Court Opinion

ID: 2726793
Source: CourtListenerOpinion
Date Created: 2014-09-08 21:08:54.393523+00
Date Added: 2024-06-11T12:39:45.912375
License: Public Domain

NO. COA13-1427

                    NORTH CAROLINA COURT OF APPEALS

                         Filed: 19 August 2014

NORTHERN STAR MANAGEMENT OF
AMERICA, LLC,
     Plaintiff,

    v.                                   Guilford County
                                         No. 13 CVS 7584
MARK SEDLACEK,
     Defendant.

    Appeal by Defendant from order entered 4 September 2013 by

Judge David L. Hall in Guilford County Superior Court.         Heard in

the Court of Appeals 24 April 2014.

    Nelson Levine de Luca & Hamilton, by David G. Harris II,
    David L. Brown, and John I. Malone, Jr., for Plaintiff.

    Carruthers & Roth, P.A., by Mark K. York and J. Patrick
    Haywood, for Defendant.

    DILLON, Judge.

    Mark   Sedlacek     appeals   from     the   trial   court’s   order

enjoining him from violating non-compete provisions contained in

an agreement he entered into with his former employer, Northern

Star Management of America, LLC          (“Northern Star”).    For the

following reasons, we vacate and remand for further proceedings

consistent with this opinion.

                  I. Factual & Procedural Background
                                           -2-
       Northern Star is a company which specializes in the design,

development      and     administration         of    insurance      products.           Its

principal place of business is located in North Carolina, though

its parent company, Northern Star Management, Inc., is based in

New Jersey.        Mr. Sedlacek, a North Carolina resident, has worked

in    the     insurance      industry     since       1982     and    specializes        in

“creating and managing insurance products for and on behalf of

commercial          carriers          related        to      collateral           recovery

(repossession), automobile transporters, and towing.”

       In early 2010, Mr. Sedlacek was an officer and part-owner

of    AEON    Insurance      Group,     Inc.,     when      AEON    was   purchased      by

Northern      Star.      Mr.    Sedlacek      thereafter       worked     for     Northern

Star,    on   and     off,   until     June     2013.       During    this      time,    Mr.

Sedlacek and Northern Star entered into three agreements, each

of which contained non-compete and                     confidentiality provisions

(hereinafter referred to generally as the “covenants”), whereby

Mr.     Sedlacek      agreed     to     refrain      from     engaging       in    certain

activities in the insurance business within certain territories

for a specified period of time.

       The     parties       entered     into        the    first     two       agreements

(collectively,         the     “2010    Agreements”)         around       the     time   of

Northern Star’s purchase of AEON, and each included a provision
                                             -3-
designating New Jersey law as governing the agreements.                                      Mr.

Sedlacek     signed      the     first       agreement          (the     “Asset       Purchase

Agreement”) as an owner of AEON, agreeing to sell AEON’s assets

and   liabilities      to    Northern        Star     and      to    refrain     from       using

Northern Star’s confidential information and from engaging in

certain activities in the insurance business with Northern Star

“worldwide.”          In       the        second     agreement          (the     “Consulting

Agreement”), Mr. Sedlacek agreed to work as a consultant for

Northern     Star    and    further         agreed    not       to   engage      in    certain

activities in the insurance business and not to use Northern

Star’s confidential information outside his relationship with

Northern Star for a certain period in the United States and its

territories.

       The   parties        entered         into     the       third     agreement           (the

“Severance     Agreement”)           in    February      2013,       when      Mr.    Sedlacek

temporarily    separated         from      Northern      Star.          Pursuant       to   this

agreement,     Mr.    Sedlacek            accepted       a     severance        payment      and

acknowledged      that     his   obligations          under      the    prior        agreements

would continue in accordance with their terms.                                 The Severance

Agreement contained a provision designating North Carolina law

as    governing     that    agreement.             Mr.       Sedlacek    was     rehired      by

Northern Star the day after the parties executed the Severance
                                          -4-
Agreement and continued his employment with Northern Star for

approximately four additional months before resigning on 23 June

2013.

       Northern Star commenced the present action in August 2013,

within two months of Mr. Sedlacek’s resignation, alleging that

Mr. Sedlacek had engaged in competitive activities in violation

of the covenants contained in the 2010 Agreements.                              Northern

Star    requested     an     injunction      proscribing        Mr.     Sedlacek       from

further violation of the covenants.

       At   the     preliminary       injunction        hearing,        Northern       Star

introduced        evidence     that    Mr.      Sedlacek        had     violated        the

covenants.        Mr. Sedlacek asserted that the covenants imposed

overly broad restrictions, rendering them unenforceable                            under

North Carolina law.          Northern Star countered that New Jersey law

governed    and     that,    accordingly,        even    if   the     covenants        were

overly broad as written, the court possessed the authority to

modify the covenants           to bring them        into compliance with                New

Jersey law.

       By   order    entered      4   September         2013,     the     trial    court

concluded    that     New    Jersey    law      applied    with       respect     to    its

interpretation of the covenants; granted Northern Star’s request

for a preliminary injunction; and directed that Mr. Sedlacek
                                    -5-
refrain from further violation of the covenants contained in the

2010 Consulting Agreement.         The trial court also indicated in

its order that Northern Star had presented sufficient evidence

to establish that it would likely prevail on the merits of its

claims against Mr. Sedlacek and, moreover, that Northern Star

would   likely   sustain    irreparable   loss   absent    the   injunction.

From this order, Mr. Sedlacek appeals.

                             II. Jurisdiction

    The     trial     court’s     preliminary    injunction       order   is

interlocutory in nature, in that it “does not dispose of the

case, but leaves it for further action by the trial court in

order to settle and determine the entire controversy.”                Veazey

v. City of Durham, 231 N.C. 357, 361-62, 57 S.E.2d 377, 381

(1950).     This    Court   has   jurisdiction   over     an   interlocutory

appeal where the order “‘affects some substantial right claimed

by [the] appellant and will work injury to him if not corrected

before an appeal from the final judgment.’”             Stanford v. Paris,

364 N.C. 306, 311, 698 S.E.2d 37, 40 (2010) (citation omitted).

We have stated that “[i]n cases involving an alleged breach of a

non-competition     agreement[,]    North   Carolina      appellate   courts

have routinely reviewed interlocutory court orders both granting

and denying preliminary injunctions . . . .”            QSP, Inc. v. Hair,
                                      -6-
152 N.C. App. 174, 175, 566 S.E.2d 851, 852 (2002); see also

Copypro, Inc. v. Musgrove, __ N.C. App. __, __, 754 S.E.2d 188,

191 (2014) (“[W]hen the entry of an order granting a request for

the    issuance   of   a   preliminary     injunction      has   the    effect   of

destroying a party’s livelihood, the order in question affects a

substantial right and is, for that reason, subject to immediate

appellate   review.”).        We   accordingly    proceed        to   address    the

merits of Mr. Sedlacek’s appeal.

                           III. Standard of Review

       In order to obtain a preliminary injunction, the movant

must demonstrate (1) that it will likely succeed on the merits

of its case; and (2) that it will likely sustain irreparable

harm absent the injunction.              Ridge Cmty. Investors, Inc. v.

Berry, 293 N.C. 688, 701, 239 S.E.2d 566, 574 (1977).                            Mr.

Sedlacek does not challenge any of the trial court’s factual

findings; rather, he takes issue with the trial court’s legal

conclusions,      which    this    Court    reviews   de     novo      on   appeal.

Copypro, Inc., __ N.C. App. at __, 754 S.E.2d at 191 (stating

that    where   “the   ultimate     question   for    our    consideration       is

whether the trial court correctly applied the applicable law to

the undisputed record evidence, [we] utilize a de novo standard

of review”).
                                      -7-
                                IV.   Analysis

      Mr. Sedlacek raises three primary contentions on appeal:

(1) the trial court erred in applying New Jersey law instead of

North Carolina law; (2) the trial court erred in concluding that

the covenants contained in the Asset Purchase Agreement apply;

and (3) the trial court erred in concluding that the terms of

the   covenants     were    valid   and    enforceable      as    written.     Upon

careful review of the record and               the parties’        arguments, we

conclude that the trial court did not err in applying New Jersey

law and in determining that the Asset Purchase Agreement was

applicable.     We further conclude, however, that in applying New

Jersey law the trial court should have determined whether the

scope of the covenants was overly broad and, if so, should have

appropriately       narrowed    the       restrictions      and     tailored    the

preliminary injunction accordingly.                Thus, for the reasons set

forth below, we vacate the trial court’s order and remand to the

trial court for entry of findings and conclusions concerning the

scope   of    the    preliminary      injunction      consistent       with    this

opinion.

                                A. Choice of Law

      Mr.    Sedlacek      argues   that     the    trial    court    incorrectly

applied New Jersey law, in that the choice-of-law provision in
                                           -8-
the Severance Agreement – which designates North Carolina law as

governing that agreement – effectively supersedes the choice-of-

law    provisions     in        the   Asset      Purchase        Agreement    and   the

Consulting Agreement, both of which designate New Jersey law as

governing.

       “Whenever a court is called upon to interpret a contract

its primary purpose is to ascertain the intention of the parties

at the moment of its execution.”                 Lane v. Scarborough, 284 N.C.

407, 409-10, 200 S.E.2d 622, 624 (1973).                          The intent of the

parties “is to be ascertained from the expressions used, the

subject matter, the end in view, the purpose sought, and the

situation of the parties at the time.”                    Gould Morris Elec. Co.

v. Atl. Fire Ins. Co., 229 N.C. 518, 520, 50 S.E.2d 295, 297

(1948).      Where “a contract is ‘in writing and free from any

ambiguity which would require resort to extrinsic evidence, or

the    consideration       of    disputed     fact,’      the     intention    of   the

parties is a question of law[.]”                 Vue-Charlotte, LLC v. Sherman,

__    N.C.   App.   __,    __,    719   S.E.2d     161,     163    (2011)     (citation

omitted).

       Mr.   Sedlacek      relies     on    paragraph       16    of   the    Severance

Agreement which provides as follows:

             16. Governing Law. This Agreement and any
             amendments hereof shall be governed and
                                        -9-
            interpreted in accordance with the laws
            (both substantive and procedural) of the
            State of North Carolina and without regard
            to any conflict of laws provisions. Each of
            the parties to this Agreement irrevocably
            consents to the exclusive jurisdiction and
            venue of any state or federal court of the
            State of North Carolina permitted by law to
            have jurisdiction over any and all actions
            between or among any of the parties, whether
            arising hereunder or otherwise, except as
            otherwise directed by such court. . . .

Mr. Sedlacek asserts in his brief that this provision “clearly

states    that   North     Carolina   law     will    apply   substantively   and

procedurally to any and all actions between the parties, whether

arising     under    the    Severance    Agreement       or   otherwise.”     We

disagree.

    We interpret paragraph 16 as indicative of the parties’

intent that “This Agreement,” i.e., the Severance Agreement, “be

governed and interpreted in accordance with” North Carolina law.

Further, the language “any and all actions between or among any

of the parties, whether arising hereunder or otherwise” – to

which    Defendant    directs    this       Court’s    attention   –   does   not

support Defendant’s position that North Carolina law will govern

any action between or among the parties.                Rather, this provision

reveals only that the parties intended North Carolina courts to

have “exclusive jurisdiction and venue” over any such action.

In other words, this provision evidences the parties’ intent
                                       -10-
that   any    action    between   or    among   them   be   heard   in   North

Carolina, not that any such action be governed by North Carolina

law.

       This interpretation is reinforced when construing paragraph

16 in conjunction with paragraph 8, which provides as follows:

             8. Non-disparagement, Non-Solicitation, Non-
             Competition,   and   Confidentiality.       In
             connection     [with      Mr.      Sedlacek’s]
             termination, [Defendant] . . . understands
             and acknowledges that all of his duties as a
             consultant of [Northern Star] ceased on the
             Separation    Date,     except     that    all
             obligations, including all non-disclosure,
             non-solicitation      and      non-competition
             obligations, that [Mr. Sedlacek] owes to
             [Northern Star], under law or any agreement
             [Mr. Sedlacek] has with [Northern Star],
             will continue after the Separation Date
             pursuant to the terms of those laws and/or
             agreements.

We believe the language in paragraph 8 reflects the parties’

intent that Mr. Sedlacek remain bound by all previously assumed

“non-competition       obligations,” including, but not limited to,

the covenants in the 2010 Agreements.           We note that neither this

provision nor any other provision in the Severance Agreement

seeks to redefine Mr. Sedlacek’s “non-competition obligations”;

rather, as paragraph 8 states, such obligations “will continue .

. . pursuant to the terms of those . . . agreements.”               (Emphasis

added).      Both 2010 Agreements specify that Mr. Sedlacek’s “non-
                                   -11-
competition obligations” are to be defined with reference to New

Jersey law, which includes the approach employed by New Jersey

courts of permitting the trial court to rewrite an otherwise

unreasonably     restrictive     covenant.       Thus,    to      accept     Mr.

Sedlacek’s position that the Severance Agreement superseded the

prior agreements would also require this Court to accept the

unlikely proposition that Northern Star intended to remove the

non-compete covenants from the purview of New Jersey’s flexible

approach in favor of North Carolina’s more restrictive approach,

which does not permit the trial court to rewrite an overly broad

restrictive covenant.       See, e.g., Whittaker Gen. Med. Corp. v.

Daniel, 324 N.C. 523, 528, 379 S.E.2d 824, 828 (1989) (“The

courts will not rewrite a contract if it is too broad but will

simply not enforce it.”).         Thus, respecting the intent of the

parties as manifested in the terms of their agreements, we hold

that the trial court correctly concluded that New Jersey law

governed its determination concerning the enforceability of the

parties’ non-compete covenants.

                B. Covenants in Asset Purchase Agreement

    Mr.      Sedlacek   argues    that    the   trial     court     erred    in

concluding     that   the   covenants     included   in   the     2010     Asset

Purchase Agreement applied because they were superseded by the
                                      -12-
covenants set forth in the 2010 Consulting Agreement.                    We do not

believe that this issue is properly before us, since the trial

court only enjoined Mr. Sedlacek from continued violations of

the    covenants      contained       in     the    Consulting          Agreement.

Specifically, the trial court enjoined Mr. Sedlacek in three

ways, ordering that he “refrain from (i) soliciting, servicing,

selling, designing, developing, producing, forming, purchasing,

administering,        or      procuring      for        third-parties       Local,

Intermediate    and    Long    Haul   Commercial        Auto,   Garage,    Towing,

Collateral     Recovery       (Repossession),       Auto        Dismantlers      and

Automobile   Transporters       insurance    products      .    .   .   within   the

Restricted Area as defined by the 2010 Consulting Agreement;

(ii) furnishing, divulging and/or making accessible to others

Confidential    Information      as   defined      in    the    2010    Consulting

Agreement; and (iii) continuing to be a member of a partnership

or a stockholder, investor, officer, director, employee, agent,

associate or consultant or persons and entities engaging in the

foregoing activities [described in the Consulting Agreement].”

Accordingly, this argument is dismissed.

             C. Enforceability of Non-Compete Covenants

      Finally, Mr. Sedlacek argues that the covenants are not

enforceable, even under New Jersey law.             Under New Jersey law, a
                                          -13-
covenant not to compete is enforceable to the extent that it is

“reasonable under the circumstances.”                   Solari Indus., Inc. v.

Malady, 55 N.J. 571, 585, 264 A.2d 53, 61 (1970).                           To be deemed

reasonable under the circumstances, a non-compete covenant (1)

must   be    reasonably          necessary       to    protect        the     employer’s

legitimate interests; (2) must not cause undue hardship on the

former employee; and (3) must not be contrary to the public

interest.    Id.         New Jersey courts have stated that an “employer

has no legitimate interest in preventing competition as such,”

Whitmyer Bros., Inc. v. Doyle, 58 N.J. 25, 33, 274 A.2d 577

(1971),     and,     therefore,         will     not   enforce        “a     restrictive

agreement     merely        to    aid     the     employer       in        extinguishing

competition . . . from a former employee.”                       Campbell Soup, 58

F.Supp.2d at 489.            However, New Jersey courts will enforce a

non-compete provision where doing so is necessary to protect

legitimate     interests         of     the    employer,     for       instance,       the

“employer’s interest in protecting trade secrets, confidential

information,       and    customer      relations.”      Ingersoll–Rand          Co.    v.

Ciavatta, 110 N.J. 609, 628, 542 A.2d 879 (1988).                           Further, the

New Jersey Supreme Court has recognized that “employers may have

legitimate interests in protecting information that is not a

trade secret or proprietary information, but highly specialized,
                                           -14-
current information not generally known in the industry, created

and   stimulated       by    the   research       environment    furnished       by   the

employer, to which the employee has been exposed and enriched

solely     due   to    his    employment.”          Id.   at    638,    542    A.2d   879

(internal quotation marks omitted).

      Here,      Mr.   Sedlacek     argues    that       the   trial    court’s    order

enforces a non-compete covenant that is overly broad as a matter

of law.     Northern Star counters that the non-compete covenant is

not   overly      broad      and   that,     in    any     event,      Mr.    Sedlacek’s

contentions to the contrary are “premature because the Trial

Court has not ruled that any of the restrictive covenants at

issue are to be enforced in their entirety.”

      We    do   not    believe     that     Mr.    Sedlacek’s      challenges        with

respect to the enforceability of the non-compete covenant set

forth in the Consulting Agreement are premature.                              See, e.g.,

Coskey’s T.V. & Radio Sales v. Foti, 253 N.J. Super. 626, 602

A.2d 789 (App. Div. 1992) (further limiting the scope of a non-

compete covenant – after trial court had trimmed the covenant’s

scope – upon review of the trial court’s preliminary injunction

order).     Accordingly, we address each portion of trial court’s

injunction order.

      First, the trial court enjoined Mr. Sedlacek from engaging
                                          -15-
in   certain        insurance-related      business      activities     within     the

areas described in the Consulting Agreement, namely, the fifty

states, the District of Columbia and Puerto Rico.                         While the

uncontested findings support the restrictions on the activities

described, they do not support the geographic scope of those

restrictions.         Specifically, the trial court made no findings

with   respect       to    the   geographic      regions   where      Northern   Star

competes for business.              Accordingly, we vacate and remand this

portion   of    the       injunction     order    for   entry    of   findings   with

respect to the reasonableness of the geographic scope of the

covenants      as    set    forth   in   the     Consulting     Agreement,   and    to

tailor the geographic scope of the restrictions to that area

that is reasonable under the circumstances as supported by the

court’s findings.1

       Second, the trial court’s order enjoins Mr. Sedlacek from

1
  We note that the covenants at issue contain a provision
assigning a duration of ten years to the restrictions set forth
therein.   If North Carolina law were applicable, it would be
appropriate to consider the reasonableness of this ten-year
duration   at  the   preliminary   injunction stage   of  these
proceedings. That is, if the ten-year duration were determined
to be unreasonable, then, applying North Carolina law, the
covenants would be unenforceable and a preliminary injunction
would be inappropriate. Here, however, New Jersey law applies,
and the preliminary injunction enforces the covenant only until
the propriety of a permanent injunction is presented for
consideration by the trial court. It will be necessary at that
time for the trial court to inquire into the reasonableness of
the ten-year duration of the covenants.
                                     -16-
divulging confidential information of Northern Star.                 However,

Mr. Sedlacek does not make any argument challenging this portion

of the injunction as unreasonable, and we accordingly do not

address this portion of the order.

     Third, the trial court’s order enjoins Mr. Sedlacek from

participating in essentially any capacity in any entity engaged

in   the   activities    described    in    the    first   portion    of     the

injunction, supra.        This portion of the order appears overly

broad, in that, for instance, it prohibits Mr. Sedlacek from

owning stock as a passive investor in a publicly traded company

that engages in any of the insurance businesses described in the

Consulting      Agreement.   We    therefore      vacate   and    remand    this

portion    of   the   injunction   order    for   entry    of    findings    and

conclusions with respect to the reasonableness of the scope of

these restrictions.

                              V. Conclusion

     In light of the foregoing, we             vacate the trial court’s

preliminary injunction order and remand for further proceedings

consistent with this opinion.

     VACATED AND REMANDED.

     Judge STROUD and Judge HUNTER, JR. concur.