Opinion ID: 1294109
Heading Depth: 1
Heading Rank: 1

Heading: Enforceability of 1982 Sales Representative Agreement

Text: 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 Sea Food Co. v. Way, 169 N.C. 767, 86 S.E. 603 (1915) (defendant enjoined from engaging in fish dealer business); Anders v. Gardner, 151 N.C. 581, 66 S.E. 665 (1910) (defendant restrained from engaging in livery stable business); King v. Fountain, 126 N.C. 114, 35 S.E. 427 (1900) (defendant precluded from owning a livery stable business); Cowan v. Fairbrother, 118 N.C. 253, 24 S.E. 212 (1896) (defendant enjoined from owning a newspaper business); Baumgarten v. Broadway, 77 N.C. 22 (1877) (defendant precluded from engaging in photography business). As long as the time limit and territory restrictions were reasonable, these covenants, designed for the reasonable protection of the vendee, were generally upheld. See Faust v. Rohr, 166 N.C. 187, 81 S.E. 1096 (1914). The same principle underlying this Court's sustaining the enforceability of restrictive covenants that preclude a seller of a business from competing with the new owner was subsequently extended to the employer-employee situation. See Scott v. Gillis, 197 N.C. 223, 148 S.E. 315 (1929). Whether the covenantor is a former owner or a former employee, intimate knowledge of the business operations or personal association with customers provides an opportunity to either the former employee or the former owner to injure the business of the covenantee. Moskin Bros. v. Swartzberg, 199 N.C. 539, 155 S.E. 154 (1930). A non-competition agreement, therefore, is a device used by the covenantee to prevent the covenantor from utilizing this opportunity to do injury. Id. Moreover, a further consideration by this Court, in recognizing the validity of these covenants, is that at the time of entering these contracts containing covenants not to compete both parties apparently regarded the restrictions as reasonable and desirable. Sonotone Corp. v. Baldwin, 227 N.C. 387, 42 S.E.2d 352 (1947). Essentially, by enforcing the restrictions [a] court is only requiring the defendants to do what they agreed to do. Asheville Associates v. Miller and Asheville Associates v. Berman, 255 N.C. 400, 404, 121 S.E.2d 593, 595 (1961). While the law frowns upon unreasonable restrictions, it favors the enforcement of contracts intended to protect legitimate interests. It is as much a matter of public concern to see that valid [covenants] are observed as it is to frustrate oppressive ones. Sonontone Corp. v. Baldwin, 227 N.C. 387, 390, 42 S.E.2d 352, 355. Today, in North Carolina, restrictive covenants between an employer and employee are valid and enforceable if they are (1) in writing; (2) made part of a contract of employment; (3) based on valuable consideration; (4) reasonable both as to time and territory; and (5) not against public policy. See A.E.P. Industries v. McClure, 308 N.C. 393, 302 S.E.2d 754 (1983). Defendants contend that the 1982 agreement is not designed to protect a legitimate business interest and for that reason is against public policy. In holding that the restrictions in the 1982 agreement were unenforceable, the Court of Appeals promulgated the following rule: Before a covenant can be found reasonably necessary for the protection of a legitimate business interest, we hold that it is first necessary to find the employee, as a result of his employment, acquired intimate knowledge of the nature and character of the business which was not otherwise generally available to the public. United Laboratories, Inc. v. Kuykendall, 87 N.C.App. 296, 306, 361 S.E.2d 292, 298. While this is an accurate statement of the law, as far as it is stated, the opinion of the Court of Appeals is subject to the interpretation that the information obtained must be of a confidential nature and that this is the only basis for finding a legitimate protectable interest. However, there are two separate and distinct legitimate bases for enforcing restrictive covenants in the employer-employee relationship: The general rule with respect to enforceable restrictions is stated in 9 A.L.R. 1468: It is clear that if the nature of the employment is such as will bring the employee in personal contact with patrons or customers of the employer, or enable him to acquire valuable information as to the nature and character of the business and the names and requirements of the patrons or customers, enabling him by engaging in a competing business in his own behalf, or for another, to take advantage of such knowledge of or acquaintance with the patrons and customers of his former employer, and thereby gain an unfair advantage, equity will interpose in behalf of the employer and restrain the breach ... providing the covenant does not offend against the rule that as to time ... or as to the territory it embraces it shall be no greater than is reasonably necessary to secure the protection of the business or good will of the employer. A.E.P. Industries v. McClure, 308 N.C. 393, 408, 302 S.E.2d 754, 763 (emphasis added) (quoting Asheville Associates v. Miller and Asheville Associates v. Berman, 255 N.C. 400, 403, 121 S.E.2d 593, 595). The narrow holding of the Court of Appeals effectively eliminates consideration of an employer's good will and customer relationships as a basis for enforcement of post-termination restrictions. However, protection of customer relationships and good will against misappropriation by departing employees is well recognized as a legitimate protectable interest of the employer. See generally Annot. Employee Restrictive CovenantArea, 43 A.L.R.2d 94, § 24 (1955) and Annot. EmployeeRestrictive CovenantTime, 41 A.L.R.2d 15, § 14 (1955). The greater the employee's opportunity to engage in personal contact with the employer's customer, the greater the need for the employer to protect these customer relationships. Annot. Employee Restrictive CovenantTime, 41 A.L.R. 2d 15, § 15. This theory, which is often referred to as the customer contact theory, is most applicable where the employee is the sole or primary contact between the customer and the employer. See Blake, Post Employment Restraints, 73 Harv.L. Rev. 625, 657 (1960). Furthermore, the customer contact theory is well recognized under North Carolina law. See A.E.P. Industries v. McClure, 308 N.C. 393, 302 S.E.2d 754; Asheville Associates v. Miller and Asheville Associates v. Berman, 255 N.C. 400, 121 S.E.2d 593. Indeed, the Court of Appeals, while not labeling it as such, relied on this theory in upholding a non-competition agreement involving a janitorial supply salesman. See Wilmar, Inc. v. Corsillo, 24 N.C.App. 271, 210 S.E.2d 427 (1974), cert. denied, 286 N.C. 421, 211 S.E.2d 802 (1975). In Wilmar, the restrictive covenant specifically noted that the defendant salesman would, through personal contact with plaintiff's customers, establish business good will which is a valuable asset of [plaintiff], and that the salesman would become familiar with the price lists, catalogs, methods of pricing, needs and requirements of customers and methods of operation of [plaintiff], all of which would place defendant in an unfair competitive position as to [plaintiff] in the event that [defendant's] employment should for any reason be terminated and he should go into competition with [plaintiff]. Wilmar, 24 N.C.App. at 274, 210 S.E.2d at 430. The Court of Appeals held that this covenant was valid, stating that it seeks to protect a legitimate business interest of plaintiff and is reasonable to the parties and the public. Id. In the case sub judice, the Court of Appeals first acknowledged that defendant Kuykendall had knowledge about the buying habits of [plaintiff's] customers, the cyclical nature of their ordering, and the special needs of the customers. United Laboratories v. Kuykendall, 87 N.C.App. 296, 307, 361 S.E.2d 292, 299. However, the Court of Appeals then stated that this information was not acquired because of Kuykendall's association with plaintiff but rather through his own efforts on plaintiff's behalf. Id. Furthermore, although having conceded that defendant Kuykendall had knowledge concerning customer requirements, the Court of Appeals then stated that Kuykendall acquired no intimate knowledge as to the nature and character of plaintiff's business which was not otherwise generally available to the public at large. Id. First, we disagree with the implication that information obtained through a salesman's efforts during the course of employment belongs to the employee. An acceptance of this premise would undermine the law of agency: Under traditional agency concepts, any new business or improvement in customer relations attributable to [the employee] during his employment is for the sole benefit of the principal. This is what he is being paid to do. When he leaves the company he should no more be permitted to try to divert to his own benefit the product of his employment than to abscond with the company's cashbox. Blake, Post Employment Restraints, 73 Harv.L.Rev. 625, 654 (1960). When an employee, during the course of his or her employment, develops or improves customer relationships, the employee is establishing business good will, which is a valuable asset of the employer, a principle that this Court has implicitly and explicitly endorsed. See A.E.P. Industries v. McClure, 308 N.C. 393, 302 S.E.2d 754; Greene Co. v. Arnold, 266 N.C. 85, 145 S.E.2d 304 (1965); Asheville Associates, Inc. v. Miller and Asheville Associates v. Berman, 255 N.C. 400, 121 S.E.2d 593; Welcome Wagon International, Inc. v. Pender, 255 N.C. 244, 120 S.E.2d 739; Moskin Bros. v. Swartzberg, 199 N.C. 539, 155 S.E. 154; Scott v. Gillis, 197 N.C. 223, 148 S.E. 315. Prior to the case sub judice, the Court of Appeals also recognized this principle. See Robins & Weill, Inc. v. Mason, 70 N.C.App. 537, 320 S.E.2d 693; Manpower, Inc. v. Hedgecock, 42 N.C.App. 515, 257 S.E.2d 109 (1979); Wilmar, Inc. v. Corsillo, 24 N.C.App. 271, 210 S.E.2d 427. Second, we disagree with the Court of Appeals' conclusion that defendant Kuykendall acquired no intimate knowledge as to the nature and character of plaintiff's business which was not otherwise generally available to the public at large. United Laboratories, Inc. v. Kuykendall, 87 N.C. App. 296, 307, 361 S.E.2d 292, 299. As noted by the Court of Appeals, Kuykendall had knowledge about the buying habits of the customers, the cyclical nature of their ordering, and the special needs of the customers. Id. Moreover, the evidence shows that this specific information concerning particular customers of plaintiff's was not generally available to the public. Indeed, Kuykendall testified that at the time he joined Share, he was familiar with the products plaintiff had and the prices at which they sold; that when he called upon the former United accounts he knew the requirements of that customer, who was buying what product, and who liked the different types of products. Kuykendall further testified that he made efforts to determine which Share products were comparable to United products and then told his United accounts that the Share products were comparable to the products which they had been purchasing through defendant Kuykendall from United. This detailed knowledge of the buyer's needs and buying history, coupled with the close personal relationship developed between Kuykendall and the customer, naturally enabled Kuykendall to readily procure sales for defendant Share from the former customers of his previous employer. Moreover, Kuykendall's testimony reveals that although names of potential customers may easily be ascertained from public documents, information concerning particular customers and their specific needs and buying habits was intimate knowledge, obtainable only because of Kuykendall's employment with plaintiff. We hold, therefore, that the 1982 contract was valid and enforceable under North Carolina law and accordingly reverse the Court of Appeals on this issue.