard
On a motion for summary judgment, the moving party has the burden of production to show that there are no genuine issues for trial. Upon the moving party's meeting that burden, the nonmoving party has the burden of persuasion to establish that there is a genuine issue for trial.
When the moving party has carried its burden under Rule 56(c), its opponent must do more than simply show that there is some metaphysical doubt as to the material facts. In the language of the Rule, the nonmoving party must come forward with "specific facts showing that there is a genuine issue for trial." Where the record taken as a whole could not lead a rational trier of fact to find for the non-moving [sic] party, there is no "genuine issue for trial."Matsushita Electric Industrial Co. v. Zenith Radio Corp., 475 U.S. 574, 586-87 (1986) (citations omitted; emphasis in the original) (quoting Fed.R.Civ.P. 56). There must be more than just a factual dispute; the fact in question must be material and readily identifiable by the substantive law. Anderson v. Liberty Lobby, Inc., 477 U.S. 242 (1986). By reviewing substantive law, the court may determine what matters constitute material facts. Id. "Only disputes over facts that might affect the outcome of the suit under governing law will properly preclude the entry of summary judgment." Id. at 248. A dispute about a material fact is "genuine" only if the evidence is such that "a reasonable jury could return a verdict for the nonmoving party." Id.
[T]he court is obliged to credit the factual asseverations contained in the material before it which favor the party resisting summary judgment and to draw inferences favorable to that party if the inferences are reasonable (however improbable they may seem).Cole v. Cole, 633 F.2d 1083, 1092 (4th Cir. 1980). Affidavits filed in support of defendants' Motion for Summary Judgment are to be used to determine whether issues of fact exist, not to decide the issues themselves. United States ex rel. Jones v. Rundle, 453 F.2d 147 (3d Cir. 1971). When resolution of issues of fact depends upon a determination of credibility, summary judgment is improper. Davis v. Zahradnick, 600 F.2d 458 (4th Cir. 1979).
III. Discussion
A. Applicable North Carolina Law
Inasmuch as the non-compete agreements were made and executed in North Carolina, there is no dispute that North Carolina law governs the resolution of this diversity action. The North Carolina appellate courts have consistently held, as follows:
Covenants not to compete between an employer and employee are "not viewed favorably in modern law." To be enforceable, a covenant must meet five requirements — it must be (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. The reasonableness of a non-compete agreement is a matter of law for the court to decide.Farr Associates, Inc. v. Baskin, 138 N.C. App. 276, 279 (2000) (citations omitted).
In this case, defendants challenge the covenant based on the fourth factor. The North Carolina appellate courts have been most instructive on the requirement as to "time and territory" and the impact of an overly broad territorial requirement on the entire agreement:
The employer must show that the territory embraced by the covenant is no greater than necessary to secure the protection of its business or good will. If the territory is too broad, "the entire covenant fails since equity will neither enforce nor reform an overreaching and unreasonable covenant."Hartman v. W.H. Odell and Associates, Inc., 117 N.C. App. 307, 312 (1994) (citations omitted). The appellate court in Farr Associates, Inc. v. Baskin, supra, further held, as follows:
In evaluating reasonableness as to time and territory restrictions, we must consider each element in tandem — the two requirements are not independent and unrelated. Although either the time or the territory restriction, standing alone, may be reasonable, the combined effect of the two may be unreasonable. A longer period of time is acceptable where the geographic restriction is relatively small, and vice versa.
We have previously held that time restrictions of a certain length are presumed unreasonable absent a showing of special circumstances. A five-year time restriction is the outer boundary which our courts have considered reasonable, and even so, five-year restrictions are not favored. Further, when a non-compete agreement reaches back to include clients of the employer during some period in the past, that look-back period must be added to the restrictive period to determine the real scope of the time limitation.
To prove that a geographic restriction in a non-compete provision is reasonable, an employer must first show where its customers are located and that the geographic scope of the covenant is necessary to maintain those customer relationships. The employer must show that the territory embraced by the covenant is no more than necessary to secure the protection of its business or good will. In addition, our Supreme Court has recognized the validity of geographic restrictions that are limited not by area, but by a client-based restriction.
In Hartman, supra, we set forth a six-part test to determine whether the geographic scope of a covenant not to compete is reasonable. The six factors are: (1) the area or scope of the restriction; (2) the area assigned to the employee; (3) the area where the employee actually worked; (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. Although we do not apply this test to the physical scope of the covenant, since it is not an issue, we do adapt the test as being applicable to assess the client-based restriction.Id., 280-83 (citations omitted). In determining whether the geographic scope of the agreement is overly broad, the court will consider each of the six factors.
B. The Geographic Scope of the Covenant
1(a). The Scope of the Restriction
The non-compete agreement at issue here would prevent defendants from going to work for "any person or entity that competes with any product being designed, manufactured, distributed, retailed, planned or proposed by [plaintiff] at the time the employee's employment terminates." Such an agreement would prevent defendants from working for direct competitors in the gift market, like Rug Barn, Goodwin Weavers, Cockrell Riddle, and Simply Country; however, it would also prevent them from working for any number of other textile concerns which manufacture, but do not directly market, items for ultimate sale in the gift market.
1(b). The Area of the Restriction
As to geographic scope, the agreement seeks to prevent defendants from going to work for any "competitor," as that term has been construed above, in all 50 of the United States, as well as the countries of Canada, Japan, Singapore, Italy, Finland, Sweden, Norway, Germany, Belgium, France, Great Britain, Australia, New Zealand, Austria, South Korea, Spain, India, the Grand Cayman Islands, and Saudi Arabia, and two territories of the United States — the Virgin Islands and Puerto Rico. Plaintiff derives between five and ten percent of its business from the overseas market. The testimony of plaintiff's president also indicates that a single sale to a single customer in a given foreign country was enough to include that country in the non-compete agreement. Plaintiff also maintains that it is entitled to national protection because it has at least one customer in every state.
2. The Area Assigned to the Employee
Both individual defendants appear to have been involved in the manufacturing end of plaintiff's business, not sales or marketing. This factor, therefore, would have little relevance.
3. The Area Where the Employee Actually Worked
Again, this factor appears to have little relevance. Both defendants appear to have worked in western North Carolina.
4. The Area in Which the Employer Operated
The area in which plaintiff operated appears to be delineated by the terms of the non-compete; however, where it actually does business shifts based on demand for its novelties. Further, some of the areas, regions, states, and countries in which it operated had limited sales.
5. The Nature of the Business Involved
Plaintiff's business concerns the sale of pictorial textile products in the low-end gift market, primarily in the form of throw blankets and afghans.
6. The Nature of Defendants' Duties and Knowledge
One defendant was involved in the manufacture of plaintiff's product at a management level, and the other was involved in the purchase of raw materials from vendors. No clear delineation is made between the knowledge that defendants brought with them to plaintiff's employ and the quantum with which they left.
One defendant may have had knowledge of the manufacturing process and the customers who placed orders, while the other knew the supply chain. No evidence has been submitted in response to the summary judgment motion that such defendant in any way used the customer information he may have had to the advantage of his new employer, while plaintiff's president testified that within the industry, competitors knew who each other's vendors were.
C. Impact of the Agreement
Without doubt, North Carolina law allows plaintiff to negotiate a non-compete agreement designed to secure the protection of its business.Hartman, supra. The problem in this case is that plaintiff attempts to impose a geographic limitation, which is based on marketing, to employees who were engaged in manufacturing. To do so is like trying to fit a piece of a jigsaw puzzle into the wrong puzzle — even if, by chance, it does fit, it does not look right. Here, plaintiff has not shown that defendants had any contact or specific knowledge of its customer base that would coincide with a geographic limitation based on marketing or that these defendants were privy to any processes of plaintiff's that were both propriety and unknown in the industry.
For example, if Coca Cola required employees engaged in the manufacture of its products to sign a non-compete which extended to any direct or indirect competitor in any place where it sold its product, such former Coca-Cola employees would effectively be prohibited from engaging in their area of skill or expertise anywhere. Testifying on behalf of the plaintiff in accordance with Rule 30(b)(6), Federal Rules of Civil Procedure, plaintiff's president recognized that the noncompete agreement could prevent a former employee from going to work for any entity that manufactures a product that might eventually be resold in the gift market:
Q: If, say, one of your employees — Say, if Marvin Allen had gone to work for La France making camouflage for army uniforms. If La France is a convertor [or commission weaver], making product that's going to end up in the gift market, he's violating this agreement, isn't he?
A: Okay. You know, I can see where you could come to that conclusion off that contract.
Oates Dep., at 53-54.
If Coca-Cola used a non-compete similar to the one used in this case, its former employees would be prohibited from not only manufacturing competing products worldwide, but from even providing janitorial services. Specifically, the agreement at issue here provides, as follows:
[E]mployees shall not provide any services or advice to any person or entity that competes with any product being designed, manufactured, distributed, retailed, planned or proposed by [plaintiff] at the time employee's employment terminates.
Such term would prevent a former employee from working in any capacity for a competitor, regardless of whether the former employee had any knowledge, skill, or association with such products. As such, the terms of the agreement are not connected to any legitimate business concern, such as the lawful protection of trade secrets, and can only be construed as an unlawful attempt to keep employees from seeking better jobs at better pay. North Carolina law is unequivocal that, standing alone, a covenant that an employee will not compete with his former employer is not viewed favorably. Safety Equipment Sales Service, Inc. v. Williams, 206 S.E.2d 745 (N.C. 1974).
D. Consideration of Geographic and Time Restrictions in Tandem
A three-year restriction is not, per Se, unreasonable; however, North Carolina courts have found a two-year restraint unreasonable when coupled with extensive territorial limitations. Triangle Leasing Co. v. McMahon, 385 S.E.2d 360 (N.C.Ct.App. 1989).
With respect to geographic limitations, plaintiff must show that the territory embraced by the negative covenant is no greater than necessary to secure the protection of its business or goodwill. The geographic limitation asserted would cover all states in the Union, its territories and possessions, and 21 foreign countries. In effect, the covenant at issue here would prohibit these defendants for three years from plying their trade in most of the free world. When all the factors are considered, and time and geographic limitations are viewed together, the court can only conclude that such agreement is unenforceable as overly broad as a matter of law. While plaintiff may have valid manufacturing processes it desires to protect, such corporate rights are not any more valuable than an individual's right to work and provide for his family; to that end, it is incumbent upon the party desiring to protect its rights by limiting the rights of others to tailor the restriction narrowly to protect identifiable interests for a reasonable amount of time in a reasonable geographic region. As to the subsequent non-compete signed by one defendant upon his departure, it appears to be even more overly broad than the original because it has no geographic limitation.
D. Conclusion
The court has considered both the written and oral arguments of respective counsel and concludes that the non-compete at issue is overly broad and unenforceable as a matter of law. To that end, the individual defendants' Motion for Summary Judgment is granted, plaintiff's Motion to Dismiss the corporate defendant is allowed, and all other motions now pending are denied as a matter of housekeeping. A judgment reflecting such decision is entered simultaneously herewith.