Hartman v. W.H. Odell and Associates, Inc.

• Citation: 450 S.E.2d 912,117 N.C.App. 307
• Decision Date: 20 December 1994
• Docket Number: No. 9422SC83,9422SC83
• Parties: Mark V. HARTMAN, Plaintiff, v. W.H. ODELL AND ASSOCIATES, INC., Defendant.
• Court: North Carolina Court of Appeals

Page 912

450 S.E.2d 912

117 N.C.App. 307

Mark V. HARTMAN, Plaintiff, v. W.H. ODELL AND ASSOCIATES, INC., Defendant.

No. 9422SC83.

Court of Appeals of North Carolina.

Dec. 20, 1994.

Womble, Carlyle, Sandridge & Rice by Thomas D. Schroeder and David A. Shirlen, Winston-Salem, for plaintiff-appellee.

House & Blanco, P.A. by John S. Harrison and Peter J. Juran, Winston-Salem, for defendant-appellant.

THOMPSON, Judge.

The issue presented by this appeal is whether or not the defendant can enforce a covenant not to compete contained in two successive employment agreements signed by the plaintiff. We hold the covenant not to compete is overly broad and cannot be saved by "blue penciling" the agreement. Therefore, we affirm.

The plaintiff was an employee of the defendant from 1986 to 1991. In 1987 and again in 1989, the plaintiff signed employment agreements containing covenants not to compete.

After plaintiff's resignation in 1991, defendant, through its attorneys, wrote numerous letters to plaintiff concerning the covenants. Plaintiff filed this action in Davidson County Superior Court on 4 March 1992.

The case was called for trial before the Honorable James A. Beatty, Jr. during the 29 March 1993 civil session of Davidson County Superior Court. Pursuant to defendant's motion and by agreement of the parties, the trial court held a bifurcated trial. In the first portion of the trial, a bench trial was held for the purpose of interpreting the contract and determining the enforceability of the covenant not to compete. The trial court held that: (1) the restrictive covenant survived termination of employment; (2) the covenant protected a legitimate interest of the defendant; (3) portions of the covenant were overly broad as to the nature of the restricted activity; (4) portions of the covenant were overly broad as to one of the time periods; and (5) portions of the geographic restriction were unreasonable. The trial court "blue penciled" Article 13(a) and directed that a written statement of its holding as to the enforceable provisions of Article 13(a) of the covenant not to compete be prepared and read to the jury at the subsequent jury trial.

The original covenant reads in part as follows:

ARTICLE 13. COVENANTS AGAINST COMPETITION

(a) Employee agrees that during his term as an employee of the Corporation and for five (5) years thereafter, he will not, either directly or indirectly, on his own account, or in the service of others, own, manage, lease, control, operate, participate, consult or assist any person or entity providing actuarial services or any other services of the same nature as the services currently offered by the Corporation to the insurance industry and others or otherwise compete against the Corporation in the actuarial or consulting business. This covenant shall be binding upon employee within the geographic territory of North Carolina, South Carolina and Georgia (the "Primary Territory") and those five (5) states, not including the Primary Territory, from which the Corporation has derived the greatest revenues during the twenty-four (24) month period preceding the termination of the Employee's employment, which five (5) states, along with the Primary Territory, shall constitute the "Restricted Territory." Notwithstanding the foregoing, if Employee ceases to be employed by the Corporation, he shall have the right to work as a full-time employee of an insurance company so long as he renders services only for the exclusive benefit of such company.

(b) Employee shall have the right to render actuarial or consulting services to the insurance industry outside of the Restricted Territory; however, he covenants and agrees that if he does render such services outside of the Restricted Territory to any Client (as hereinafter defined) of the Corporation, he shall pay to the Corporation an amount equal to forty percent (40%) of the aggregate fees paid to him or his affiliates by a client during the first three (3) years after the termination of his employment with the Corporation and thirty percent (30%) of the aggregate fees paid to him or his affiliates by a Client during the next two (2) years. For purposes of this agreement, a "Client" shall mean any person, firm, or corporation in the insurance industry for which the Corporation has provided actuarial or consulting services at any time during the twenty-four (24) month period preceding termination of Employee's employment or any person, firm, or corporation with which the Corporation was engaged in discussions at the time of the termination of Employee's employment or within six (6) months prior thereto about the rendering of actuarial or consulting services by the Corporation to such person, firm or corporation. The percentage payment due to the Corporation shall be payable to it within ten (10) days after receipt of any payment by Employee or his affiliates. Further, Employee shall render an annual accounting to the Corporation identifying all Clients served by him or his affiliates during the previous year and the gross fees charged to and paid by such clients to him or his affiliates. To the extent that Employee fails or refuses to make any payment hereunder or provide any accounting, the Corporation shall have the right to seek immediate injunctive relief prohibiting Employee or his affiliates from rendering in the future actuarial or consulting services to any Client, as well as the recovery of all sums thereunder.

(c) Employee further agrees that during such time and within the above-described Restricted Territory he will not induce any client of the Corporation to patronize any other actuarial or consulting business similar to the business of the Corporation, nor will he request or advise any Client of the Corporation to withdraw, curtail or cancel such Client's business with the Corporation.

Paragraph (a) of the "blue penciled" or modified covenant submitted to the jury read as follows:

(a) Employee agrees that during his term as an employee of the Corporation and for five (5) years thereafter, he will not, either directly or indirectly, on his own account, or in the service of others, own, manage, lease, control, operate, participate, consult or assist any person or entity providing actuarial services or any other services of the same nature as the services currently offered by the Corporation to the insurance industry and others {in competition} against the Corporation in the actuarial or consulting business. This covenant shall be binding upon Employee within the geographic territory of North Carolina, South Carolina and Georgia Notwithstanding the foregoing, if Employee ceases to be employed by the Corporation, he shall have the right to work as a full-time employee of an insurance company so long as he renders services only for the exclusive benefit of such company.

With these modifications to the covenants in effect, the trial court conducted a jury trial on the issues of whether the plaintiff breached the modified Article 13(a) and whether damages resulted from any such breach. The court chose not to submit issues to the jury concerning the breach of Articles 13(b) and 13(c), and defendant did not challenge that decision. The jury found a breach of the modified Article 13(a) and awarded damages of $42,380.00. The court enjoined the plaintiff from engaging in conduct in violation of the modified covenant.

The plaintiff then filed motions for judgment notwithstanding the verdict, judgment for plaintiff, relief from the verdict, and a new trial. In an extensive order dated 17 May 1993 the trial court acknowledged that the covenants were overly broad, recognized that it should not have rewritten the covenants, granted judgment in favor of the plaintiff, and stated the following:

The Court therefore concludes as a matter of law that the covenant not to compete contained in the employment agreement between the plaintiff and the defendant is unenforceable and therefore void.

After the court granted judgment for the plaintiff, the defendant moved for modification or reconsideration of that decision. The defendant specifically argued that the trial court had not addressed the covenants in Articles 13(b) and 13(c). The plaintiff opposed the motion, specifically arguing that the language of the judgment clearly invalidated the entire "covenant not to compete contained in the employment agreement." The trial court denied the defendant's motion, and the defendant appealed.

On appeal the defendant contends that the covenant not to compete is not overly broad and is enforceable as written; and if the covenant not to compete is overly broad, it can be saved by "blue penciling." We disagree.

A covenant in an employment agreement providing that an employee will not compete with his former employer is "not viewed favorably in modern law." Safety Equipment Sales & Service, Inc. v. Williams, 22 N.C.App. 410, 414, 206 S.E.2d 745, 749 (1974). To be enforceable a covenant not to compete must be:

(1) in writing; (2) reasonable as to time and territory; (3) made a part of the employment contract; (4) based on valuable consideration; and (5) designed to protect a legitimate business interest of the employer (citations omitted).

Young v. Mastrom, Inc., 99 N.C.App. 120, 122-123, 392 S.E.2d 446, 448, disc. review denied, 327 N.C. 488, 397 S.E.2d 239 (1990). "The reasonableness of a noncompetition covenant is a matter of law for the court to decide." Beasley v. Banks, 90 N.C.App. 458, 460, 368 S.E.2d 885, 886 (1988) (citations omitted).

The party who seeks the enforcement of the covenant not to compete has the burden of proving that the covenant is reasonable. E.g. Kadis v. Britt, 224 N.C. 154, 158, 29 S.E.2d 543, 545 (1944); Harwell Enterprise, Inc. v. Heim, 6 N.C.App. 548, 552, 170 S.E.2d 540, 543 (1969), aff'd in part and rev'd in part, 276 N.C. 475, 173 S.E.2d 316 (1970).

To carry its burden defendant must prove that the covenant not to...