United Laboratories, Inc. v. Kuykendall
| Decision Date | 28 July 1988 |
| Docket Number | No. 598A87,598A87 |
| Citation | 322 N.C. 643,370 S.E.2d 375 |
| Court | North Carolina Supreme Court |
| Parties | , 5 IER Cases 1346 UNITED LABORATORIES, INC., a Delaware Corporation v. William Douglas KUYKENDALL, and Share Corporation, a Wisconsin Corporation. |
Petree, Stockton & Robinson by Jackson N. Steele, Winston-Salem, and Simon & Welnhofer by Paul G. Simon, Oakwood Terrace, Ill., for plaintiff-appellant.
Fox, Carpenter, O'Neill & Shannon, S.C. by Bruce C. O'Neill, Milwaukee, Wis., and Brock & Drye, P.A., by Michael W. Drye, Ashville, for defendants-appellees.
This appeal involves issues concerning non-competition clauses, tortious interference with contract, and unfair trade practices. These issues are before us on the basis of a dissenting opinion filed in the Court of Appeals. N.C.R.App.P., Rule 16(b) (1988).
Plaintiff, United Laboratories, Inc. (United), is in the business of manufacturing and selling specialty chemical products through a nationwide system of sales representatives. Its home office is in Addison, Illinois. Sales representatives are assigned to a specific geographical territory either on an exclusive or open basis. If a sales representative has been assigned a county on an exclusive basis, no other sales representative of United may call upon customers located in that particular county. The "open" counties designation is typically reserved for counties containing larger cities and industrial output where more sales representatives are needed to penetrate the account potential. However, in these "open" counties, once an account has been opened and a commission paid to a particular sales representative, that account is registered to that particular sales representative and no other sales representative of United may call upon that particular customer.
Defendant Kuykendall first started as a sales representative with United in 1971 in North Carolina. United provided start-up training for Kuykendall and also provided continuing supplemental training in technical support and customer services to develop his ability to secure and maintain long-standing personal relationships with customers of United. In 1979, Kuykendall terminated his employment with United and went to work as a sales representative for one of United's competitors, working the same territory he had covered for United. However, after being advised by United that he was breaching a non-competition clause by working the same territory for his new employer that he had worked while employed with United, Kuykendall rejoined United in 1979 as a sales manager.
In 1982, Kuykendall transferred from this managerial position to once again become a sales representative for United. Upon returning to sales, Kuykendall signed the standard United Sales Representative Agreement, which contained a non-competition clause. This agreement specifically precluded Kuykendall, for eighteen months following the termination of his employment with United, from calling upon accounts which he serviced while employed by United. The parties agreed that this agreement was to be governed by North Carolina law.
In 1983, Kuykendall enrolled in United's voluntary profit-sharing pension plan and signed a Supplementary Compensation Agreement under which he gained rights to additional revenues based upon the profits of United. This agreement contained a non-competition clause similiar to the 1982 agreement, but the restrictions were more broad. The 1983 agreement contained a territory restriction that precluded Kuykendall from calling upon any actual or potential United customers located within the same territory to which he was assigned at the time he terminated his employment with United. As in the 1982 agreement, the time restraint was for the eighteen-month period following Kuykendall's employment termination with United. This 1983 agreement was to be governed by Illinois law.
During September, 1985, Kuykendall resigned from United and went to work as a sales representative for defendant Share Corporation (Share), a competitor of United. When Kuykendall resigned from United, the vice-president of sales for United sent Kuykendall a letter reminding him of the restrictions in the Sales Representative Agreement. As a sales representative for Share, defendant Kuykendall called upon the same customers he had called upon while employed at United. Upon discovering that Kuykendall was servicing the same customers he had serviced while employed by United, United's general counsel notified both Kuykendall and Share that this was a breach of Kuykendall's Sales Representative Agreement.
Because defendants continued servicing plaintiff's accounts, plaintiff filed suit on 26 November 1985 in the Superior Court for Buncombe County. Plaintiff sought preliminary and permanent injunctive relief, together with monetary damages, on the basis that defendant Kuykendall breached both the 1982 Sales Representative Agreement and the 1983 Supplementary Compensation Agreement. Plaintiff sought also injunctive and monetary relief against Share, alleging that Share tortiously interfered with the 1982 and 1983 agreements and other business relationships of United, and also violated the North Carolina Unfair Trade Practices Act.
A hearing was held on 11 December 1985 and Judge Charles Lamm, Jr., entered a preliminary injunction on 31 December 1985, enjoining Kuykendall from contacting any United customers he had solicited while employed by United. On 19 May 1986, Judge Forrest Ferrell denied defendants' motion to dissolve the preliminary injunction.
The case was tried before a jury 23 June through 25 June 1986. At the conclusion of all the evidence, the trial court first determined that the 1982 Sales Representative Agreement was superseded by the 1983 Supplementary Compensation Agreement. The court then granted plaintiff's motions for directed verdicts against defendants on matters of liability for breach of the 1983 agreement, for tortious interference with contract, and for violations of the North Carolina Unfair Trade Practices Act. The court then submitted the question of damages to the jury and a verdict was returned for $77,477.77. The jury also made a finding that plaintiff had incurred attorneys' fees and costs in the amount of $47,522.23. The court, believing that the jury erroneously assessed damages for an eighteen-month period rather than for the nine month period that had elapsed between the time of the breach and the time of the trial, reduced the actual damages from $77,477.77 to $38,738.89. This amount was trebled as a result of the court's finding of liability pursuant to the North Carolina Unfair Trade Practices Act. Judgment was also entered in the amount of $47,522.23 for attorneys' fees and costs. The court then entered a permanent injunction against defendant Kuykendall enjoining him from selling Share products for the remaining portion of the eighteen-month time restriction within the territory in which he was formerly assigned while employed by United. Furthermore, Kuykendall was enjoined from disclosing, and Share was enjoined from utilizing, any confidential information concerning United's business practices and United's customers.
Defendants appealed the trial court's decision to the Court of Appeals. The Court of Appeals first held that the trial court erred in finding that the 1982 agreement was superseded by the 1983 agreement. It then reversed the directed verdict for plaintiff and ordered a directed verdict in favor of defendants, holding that the restrictions contained in the 1982 Sales Representative Agreement and the 1983 Supplementary Compensation Agreement were unenforceable under North Carolina and Illinois law, respectively. The Court of Appeals also found that without enforceable restrictions in the employment contracts, the contracts were terminable at will and Share could not be liable for tortious interference with contract. The Court of Appeals then reversed the trial court's entry of directed verdict for plaintiff concerning the alleged violations by Kuykendall and Share of the North Carolina Unfair Trade Practices Act. The case was remanded for a new trial on this issue.
In his dissent to the majority opinion of the Court of Appeals, Judge Phillips agreed with the majority that the trial court erred in finding that the 1983 Supplementary Compensation Agreement superseded the 1982 Sales Representative Agreement. On the remaining issues, however, Judge Phillips stated that he would hold the 1982 and the 1983 agreements to be valid and enforceable. Moreover, Judge Phillips stated that the trial court's judgment should be upheld as to the claim of tortious interference with contract by Share with the contractural relations between Kuykendall and United, and would find also that the actions of defendants violated the North Carolina Unfair Trade Practices Act.
On the basis of Judge Phillips' dissent, plaintiff appealed to this Court. 1
Plaintiff first contends that the Court of Appeals erred in holding that the non-competition clause in the 1982 Sales Representative Agreement is unenforceable under North Carolina law. We agree with plaintiff and reverse the Court of Appeals.
At common law, non-competition clauses generally were not upheld because such agreements were held to be in restraint of trade and thus against public policy. See Mar-Hof Co. v. Rosenbacker, 176 N.C. 330, 97 S.E. 169 (1918). However, this position was modified and it became generally recognized that, while non-competition clauses were in partial restraint of trade, they would nevertheless be upheld if the covenants were supported by valuable consideration, reasonably necessary to protect the interests of the covenantee, and not against public policy. Hill v. Davenport, 195 N.C. 271, 141 S.E. 752 (1928). Prior to 1929, the parties to these contracts were usually a buyer and seller of a business. See ...
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