Restrictive covenants are a set of tools that employers sometimes utilize to prevent employees from competing with them after termination of their employment.   One of the most common restrictive covenants used by an employer is a “non-compete clause.”   An evaluation of the enforceability of a non-complete clause necessarily involves a balancing of interests.   On the one hand, there is the employer’s interest in protecting its investment in an employee’s success whether that be training, promotional or marketing activities, or granting the employee access to important company trade secrets.  Obviously, the employee would be positioned to unfairly use this information to harm its former employer if not for the employer’s ability to protect itself.  On the other hand, there is the employee’s interest in earning a living and promoting his/her own professional growth and development through the freedom to seek new job opportunities.  While non-compete clauses are solely intended to protect and benefit the employer, they cannot unduly burden an employee’s freedom to seek other gainful employment.

State courts tend to view restrictive covenants with varying degrees of favorability, and they are generally disfavored in North Carolina.  In order to be enforceable in North Carolina courts, a covenant not to compete must meet certain general requirements:

1. It must be in writing and incorporated into the employment contract.
2. It must be reasonable as to time and territory.
3. If the restriction is implemented as to an existing employee, it must be based on valuable consideration. This means that the employee must be offered something – typically some form of monetary compensation – in exchange for abiding by the restriction. This is not necessary for new employees, as the restriction is part of the bargain of receiving employment with the company.

An element that tends to be heavily litigated is the reasonableness of time and territory.   For a discussion on the enforceability of non-compete agreements in general, please click here to review our previous post on this topic.  This post will focus on what happens when a restrictive covenant’s time and territory limitations are found unduly restrictive.

Historically, North Carolina has adhered to a strict doctrine known as the “blue pencil” rule, meaning a court may strike out (but not revise) provisions of a non-compete clause that it finds unreasonable while upholding the remainder of the employment agreement.   The blue-pencil rule can be beneficial to employers in that it might allow courts to enforce an agreement even when one of the terms is enforceable.   A court can simply strike (blue pencil) an unenforceable provision and uphold the rest of the agreement.  However, the blue-pencil rule has traditionally stopped short of allowing courts to not only strike, but to revise an unenforceable term.   The North Carolina Supreme Court recently rendered an opinion in Beverage Systems of the Carolinas, LLC, v. Associated Beverage Repair, LLC that sheds additional light on a court’s power to not only strike an unenforceable provision, but to revise a provision altogether to make it enforceable.

The underlying dispute in the Beverage Systems case involved two companies in the beverage service industry that had negotiated the purchase and sale of a business.  The purchase and sale agreement contained a restrictive covenant that prohibited the sellers from conducting business in their industry anywhere in North or South Carolina.  The agreement also contained a provision allowing courts to revise or narrow these territorial provisions should a dispute arise.  Shortly thereafter, one of the parties to the agreement broke away and formed a new beverage company that directly competed with the plaintiff’s business.  In the ensuing litigation, the trial court determined that the geographical scope of the restrictive covenant was overly broad and thus unenforceable.   Although the agreement itself allowed the Court to rewrite portions of the agreement, the Court declined to do so.  With no territorial restriction left in the agreement after blue-penciling, the remainder of the agreement was rendered unenforceable.

On appeal, the North Carolina Court of Appeals reversed the trial court’s decision, holding that the parties’ express consent to the Court’s revision of portions of the agreement trumped the blue pencil doctrine, which allows a court to strike unenforceable provisions but not to add or revise the terms of the agreement.  That is, instead of striking out the over-broad territorial restrictions and scrapping the entire argument, the trial judge should have simply rewritten that portion of the agreement to make it reasonable, that is, narrow the designated geographical area.

However, upon discretionary review, the Supreme Court reversed the opinion of the Court of Appeals.  Although the Supreme Court agreed with the Court of Appeals that the territorial restriction was overbroad, the Supreme Court’s opinion stated that the blue pencil doctrine only applies when the agreement “sets out both reasonable and unreasonable restricted territories.”  In the present case, the territorial limitation was only unreasonable and was so broad that striking the unenforceable provisions of the agreement would leave no territory left within which to enforce the agreement.  As the Court thus noted, “blue-penciling cannot save the Agreement.”  The Supreme Court further noted that “[a]llowing litigants to assign to the court their drafting duties as parties to a contract would put the court in the role of a scrivener, making judges postulate new terms that the court hopes the parties would have agreed to be reasonable after the court rewrote the limitation.”

Ultimately, the Supreme Court’s decision reinforced the principle that parties cannot contract to give courts power they do not have.  As a result, courts are now definitively limited to the blue pencil rule.  They have the power to strike out overbroad provisions in an employment contract.  However, if after striking out these provisions, the agreement is unenforceable, the Courts must put the task of recrafting the agreement in the hands of the parties.

When drafting restrictive covenants, it is crucial to consider which geographical areas should and should not be included, considering factors such as the presence of existing business relationships or opportunities.   Moreover, any provision purporting to give courts authority to intervene in resolving disputes will likely be struck down and the entire agreement rendered unenforceable.  The attorneys at Miller Monroe PLLC can assist you in drafting a non-compete clause that will be narrowly tailored to serve your business interests.   Our firm also has substantial experience litigating the enforceability of non-compete provisions and other restrictive covenants.  If you are considering the enforceability of a restrictive covenant, please feel free to contact Miller Monroe for a consultation.

For the Supreme Court’s full opinion, click here.

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It is surprising how often clients seek advice for breach of contract claims but cannot articulate the scope of their agreement with the breaching party.  The North Carolina Court of Appeals recently issued an opinion that highlights just how problematic this can be.

In Rider v. Hodges, two parties entered into an informal agreement for landscaping services.  The plaintiff homeowners paid a landscaper $24,000 upfront to “do landscaping.”  There was some discussion about the tasks to be performed, for instance, planting shrubs, spreading mulch, installing a fence, planting a flagpole, and irrigating the land.  However, the parties never discussed the scope of the work, such as how much mulch was to be spread, where plants were to be placed, or how much fencing would be installed.

Further, the parties did not reach an agreement about compensation.  The homeowners simply paid the initial $24,000 and directed the landscaper to commence work, but did not discuss the specifics of hourly compensation for labor, confirm the cost of materials, or establish a projected total cost.  Eventually, the plaintiff homeowners complained about the quality of the landscaping work and brought a lawsuit for breach of contract, among other claims.  In his deposition, defendant landscaper admitted the parties never reached a “meeting of the minds” and had “no specific agreement about anything.”

The trial court ruled that there was no genuine issue of material fact as to whether the parties’ landscaping agreement was breached, because no valid contract had ever been formed. Accordingly, the trial court ruled in favor of the landscaper on summary judgment. The homeowners appealed from the trial court’s ruling. However, they found themselves out of luck yet again on appeal.   In its August 15^th opinion, the Court of Appeals ruled that no contract was ever formed because the parties’ landscaping agreement was not certain and definite enough as to price or the scope of work – key components of a contract for services.  The parties spoke generally about the tasks to be performed, but at no point did they discuss specifics.

The opinion explained that traditionally, a valid contract only exists where the parties have a “meeting of the minds” regarding all the essential terms of the agreement.  With respect to a services contract, established case law states that a valid agreement must be “certain” and “definite” as to: 1) The nature and extent of services to be performed, 2) the place where and person to whom the services are to be rendered, and 3) the compensation to be paid.  If even one of these terms is not sufficiently certain or definite, the contract will not be judicially enforced if disputed.  In the present case, there was no valid breach of contract claim because there was no valid contract.  Both parties acknowledged that a landscaping arrangement existed, but never had a meeting of the minds about the scope of the work to be done or the amount the landscaper was to be paid.

In order to avoid the Riders’ plight, be sure to clearly designate the specific and particular tasks to be performed in your services contract.  Beware the “just start working” agreement: clearly list each task to be provided, the materials used, and a timeline for completion of the work.  Further, don’t forget to reach an agreement on compensation, and keep track of completed work by requesting and keeping detailed, itemized invoices.  Of course, as much as possible, memorialize your agreement in writing.  If you are unsure of how to form your agreement or have concerns about potential holes in a service contract, be sure to contact your attorney.

This article does not establish an attorney-client relationship and must not be construed as legal advice.

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• On April 6, 2018, the North Carolina Supreme Court, by unanimous decision written by Chief Justice Martin, reversed the N.C. Court of Appeals. (See addendum below for summary of Supreme Court opinion.)

In City of Asheville v. Frost, (COA16-577, filed May 2, 2017), the North Carolina Court of Appeals wrestles with an ambiguous law passed by the General Assembly.  On its face, the law grants only one party (“the petitioner”) the right to demand a jury trial, while denying the opposing party (“the respondent”) that right.  The decision of the Court of Appeals hinges on statutory construction.  The opinion makes no mention of any constitutional challenge to the law.

The Facts

Asheville Police Officer Robert Frost (“Frost”) was fired for allegedly using excessive force when arresting a woman for trespassing.  He appealed his termination to the Civil Service Board of the City of Asheville (“the Board”).  The Board concluded that his termination was unjustified.  The Board recommended that Frost be reinstated with back pay and benefits.

The City disagreed with the Board’s decision and filed a petition for trial de novo in Buncombe County Superior Court.  The City did not request a trial by jury.  Frost demanded a jury trial in his response to the petition.  The City moved to strike Frost’s demand for a jury trial on the grounds that only “the petitioner” is authorized to request a trial by jury, under Asheville Civil Service Law, 1953 N.C. Session Laws Chapter 747, as amended by 2009 N.C. Session Law Chapter 401 (“the Act”).

The Act

The pertinent part of the Act, which is entitled “An act to revise the laws relating to the Asheville Civil Service Board,” provides as follows:

“Within ten days of the receipt of notice of the decision of the Board, either party may appeal to the Superior Court Division of the General Court of Justice for Buncombe County for a trial de novo.  The appeal shall be effected by filing with the Clerk of the Superior Court of Buncombe County a petition for trial in superior court, setting out the fact upon which the petitioner relies for relief.  If the petitioner desires a trial by jury, the petition shall so state. . . . Therefore, the matter shall proceed to trial as any other civil action.”  (emphasis added).

The Holding

The trial court denied the City’s motion to strike Frost’s demand for a jury trial.  It reasoned that because the Act directs that “the matter shall proceed to trial as any other civil action,” Rule 38 of the Rules of Civil Procedure controls.  Rule 38 allows any party to demand a jury trial.  The City appealed this decision to the Court of Appeals.  In a divided opinion, a three judge panel reversed the trial court.  The Court of Appeals held that the trial court erred in failing to dismiss Frost’s request for a jury trial.

Foundation of Statutory Interpretation

Judge Wanda Bryant, in the majority opinion, states that“[s]tatutory interpretation begins with the plain meaning of the words of the statute.  Where the plain meaning of the statute is clear, no further analysis is required.  Where the plain meaning is unclear, legislative intent controls.” (p. 8, citing Sharpe v. Worland, 137 N.C. App. 82, 85, 527 S.E. 2d 75, 77 (2000).

Ejusdem Generis  (“of the same kind”)

The majority opinion applies the doctrine of ejusem generis.  The rule of statutory construction ejusem generis provides:

“Where general words follow a designation of particular subjects or things, the meaning of the general words will ordinarily be presumed to be, and construed as, restricted by the particular designations and as including only things of the same kind, character and nature as those specifically enumerated.”  Id, at 8, citing

Knight v. Town of Knightdale, 164 N.C. App. 766, 769, 596 S.E. 2d 881, 884 (2004).

The majority opinion held that the section of the Act that specifically provides that the petitioner is the only party that can demand a jury trial trumps the section of the Act that provides that the case “shall proceed to trial as any other civil action.”

The Absurdity Canon

The concurring and dissenting opinions reach opposite conclusions about whether the majority’s interpretation of the Act leads to absurd results.  The absurdity canon applies “where the plain language of the statute would lead to patently absurd consequences” that the legislature “could not possibly have intended.”  at p. 13, citing Pub. Citizen v. U.S. Dep’t of Justice, 491 U.S. 440, 470 (1989) (Kennedy, J., concurring) (emphasis in original).

Judge Richard Dietz, in his concurring opinion, exercises judicial restraint by characterizing the Act, which allows only the losing side to request a jury trial, as “unusual.”  In a damning assessment of the legislature’s work product, Judge Dietz concludes that a right to demand a jury trial enjoyed by one litigant, but not enjoyed by the opposing litigant “is something the General Assembly certainly could have intended.” (p. 2 of concurring opinion) (emphasis in original).

Judge Robert N. Hunter, for his part, gives the legislature more credit.  In his dissenting opinion, Judge Hunter concludes that the General Assembly could not possibly have intended the result reached by the majority.  The dissent points out that the majority’s interpretation of the Act “creates an incentive for a party to lose its proceeding in front of the Board.”  It notes, “[i]n order for a party to qualify as a petitioner, and have the right to a jury trial, a party must first lose before the Board.” (p. 6 of dissenting opinion).

The absurdity canon, as set forth in the dissent, provides that “[w]hen a literal interpretation of statutory language yields absurd results, however, or contravenes clearly expressed legislative intent, ‘the reason and purpose of the law shall control and the strict letter thereof shall be disregarded.’” (p. 4 of dissenting opinion, citing AVCO Financial Services v. Isbell, 67 N.C. App. 341, 343, 312 S.E. 2d 707, 708 (1984), quoting State v. Barksdale, 181 N.C. 621, 625, 107 S.E. 505, 507 (1921).  The dissent would affirm the trial court’s order denying the City’s motion to strike Frost’s demand for a jury trial.

On April 6, 2018, the North Carolina Supreme Court reversed the N.C. Court of Appeals.  Chief Justice Martin’s unanimous decision notes that Section 8(g) of the Asheville Civil Service Law allows “either party” to appeal an Asheville Civil Service Board decision and “the matter shall proceed to trial as any other civil action.”  Consequently, 8(g) incorporates Rule 38(b) of the N.C. Rules of Civil Procedure, which provides, “any party may demand a trial by jury of any issue triable of right by a jury.” (emphasis in original).  Because 8(g) grants a right to a trial by jury, the Supreme Court held that both the respondent and the petitioner from an Asheville Civil Service Board decision may demand a jury trial in Superior Court.

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In the case, a plaintiff patient was undergoing cardiovascular surgery and, while opened up and with surgical tools inside her body, fell off the operating table and sustained serious injuries including concussion, double vision, bruises, and emotional trauma.  The Plaintiff filed a complaint alleging that Defendants Duke and Southeastern Medical Center acted negligently by retaining physicians and nurses who allowed the accident to occur.  On appeal, the Court considered whether Plaintiff’s claim sounded in ordinary negligence, or whether it took the form of a malpractice claim that demanded more stringent pleading standards which, if not met, would result in the dismissal of the plaintiff’s complaint.

In North Carolina, the distinction between ordinary negligence and medical malpractice claims is determined by statute.  A medical malpractice claim is a “civil action for personal injuries or death arising out of the furnishing or failure to furnish professional services in the performance of . . . health care by a health care provider.”  North Carolina General Statute Section 90-21.11(2)(a).  The term “professional services” is not defined by statute, but North Carolina courts have referred to it as an act arising out of some vocation, calling, occupation, or endeavor that involves some level of specialized knowledge or skill: a skill that is intellectual rather than manual or physical.  Conversely, ordinary negligence claims in the medical setting arise from acts or omissions that do not implicate some specialized assessments or clinical judgments.  Rather, these types of acts or omissions are measured from a standard of ordinary judgment.  In other words, the inquiry is whether the typical, reasonable person have acted in that manner under the same or similar circumstances.

The Court went on to explain that in the case of a patient falling off an operating table, the dispositive factor in determining whether the case falls under medical malpractice or ordinary negligence is “whether the decisions leading up to the fall required clinical judgment and intellectual skill.” Thus, if evidence shows the fall occurred because physicians failed to properly use restraints, the claim sounds in medical malpractice.  On the other hand, if the evidence shows the patient fell off a gurney because the physicians did not remain in close proximity to the patient or stepped away from the patient, leaving her unattended, the claim would be based in ordinary negligence.  In the first instance, only a person possessing specialized medical knowledge would know the proper use of restraints.  In the second instance, however, the reasonable, ordinary person would know to never leave a patient unattended while minimally conscious or unconscious.

In the instant case, the Court determined the plaintiff’s claim fell into the category of ordinary negligence rather than medical malpractice.  The factual allegation that the plaintiff fell off the operating table while unconscious, open, and with surgical tools in her body was not the type of accident that would result from an action requiring specialized medical knowledge, skill, or judgment.  Rather, it was avoidable by the use of ordinary care, in particular, properly monitoring and controlling the plaintiff’s body during surgery, and properly supervising nurses and other staff throughout the process.  Even though the plaintiff’s complaint employed language that appeared related to a medical malpractice claim, the Court concluded the underlying facts pointed to ordinary negligence – namely, that the defendants failed to “use good judgment, reasonable skill, and diligence in the treatment of [the] Plaintiff.”

For the Court’s full opinion, click here.

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