Court Opinion

ID: 9564608
Source: CourtListenerOpinion
Date Created: 2023-08-21 19:04:09.164246+00
Date Added: 2024-06-11T09:18:33.537643
License: Public Domain

WYNN, Judge
dissenting.
Because I believe the “Cost Sharing” provision at issue in Dr. Faidas’ employment contract was, in effect, an unenforceable covenant not to compete, or, alternatively, that such provision was an unenforceable penalty, I respectfully dissent from the majority opinion.
This Court’s decisions in Newman v. Raleigh Internal Medicine Assoc., 88 N.C. App. 95, 362 S.E.2d 623 (1987) and Hudson v. Insurance Co., 23 N.C. App. 501, 209 S.E.2d 416 (1974), cert. denied, 286 N.C. 414, 211 S.E.2d 217 (1975), relied upon by the majority in concluding that the challenged “Cost Sharing” provision is not a covenant not to compete, are inapposite. Indeed, both decisions con*948cern the forfeiture of future or prospective benefits that would otherwise be paid by the former employer.
In Hudson, this Court considered the plaintiffs challenge to a provision in his employment contract. The contract provided that the plaintiff, an insurance agency manager, forfeited his right to a monthly retirement allowance from his former employer, if the plaintiff was licensed to sell, or sold, any kind of insurance in North Carolina during the payment period set forth in the contract. Following his retirement, the plaintiff was entitled to receive 120 consecutive monthly retirement benefit payments pursuant to the contract; the plaintiff made no monetary contribution to the retirement plan, which was funded solely by his former employer. The plaintiff challenged the forfeiture provision as an unenforceable covenant not to compete, arguing that such covenants are valid and enforceable only if given for valuable consideration and if the restrictions are reasonable in scope. The plaintiff reasoned that although he had “not made a financial contribution to the retirement plan, the pension rights ha[d] been earned by him and should not [have] be[en] divested by restrictions on future employment which would not [have] be[en] reasonable under the standards usually applicable to covenants not to compete.” Hudson, 23 N.C. App. at 503, 209 S.E.2d at 418.
This Court in Hudson disagreed, noting that the contractual provision at issue was “not one where the employee agrees to refrain from competitive employment.” Id. at 502, 209 S.E.2d at 417. While the question of the validity of such a provision had not previously been posed to the appellate courts of North Carolina, other jurisdictions had considered the question and concluded that:
the forfeiture provisions are designed to protect the employer against competition by former employees who might retire and obtain benefits while engaging in competitive employment, and that the employer, as part of a noncontributory plan, can provide for this contingency. [Internal citations omitted.] The Courts additionally conclude that the forfeiture, unlike the restraint included in an employment contract, is not a prohibition on the employee’s engaging in competitive work but is merely a denial of the right to participate in the retirement plan if he does so engage. “A restriction in the contract which does not preclude the employee from engaging in competitive activity, but simply provides for the loss of rights or privileges if he does so is not in *949restraint of trade [citations].” Brown Stove Works, Inc. v. Kimsey, 119 Ga. App. 453, 455, 167 S.E.2d 693, 695.
Id. at 503, 209 S.E.2d at 418 (emphasis added in part). This Court thus drew a distinction:
between contracts that preclude the employee from engaging in competitive activity and those that do not proscribe competitive employment but provide that retirement benefits provided solely by the employer under the terms of the agreement will be payable only in the event the employee elects to refrain from competitive employment.
Id. at 503-04, 209 S.E.2d at 418 (emphasis added).
Likewise, in Newman, the employee sought to recover post-termination benefits under his employment contract. The plaintiffs employment contract provided for post-termination benefits, consisting of a portion of the plaintiff’s base salary, for a period of ninety days following the plaintiff’s termination for reasons other than cause, death or disability. A separate “Limitation of Practice” provision in the plaintiff’s employment contract provided for the forfeiture of any such benefits if, within three years of his initial employment, (1) the employee voluntarily terminated his own employment, and (2) engaged in a post-termination practice in Wake County that was “similar” to his practice with his former employer.
This Court in Newman affirmed the trial court’s grant of summary judgment to the employer, holding that the “Limitation of Practice” provision was not a covenant not to compete:
Plaintiff did not promise not to engage in competitive employment. He agreed to forfeit his rights to any post-termination benefits should he decide to engage in a similar practice in Wake County within three years after beginning employment with [the employer]. The provision gives [the employer] no right to interfere with plaintiff’s post-termination practice. It allows [the employer] to avoid paying plaintiff additional sums if he decides to engage in a similar practice.
Newman, 88 N.C. App. 99-100, 362 S.E.2d at 626 (emphasis added). This Court then quoted the above-quoted language from Hudson in concluding that the “Limitation of Practice” provision was “not subject to the strict scrutiny with which courts examine” covenants-not-to-compete. Newman, 88 N.C. App. at 100, 362 S.E.2d at 626.
*950As in Hudson, the contractual provision at issue in Newman concerned the payment of post-termination benefits by the employer to the employee. In contrast, the instant case concerns not the forfeiture of future or prospective post-termination benefits paid by the employer, but the required payment by the employee of a large sum to the employer as compensation for “competing” with the employer. I fail to see a meaningful distinction between the “Cost Sharing” provision at issue herein and a traditional covenant not to compete coupled with a damages provision for breach thereof, as both involve a restraint of trade based upon a disincentive to compete in the form of damages required to be paid by the former employee. See, e.g., Nalle Clinic Co. v. Parker, 101 N.C. App. 341, 399 S.E.2d 363 (1991) (concerning a “Practice Limitation” provision and provision for liquidated damages for breach thereof); see also Iredell Digestive Disease Clinic v. Petroza, 92 N.C. App. 21, 373 S.E.2d 449 (1988). I therefore believe that the trial court erred in entering summary judgment in favor of plaintiff without any consideration of the reasonableness of the terms of the practice restriction in the “Cost Sharing” provision under a traditional covenant not to compete analysis.
Additionally, I disagree with the majority’s categorization of the damages portion of the “Cost Sharing” provision as a liquidated damages provision rather than an unenforceable penalty, based on defendant’s specifically recognizing and stipulating in the contract that “the termination of employment of Employee will result in economic damage to Employer” and that “a reasonable estimate of such damage and an equitable reimbursement thereof to Employer by Employee is the Cost Share . . . which Cost Share amount Employee agrees is reasonable.” Defendant’s stipulation at the time she signed the agreement as to the reasonableness of the damages provision should have no bearing on this Court’s independent determination of the reasonableness thereof from a legal standpoint.
Moreover, Knutton v. Cofield, 273 N.C. 355, 160 S.E.2d 29 (1968) requires not only that liquidated damages must be difficult to ascertain because of their uncertainty or indefiniteness, but also that the stipulated sum must be (1) a reasonable estimate of the damages which would probably be caused by the breach, or (2) reasonably proportionate to the damages which have actually been caused by the breach. Id. at 361, 160 S.E.2d at 34. If these conditions are not met, the stipulated sum will be deemed an unenforceable penalty. Id. In my view, neither of these conditions has been met in the instant case.
*951In the “Cost Sharing” provision, the parties acknowledged and agreed that employing Dr. Faidas required “a large commitment of capital by Employer together with the undertaking by Employer of significant long term indebtedness^]” The parties further acknowledged and agreed that the recruitment of a replacement for Dr. Faidas upon termination of her employment would be “a lengthy and expensive process; and that Employer will sustain economic loss as a result of the termination of employment of Employee and the absence of revenue generated by Employee to offset continuing overhead obligations of Employer.” The parties thus stipulated that Dr. Faidas’ termination would “result in economic damage to Employer” and that the calculated “Cost Share” was a reasonable estimate of the damage that would likely result from her termination.
Notably absent is any indication that the stipulated “Cost Share” sum was a reasonable estimate of the damages that would be caused by Dr: Faidas’ breach of the practice limitation, or were reasonably proportionate to the actual damages caused by the breach. Rather, the “Cost Sharing” provision specifically acknowledges that these costs would have been incurred by plaintiff upon the termination of Dr. Faidas’ employment under any circumstances. That is, if Dr. Faidas had decided to retire prematurely, plaintiff would still have suffered the same economic damage as it did under the circumstances present herein. As the “Cost Share” sum was in no way tied to damages caused by Dr. Faidas’ violation of the practice restriction in the “Cost Sharing” provision, I believe the majority improperly characterizes this sum as an enforceable liquidated damages provision. See Knutton.
For the foregoing reasons, I respectfully dissent.