Archive for the ‘Non-compete Provisions’ Category

Sale of a Business – North Carolina Courts May Do More Than Just Use Their Blue Pencils When Considering a Non-Compete Clause

Friday, November 7th, 2014

By:  John N. Fleming

Non-Compete clauses have long been an important part of transactions involving the purchase of a business.  Much of what is often purchased in a business acquisition includes the relationships, contracts and goodwill built-up and established by the seller.  Often, the non-compete restrictions imposed upon and agreed to by the seller and its owner protect and preserve the value of what is being purchased. 

North Carolina courts have held that a non-compete restriction that is part of the sale of a business is valid and enforceable if the written non-compete restriction: (1) is reasonably necessary to protect the legitimate interest of the purchaser; (2) is reasonable with respect to both time and territory; and (3) does not interfere with the interest of the public.  Further, traditionally in North Carolina, when courts have been asked to interpret overly-broad restrictive covenants, they have been limited to applying what is called the strict blue pencil doctrine.  Under the blue pencil doctrine, a court may cross out or choose not to enforce a distinctly separable part of a covenant to render the remainder of the provision reasonable.  However, under this theory, a court may not otherwise revise or rewrite the restrictive covenant to make it reasonable.  

Recently, in the case of Beverage Systems of the Carolinas, LLC  v. Associated Beverage Repair, LLC, Ludine Dotoli and Cheryl Dotoli, the North Carolina Court of Appeals went beyond, the  strict blue pencil doctrine because the buyer and seller had expressly granted the court the power to revise the restrictive covenant in the asset purchase agreement.  More specifically, the non-compete clause in the agreement gave the court the authority to revise the restrictive covenant to cover the maximum period, scope and area permitted by the law.  The North Carolina Court of Appeals found that the trial court had the power to revise the restriction regarding territory to make it reasonable and thus enforceable.  As a result of this decision, and when expressly directed by the buyer and the seller, the court could do more than cross out a distinct provision, but it could now revise or re-write a restrictive covenant to determine reasonableness.  It is important to note that this expansion of a court’s authority from the limitations of the blue pencil doctrine to allowing revisions by the court is limited to the interpretation of restrictive covenants that are part of the sale of a business and in situations where the purchaser and seller expressly grant the court such authority.  At present, the expansion of a court’s authority so that it may revise a restrictive covenant has not been interpreted in the context of an employment agreement.      

Although this expansion of court authority has yet to be interpreted by the North Carolina Supreme Court, it does have implications for buyers and sellers of businesses and their attorneys.  When negotiating the agreement to buy or sell a business, attention should be placed on whether a clause should be included to empower the court to revise an otherwise unenforceable provision of a restrictive covenant.  Including such a provision may result in a court revising an overly-broad restrictive covenant and preserving for the buyer the value of what was purchased.

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John Fleming is a general practitioner in corporate law with an exceptional knowledge of Health Care Law.  For help concerning the sale or purchase of a business, or for more information, contact John Fleming at jfleming@mwbavl.com or (828) 254-8800.

Posted in Business Purchase/Sale Transactions, Mergers & Acquisitions, Non-compete Provisions, Small Business | Comments Off on Sale of a Business – North Carolina Courts May Do More Than Just Use Their Blue Pencils When Considering a Non-Compete Clause

The Court of Appeals Clarifies the Level of Judicial Scrutiny for Non-Competition Provisions in Franchise Agreements

Thursday, August 8th, 2013

By Joseph P. McGuire

On August 6, 2013, the North Carolina Court of Appeals issued an opinion clarifying whether the level of judicial scrutiny for a non-competition provision in a franchise agreement should follow the standards for such a provision in an employment contract or the standards for such a provision in a contract for the sale of a business. The issue is significant because it is well-established under North Carolina law that non-competition agreements contained in an employment contract are more closely scrutinized than those contained in a contract for the sale of a business, due to concerns that employees have only their labor to sell and may more readily accede to an unreasonable restriction at the time of their employment than franchisees.

In the case before the Court of Appeals, Outdoor Lighting Perspectives Franchising, Inc. v. Harders, (No. COA12-1204), the plaintiff franchisor appealed an order from the North Carolina Business Court declining to enforce a non-competition provision in a franchise agreement authorizing franchisees to engage in the design, construction, and installation of residential and commercial outdoor lighting products. The franchise agreement prohibited the defendant franchisees from operating another outdoor lighting business within a specified area for a period of two years beginning on the date upon which the franchise agreement terminated or expired.

After expiration of its franchise agreement and upon learning that the defendants were operating an outdoor lighting business, the plaintiff franchisor filed suit to recover damages and injunctive relief. The defendants successfully moved to have the dispute designated for hearing by the Business Court, which is a trial court with offices in Raleigh, Greensboro and Charlotte that specializes in deciding complex business cases. Upon hearing the plaintiff’s motion for a preliminary injunction, the trial court ordered the franchisees to return and refrain from using certain allegedly proprietary information of the franchisor, including customer-related information, manuals and similar protected items. However, the trial court denied the plaintiff’s request for the issue of a preliminary injunction prohibiting the former franchisee from operating an outdoor lighting business. The franchisor appealed the denial of a preliminary injunction.

On appeal, the franchisor urged the Court of Appeals to adopt the standard generally utilized in cases arising from the sale of a business to evaluate the non-competition provision in the franchise agreement, while the franchisees argued that the greater scrutiny applicable to non-competes in employment contracts should govern. Finding that the franchisor-franchisee situation is a hybrid that differs from both the employer-employee and the sale of business arrangements, the Court pointed out that a franchisee is likely to possess a skill set that makes him capable of earning a livelihood in a variety of different businesses, and yet a franchisor is likely to retain and sell to a new franchisee some portion of the good will built up by the departing franchisee. Accordingly, the Court adopted elements of the tests utilized in both the employee-employer and the business sale contexts to analyze the validity of a non-compete in a franchise agreement.

The Court of Appeals concluded that the proper standard in the franchisor-franchisee context is whether the non-competition provision is no more restrictive than is necessary to protect the legitimate interests of the franchisor, with the relevant facts to be considered being the reasonableness of the duration of the restriction, the reasonableness of the geographic scope of the restriction, and the extent to which the restriction is otherwise necessary to protect the legitimate interests of the franchisor. In applying this new standard, the Court determined that the geographic scope of the restriction at issue was not reasonable in prohibiting the defendants from engaging in the outdoor lighting business within the territory assigned to any of the franchisor’s affiliates, especially since two of the affiliates were engaged in lines of business totally unrelated to outdoor lighting. In that the non-competition agreement was impermissibly broad, the Court of Appeals concluded that the trial court correctly determined that the franchisor had no likelihood of success on the merits and affirmed the denial of the franchisor’s motion for a preliminary injunction.

The analysis by the appellate court indicates a flexibility to consider the substance of a hybrid contract that does not fit neatly within prior case law involving either the employer-employee or the sale of business situations, and provides helpful guidance to franchisors and franchisees in evaluating non-compete provisions in their franchise agreements

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