The Phelps case involved the not so uncommon fact pattern of a sale of a business with the owner (or in this case, putative owner) forming a new company to compete in the same space as the old company after the close of the transaction, with the parties left to argue about whether the conduct violated any sale agreement.   In the Phelps case, S.C. Phelps (SCP) was sold through an asset purchase agreement to plaintiff Phelps Staffing, LLC.  As part of the transaction, the sole shareholder of SCP, Ms. Sheila Phelps, agreed to sign on her behalf and on behalf of SCP, a non-compete agreement.  Ms. Phelps’ husband, Charles Phelps, who was not an owner of SCP but was instrumental in acquiring new customers, refused to sign a non-compete agreement.  Ms. Phelps was allegedly disassociating herself from the business, so the non-compete was not an issue.  Mr. Phelps, on the other hand, had allegedly started his own company C.T. Phelps, Inc. (CTP), and evidently was keeping the option open of competing in the future.  Mr. Phelps received half of the proceeds from the sale, but did not personally sign the asset sale agreement. 

According to the opinion, following the sale of the business, Mr. Phelps informed his wife that he intended to reenter the contract labor staffing business and would do so through his new company, CTP.   Mr. Phelps contacted former customers of SCP and solicited them to do business with his new company.  Mr. Phelps also allegedly “flipped” some of the contract workers to his new company from SCP.   Ms. Phelps provided some marginal assistance to her husband in acquiring and installing accounting software on new computers.  Several months later, plaintiff Phelps Staffing, LLC filed suit against Mr. and Mrs. Phelps, SCP and CTP for breach of the non-compete and confidentiality provisions, trade secret misappropriation and unfair competition, among other claims.  Following summary judgment and later a bench trial, the trial court found in favor of Mr. and Mrs. Phelps on the non-compete claims.  The plaintiff appealed the decision.

On appeal, plaintiff argued that Mr. Phelps, although not a signatory to the non-compete agreement, was nonetheless subject to it as he was the “true owner” of SCP.  In support of this argument, the plaintiff apparently did not cite to and rely upon North Carolina authority.  Instead, plaintiff relied on a Montana case, Bolz v. Myers, 651 P.2d 606 (Mont. 1982). 

In Bolz, the plaintiff there, Dale Bolz,  purchased a hearing aid center, which was negotiated between Bolz and defendant Mason Myers.  Myers wife and son executed the purchase agreement, while Mason Myers did not.  The purchase agreement contained a non-compete agreement and in that case, the Montana Supreme Court found it binding on Mason Myers based in large part on the fact that Mason Myers was asked by Bolz and gave oral assurance to him that he had no intention of competing against Bolz after the sale.  In Phelps, the plaintiff argued that Bolz was factually on point.  The North Carolina Court of Appeals disagreed, finding the absence of any such oral assurance by Charles Phelps to be dispositive of the issue.

While there are several interesting aspects to this case — not the least of which is the fact that somehow all of “financial and accounting data sets” of the prior business (SCP) were somehow installed on the new computer at CTP yet no liability was found against defendants for unfair competition – perhaps the most interesting is the question of whether the Court of Appeals would have accepted and applied Bolz had the facts been slightly different.  The Court of Appeals did not just reject the proposition out of hand.  The Court of Appeals, while noting the opinion was not controlling, agreed with the plaintiff that there were factual similarities between Bolz and the present case, but then found the lack of oral assurance to be a key fact that distinguished the present case from Bolz.  

Perhaps the door has been left open just a bit for such an application in the future.  But if such an argument were to be considered, it would face great hurdles.  First, the facts would likely have to approach some manifest injustice to the plaintiff, arising almost to fraudulent conduct in deceiving the plaintiff to proceed with a sale of the business without obtaining a non-compete from one of the key persons at the seller.  Second, the plaintiff would have to overcome the fact that non-competes are disfavored in the law of this State.  Finally, the plaintiff would have to overcome N.C. Gen. Stat. 75-4, requiring non-competes be in writing, signed by the party to be bound, for it to be legally enforceable.  For some reason, the Court of Appeals did not discuss this provision.  Whether a Bolz type case could find a foothold here in North Carolina would seem to be a long shot but time will tell.

In this case, Lorillard sued Reynolds for breach of a settlement agreement, common law unfair competition and unfair and deceptive trade practices under Chapter 75-1.1.  Reynolds answered the complaint and asserted a Chapter 75-1.1 counterclaim on the basis “that Lorillard’s filing of its Complaint was an unfair trade practice.”  Reynolds asserted that Lorillard’s claim was filed in violation of a settlement agreement that prohibited the filing of such claims and was done for anticompetitive purposes.  Lorillard subsequently moved to dismiss this counterclaim.

In deciding this motion to dismiss, the Court started with the established principle in North Carolina that “a plaintiff who files an ‘objectively reasonable’ lawsuit cannot be held liable for an unfair trade practice under N.C. Gen. Stat. 75-1.1.”  Id. quoting Reichold Chems., Inc. v. Goel, 146 N.C. App. 137, 157, 555 S.E.2d 281, 293 (2001).  The central issue on this motion was whether the Court could decide whether Lorillard’s claim was “objectively reasonable” based on the pleadings, or whether, as Reynolds contended, the Court would need to await fact discovery before making that determination. 

After first reviewing the law on the protections afforded litigants under the Noerr-Pennington Doctrine — a legal doctrine that first arose under the federal Sherman Act that generally protects a litigant for liability in bringing a legal claim –  the Court then turned to a review of the law regarding the “sham litigation” exception to the Noerr-Pennington Doctrine.  Under this established exception, a claim is not protected from liability if it is (1) “objectively meritless” and (2) the court finds that the “litigant’s subjective motivation” was an unlawful intent to “interfere directly with the business relationship of a competitor.”   Lorillard quoting Prof’l Real Estate Investors, Inc. v. Columbia Pictures Indus., Inc., 508 U.S. 49, 113 S. Ct. 1920 (1993).   Significantly, the Court noted, while citing several federal court cases and Sunbelt Rentals, Inc. v. Head & Engquist Equip., LLC 2003 NCBC 4 333 (2003)*, that the inquiry into the subjective intent of the plaintiff in filing the claim “only follows a finding that the suit is objectively baseless and does not inform that initial objective determination.”  Accordingly, if the plaintiff’s action is not “objectively baseless,” then the exception to Noerr-Pennington does not apply and a claim for unfair trade practices associated with the filing of that claim must fail.

In the Lorillard case, Reynolds argued that the Court should not decide if the Plaintiff’s claim was “objectively reasonable” as a matter of law, but rather, should await discovery and further factual development regarding Lorillard’s claim.  The Court declined Reynold’s invitation and instead, relying on GoldToeMoertz, LLC v. Implus Footcare, LLC, No. 5:09-CV-0072, 2101 WL 3474792 (W.D.N.C. Aug. 31, 2010), found that the court need not in every case await fact discovery before deciding the objective reasonableness of a parties claim for purposes of deciding the applicability of the exception to Noerr-Pennington Doctrine.  The Court assumed that Reynolds was correct and that Lorillard had anticompetitive intent in bringing the claim.  But looking “through a lens of reasonable objectivity,” the Court concluded that Lorillard had a “reasoned basis” for its breach of contract claim.  According to the Court, “Lorillard’s subjective intent does not change that initial objective determination.”   While the Court was careful to note that its finding in no way indicated that Lorillard would ultimately prevail on its claim, the claim was not “utterly baseless.” 

The Business Court’s opinion is significant in several respects.  First, this case reflects one of the rare instances where a North Carolina state court has dismissed a “sham litigation” counterclaim on the pleadings.  Second, the case raises an important question.  If a plaintiff’s claim withstands a motion to dismiss, is the claim “objectively reasonable” such that a “sham litigation” counterclaim based on that claim must fail and be dismissed.  The Lorillard opinion would suggest this outcome.

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*  Parker Poe represented Sunbelt Rentals in this lawsuit.

“The touchstone of the Proposed Consent Order is the protection of consumers and competition.  Thus, the Proposed Consent Order provides structural relief designed to restore the competition lost as a result of Intel’s past conduct, and injunctive relief that prevents Intel from engaging in future unfair methods of competition.  The injunctive relief would prohibit Intel, when faced with new competitive threats, from engaging in the exclusionary and unfair conduct alleged in the Complaint.  These provisions are designed to open the door to fair and vigorous competition in the relevant markets, leading to lower prices, more innovation, and more choice for consumers.  The immediacy of this relief is particularly important in these rapidly changing markets.”  (Analysis of Proposed Consent Order to Aid Public Comment)

The settlement appears, though, to reflect a number of concessions by the FTC.  As noted, the settlement does not immediately alter Intel’s alleged monopoly status with the x86 CPU processors.  Moreover, certain of the requested relief sought in the complaint is not reflected in the settlement, such as providing notice to the FTC of acquisitions in the future.  Other relief sought in the complaint, which was broad and categorical, has been refined and narrowed in the settlement.  Indeed, an entire section of the settlement expressly carves out exceptions to the restrictions imposed on Intel’s commercial conduct in the future (see Section IV.B.).  For example, the FTC tries to strike a balance with the limitations to be imposed on Intel in entering exclusive contracts with OEM’s in the future.  In the complaint, the FTC had sought to limit Intel’s practices in entering into these exclusive contracts.  In the settlement, the FTC obtained those limitations while making it clear that it was not banning the practice entirely.

“Section IV.B.8 would allow Intel to enter into no more than ten exclusive agreements over the next ten years when it provides an OEM with “extraordinary assistance” under certain circumstances. The Commission recognizes that Intel has worked with OEMs and other customers to create innovative products that have benefitted consumers. The Commission wants to ensure that Intel has the opportunity to continue to invest monies in projects with OEMs and other customers to support future innovations. Intel, like any other firm, will only invest in research and development if it achieves a return on that investment. Section IV.B.8 recognizes that in “extraordinary” circumstances Intel should be able to negotiate exclusivity for a specific product in which it has invested research and development resources with an OEM or other customer.”

“By accepting this settlement, we open the door to competition today and address Intel’s anticompetitive conduct in a way that may not have been available in a final judgment years from now.  Everyone, including Intel, gets a greater degree of certainty about the rules of the road going forward, which allows all the companies in this dynamic industry to move ahead and build better, more innovative products.”

Clearly, for the FTC, the settlement was “the bird in the hand,” and was more valuable than trying to find two birds later in a bush that is ever changing.

The trial court upheld the non-compete agreement, granting a preliminary injunction.  In doing so, the trial court limited the geographic restriction of the non-compete to “Greenville County, and within an area encompassing fifteen miles in any direction of [the Premises].”  Rector appealed the decision, arguing, in part, that the trial court impermissibly “blue-penciled” an overbroad non-compete agreement. 

On appeal, the South Carolina Supreme Court found such rewriting of the non-compete by the court to be improper.  After citing to precedent discussing the limitations of the courts in deviating from the express terms of non-compete agreements, the Supreme Court found that the trial court’s crafted geographic limitation similarly flawed for straying from the express terms of the agreement:

“These cases stand for the proposition that, in South Carolina, the restrictions in a non-compete clause cannot be rewritten by a court or limited by the parties’ agreement, but must stand or fall on their own terms. We hold, therefore, that the trial judge erred in rewriting the territorial restriction in the parties’ contract.”

What is interesting about this case is not what questions have been answered but rather, what remains unanswered by the opinion.  For example, had the trial court simply used the third definition of the non-compete’s geographic provision — Greenville County, South Carolina — and ignored the other two, which were probably overbroad, would the court’s decision have been upheld or viewed as improper “blue-penciling”?  In such a situation, does the agreement stand by its own terms if two of the definitions are viewed as over broad and ignored?  

Interestingly, in North Carolina, where courts are also prohibited from rewriting non-compete agreements, such agreements are not unenforceable simply because the territorial restriction employs multiple definitions of varying geographic reach.  As long as the provisions are separate and distinct, a court can strike the overbroad provisions in a non-compete agreement without violating the prohibition on rewriting the covenant.  See, e.g. Wachovia Ins. Svcs., Inc. v. McGuirt, No. 06 CVS 13593, 2006 WL 3720430, *9, fn.4 (NCBC Dec. 19, 2006)  at *11 (excising single provision of covenant regarding solicitation of customers while preserving remainder); Philips Elecs. North America Corp. v. Hope, 09 cv 363, 2009 WL 1883921 (M.D.N.C. June 30, 2009) at fn.6 (stating blue penciling is especially appropriate to excise provisions separated by the term “or”).  Accordingly, a geographic restriction that is tiered in structure is not by itself a bar to enforcement in North Carolina.

South Carolina had previously recognized a similar rule, permitting courts to enforce a non-compete if the offensive provision is “severable.”  See Somerset v. Reyner, 233 S.C. 324, 104 S.E.2d 344 (1958); Lampman v. Dewolff Boberg & Assoc. Inc., 2009 U.S. App. LEXIS 6046 (4th Cir. March 23, 2009); see also Rockford Mfg., Ltd. v. Bennet, 296 F. Supp.  2d 681 (D.S.C. 2003).  At first blush, Poynter Investments seems at odds with this precedent.  Does Poynter Investments mark a change in South Carolina’s treatment of non-compete provisions that are severable?  Will South Carolina enforce a strict prohibition on all “blue-penciling” of restrictive covenants?  Certainly, the Poynter Investments case can be limited to its facts to avoid any inconsistencies with precedent.  The trial court judge did not simply enforce the non-compete based on one of three definitions of geography found in the parties’ agreement.  Rather, he modified one of the geographic definitions, thereby broadening its reach.  Even under Somerset and other precedent, such judicial intervention would be viewed as improper. 

Time will tell whether South Carolina is ushering in a stricter approach to non-compete agreements.  One thing is clear, as with North Carolina, non-compete agreements are viewed closely by the courts in South Carolina and will not be saved by judicial rewriting of existing contractual terms.

According to the complaint, U-Haul and AMERCO’s Chairman, Edward J. Shoen, developed two strategies designed to eliminate competition between U-Haul and Budget for one-way rentals, both of which were designed to secure higher rates.  Shoen then allegedly communicated these strategies internally to the regional managers of U-Haul, instructing the regional managers to set their pricing and then “LET BUDGET KNOW.”  Shoen allegedly sent other similar instructions in 2006.  In one internal communication, Shoen is alleged to have instructed local U-Haul dealers to contact Budget and Penske dealers to get them to raise their prices:

“We are successfully meeting or beating our Budget and Penske competitors.  However, their rates are WAY TOO LOW.  When you and your MCP [regional manager] decide it is time to bring some One-Way rates back up above a money loosing [sic] 35 mile, have your Dealers let the Budget and Penske Dealers know.  Try ‘Are you tired of renting 500 miles for $149 and a $28 commission?  Then, tell your Budget/Penske rep that U-Haul is up and they should be too.’”

In addition to allegedly communicating these strategies internally at U-Haul, the complaint alleges that Shoen also communicated to U-Haul’s competitors his interest in their raising their prices to meet U-Haul’s.  The complaint quotes generously from a transcript of an AMERCO earnings press conference in 2008 to bolster the claim that U-Haul and AMERCO invited competitors to collude on price.  For example, Shoen is quoted in the complaint as saying in this conference:

“[F]or the last 90 days, I’ve encouraged everybody who has rate setting authority in the Company to give in more time and see if you can’t get it to stabilize.  In other words, hold the line at a little higher.

And if they [Budget] perceive that we’ll let them come up a little bit, I remain optimistic they’ll come up, and it has a profound affect on us.”

There are a number of interesting observations about this matter, short-lived as it was.  First, the complaint does not allege that U-Haul actually conspired with Budget or any other competitor to maintain or raise prices.  The complaint does not allege a violation of Section 1 of the Sherman Act for conspiracy.  Rather, the complaint is premised on a single claim brought under Section 5 of the Federal Trade Commission Act based on U-Haul’s alleged invitation to its competitors to collude.  Three of the Commissioners (Chairman Leibowitz, Commissioner Kovacic and Commissioner Rosch) voting out the complaint, issued a separate statement highlighting this point, evidently trying to send a message to the business community that the FTC will not wait for collusion to occur before it acts:

“The parties have settled an invitation-to-collude case and not a Sherman Antitrust Act Section 1 conspiracy case.  Put differently, the complaint in this case alleges an unfair method of competition in violation of Section 5 of the FTC Act that does not also constitute an antitrust violation.  . . . Today’s Commission action is instead based on evidence that Respondents unilaterally attempted to enter into such an agreement.  The Commission therefore has reason to believe that Respondents engaged in conduct that is within Section 5’s reach.” Statement.

The U-Haul complaint is instructive on several grounds.  First, as is clearly stated by the Commissioners, the FTC is looking at business practices to determine if they are “unfair methods of competition” and not simply violations of Section 1 of the Sherman Act.  Executives of companies should not find solace in the fact that their anticompetitive comments may not have reached their competitors and resulted in an actual agreement to collude on price.  According to the FTC, no such agreement is necessary for action to be taken.  Second, executives of companies must be mindful not only of what is contained in their internal documentation (including email) but also what is stated in public press releases and earnings reports.  A sure-fire way to catch the attention of the government is to have an earnings release where there is discussion of the need for a competitor to raise its prices, as was allegedly the case here.

In White, the defendant, Andrew Thompson, was a partner with plaintiffs Charles White and Earl Ellis in an entity known as Ace Fabrication and Welding (”ACE”). Ace was formed primarily for the purpose of performing specialty construction and fabrication work at a plant owned by Smithfield Packing Company, Inc. At trial, the evidence suggested that ACE enjoyed initial success. Subsequently, infighting and disagreements overtook the partnership. Eventually, Defendant Thompson decided to leave the partnership and start his own business, PAL. While it is unclear from the opinions when he actually advised his partners of his intentions, defendant Thompson at some point advised White and Ellis of this decision but then a dispute arose between the partners regarding the distribution of partnership assets. While still a partner of ACE, defendant Thompson obtained work from the Smithfield Packing facility for PAL. Eventually, White and Ellis sued Thompson for, among other things, breach of fiduciary duty and unfair and deceptive trade practices.

After a trial, the jury found that Thompson had in fact breached his fiduciary duty to his partners and the damages were trebled under the Act. Defendant Thompson appealed the judgment. On appeal, the North Carolina Court of Appeals, in a split decision, reversed the unfair and deceptive trade practices trebling of damages, finding the Act inapplicable to the dispute because it did not meet the “in or affecting commerce” requirement of the Act.  White v. Thompson, 676 S.E.2d 104 (N.C. App. 2009).  According to the Court of Appeals, “it must be shown that the alleged unfair or deceptive acts had an impact in the marketplace” but “[t]he allegations against Defendant Andrew Thompson do not amount to practices impacting the marketplace.” And while Thompson had been found to have breached his fiduciary duty in usurping partnership opportunities for himself, that did not impact the marketplace. Plaintiffs appealed the decision to the North Carolina Supreme Court.

In another split decision, the North Carolina Supreme Court affirmed the Court of Appeals decision.  As with the Court of Appeals, the Supreme Court correctly noted that the Act requires that the unfair or deceptive act or practice be “in or affecting commerce.”  The Supreme Court also correctly noted that the Act defines “commerce” as “business activities” which the Court had previously defined as connoting “the manner in which businesses conduct their regular, day-to-day activities, or affairs, such as the purchase and sale of goods, or whatever other activities the business regularly engages in and for which it is organized.”  As the Court noted, the General Assembly intended the Act to “achieve fairness in dealings between individual market participants” in two type of business settings: (1) interactions between businesses and (2) interactions between businesses and consumers.”

Viewing the case from this perspective, the Supreme Court found the claim against Thompson to have involved purely the “internal operations of a single market participant.” The parties were partners in “a single market participant” and Thompson breached his fiduciary duty as a partner in “a single market participant.” The Act, according to the Supreme Court, was not intended to “intrude into the internal operations of a single market participant.”

The Supreme Court’s opinion in White, while perhaps adding some more definition to the Act’s reach, raises at least one important question which the majority opinion fails to answer.  In discussing Thompson’s conduct as being purely “internal” to ACE, the Court cites to and discusses briefly its prior decision in Sara Lee Corp. v. Carter, 351 N.C. 27, 519 S.E.2d 308 (1999).  In that case, the defendant there, while employed by Sara Lee, had engaged in self-dealing by creating companies which then supplied to Sara Lee at inflated prices.  Sara Lee sued this employee under 75-1.1 and the Court found that the “in or affecting commerce” requirement was met there by the buyer-seller relationship forming the basis of the employee’s self-dealing.  591 S.E.2d at 312.  But the Supreme Court, in the White opinion, fails to explain how the usurping of the partnership’s opportunities to himself and PAL is appreciably different from the self-dealing in Sara Lee. 

This noticeable absence of explanation was not lost on the dissent in the White case.  Justice Hudson, in her lengthy dissenting opinion, argued that Thompson’s conduct, like that of the defendant in Sara Lee, involved other businesses and was covered by the Act.  According to the dissent, Thompson’s conduct was not constrained to the internal operations of ACE but involved his competing company, PAL “through which he obtained specialty fabrication work at Smithfield Packing and funneled jobs that had been originally awarded to ACE” and began these activities before he advised Plaintiffs of his intention to withdraw from ACE.  Justice Hudson found these facts to put the White case within the parameters of Sara Lee (“This conduct affected commerce in much the same way as the conduct at issue in Sara Lee”).  Later, she again noted: 

“Rather than supporting the majority’s view, this Court’s decision in Sara Lee strongly indicates that the type of self-dealing found by the jury here is exactly the type of conduct that is covered by the Act.”  . . . Indeed, in its discussion of the very definition of “‘commerce,’” this court noted that the Act is subject to a “reasonably broad interpretation” and that “‘we have not limited [the Act's] applicability . . . to cases involving consumers only.  After all, unfair trade practices involving only businesses affect the consumer as well.’”  White, p. 21 (citations omitted). 

While the majority in White does not clearly, or at least convincingly, distinguish these facts from Sara Lee, the majority has made it clear that in the context of a dispute involving the internal operations of a partnership, Chapter 75’s trebling provision will not be available.  While not stated, perhaps the Court distinguished Sara Lee on the basis that, in that case, the employee engaged in his self dealing over a considerable period of time and did not disclose this conduct during his employment tenure.  Here, although there was some dispute as to exactly when Thompson advised of his intention to withdraw, he clearly had notified his partners of his intention during the time that he had engaged in this conduct.  Perhaps the majority was focused on a lack of impact on Smithfield’s business posed by Thompson’s conduct.  Finally, the majority may simply have believed that Thompson’s conduct was simply too far removed from “buyer-seller relations” to give rise to a claim under the Act.  Whatever the reason, the tug-of-war continues on the reach of Section 75-1.1.

Certainly, the Proposed Revisions offer to make important changes to the Merger Guidelines.  For example, product market definition would not necessarily be a determinative consideration.  “Market definition is not an end in itself:  it is one of the tools the Agencies use to assess whether a merger is likely to lessen competition.”  Proposed Revisions, p. 7.  The Proposed Revisions though would apply a more expansive description of the definition of the “hypothetical monopolist” test used in determining product markets.  In addition, the threshold numbers for the Herfindahl-Hirschman Index (”HHI”) would be increased (see Part 5.3) but would not be considered as necessarily providing a safe harbor.  Also, a section would be added addressing “powerful buyers” (see Part 8).  Here again, according to the revisions, the presence of so-called “power buyers” would not be determinative:  “[T]he Agencies do not presume that the presence of powerful buyers alone forestalls adverse competitive effects flowing from the merger.”  Proposed Revisions, p. 27.  Finally, the two year guidance for market entry – formerly a central touchstone in merger cases — has been eliminated (see Part 9).

Interestingly, though, the Proposed Revisions are not viewed by some as a dramatic change from the existing Merger Guidelines.  Commenting on the Proposed Revisions at the Spring Meeting, Deputy Assistant Attorney General for Civil Enforcement, Molly S. Boast, stated that the revisions were intended to bring the Merger Guidelines in line with current practice at the Agencies when reviewing mergers. Others might disagree.  In any event, what is apparent, is that the Proposed Revisions suggest a shift away from “guidelines” to “indicators.”  This appears to have been a conscious move to provide the agencies more flexibility in how they consider a merger.

“These Guidelines should be read with the awareness that merger analysis does not consist of uniform application of a single methodology.  Rather, it is a fact-specific process through which the Agencies, guided by their extensive experience, apply a range of analytical tools to the reasonably available and reliable evidence to evaluate competitive concerns in a limited period of time.” Proposed Revisions, pp. 1-2.

In the next several weeks, antitrust practitioners will be chiming in on the Proposed Revisions.  While formal comments may result in some changes around the edges, it should be expected that the Proposed Revisions will largely remain intact.  Attention will then be focused on what role the Merger Guidelines, as revised, will play in discussions with the Agencies and in court battles over contested mergers.

Caputo filed a motion to dismiss, arguing that the non-compete was unenforceable as a matter of law and that ACS had failed to state a claim under both UDTPA and the North Carolina Trade Secrets Protection Act. In a decision rendered by the Magistrate Judge, and adopted by the District Court Judge, the Court found that the non-compete, although vague as to its geographic reach and potentially invalid, was “not per se unreasonable at the motion to dismiss stage.” The Court made this ruling even though it found that the non-compete, which had no geographic restriction but rather was client based, potentially would prohibit the solicitation of prospective customers throughout the United States in the building renovation business.

“If the Court defines ‘prospective’ as ‘expected, likely or future,’ then it is possible that the non-solicitation provision could be overly broad as applied to Caputo. But, the non-solicitation provision is not so unreasonable as to be declared unenforceable as a matter of law on a FRCP 12(b)(6) Motion to Dismiss.”

Apparently, the Court was willing to permit the parties to engage in discovery to determine the meaning of the solicitation provision so the Court could then determine if the provision was invalid. Although this case is ongoing, it will be interesting to see what evidence is produced to demonstrate a meeting of the minds on this point.

Although the discussion of the non-compete is interesting, the far more important discussion relates to the treatment of the UDTPA and trade secrets claims.

The Court curiously found that the complaint did not state a cause of action under the UDTPA. Citing the principle set forth in Broussard v. Meineke Discount Muffler Shops, Inc., 155 F.3d 331 (4th Cir. 1998) that an UDTPA claim cannot “piggyback” on a breach of contract claim, the Court found that the complaint did not allege “substantial aggravating circumstances” that are necessary to support a claim under UDTPA. The Court viewed the dispute as a breach of contract, noting ACS’ UDTPA claim was not “distinct from” the primary breach of the non-compete and confidentiality agreements. The Court’s holding here is somewhat surprising in that ACS’ claims also included a claim in tort for trade secret misappropriation, which the Court upheld. The Court’s decision also seems to run counter to other cases where UDTPA claims were brought, and upheld, in similar situations involving employee breaches of non-compete or confidentiality agreements. See e.g. Philips Electronics North America Corp. v. Hope, 2009 WL 1883921 (M.D.N.C. June 30, 2009); Static Control Components, Inc. v. Darkprint Imaging, Inc., 200 F. Supp.2d 541 (M.D.N.C. 2002). Moreover, trade secret misappropriation claims frequently become the basis for an UDTPA claim. See Sunbelt Rentals, Inc. v. Head & Engquist Equipment, LLC, 00-CVS-10358, North Carolina Business Court, July 10, 2002.

More interesting, though, is the Court’s statement that ACS’ UDTPA claim was defective because it was “wholly divorced from the context of consumer transactions.” The Court cited PCS Phosphate Co., Inc. v. Norfolk Southern Corp., 559 F.3d 212 (4th Cir. 2009) and Dalton v. Camp, 353 N.C. 647, 548 S.E.2d 704, 710 (2001) for the proposition that UDTPA was “intended to benefit consumers,” and then extrapolated the principle that an UDTPA claim must address “consumer transactions.” A closer look at Dalton shows that such is not the case. In fact, in Dalton, the North Carolina Supreme Court specifically noted that while UDTPA was intended to benefit consumers, “its protections extend to businesses in appropriate circumstances.” As noted previously, “[U]nfair trade practices involving only businesses affect consumers as well.” United Labs, Inc. v. Kuykendall, 322 N.C. 643, 665, 70 S.E.2d 375, 389 (1988). Other UDTPA claims have been brought in North Carolina against businesses. See e.g. Sara Lee Corp. v. Carter, 351 N.C. 27, 519 S.E.2d 308 (1999); Static Control Components, Inc., 200 F. Supp.2d at 550; Sunbelt Rentals, Inc. v. Head & Engquist Equipment LLC, 620 S.E.2d 222 (N.C. App. 2005).* One would certainly expect that even in ACS, the UDTPA claim would have some impact on consumers. Perhaps this is one of those situations where “you know it when you see it,” and the Complaint just did not show the predicate egregious facts. Whatever the situation, the ACS case gives some pause to the federal court’s willingness to hear an UDTPA claim in the context of an employer-employee dispute even when in the presence of a trade secret misappropriation claim.

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* Parker Poe was counsel to Sunbelt Rentals, Inc. in this lawsuit and Eric Welsh was part of the trial team.

In Combs v. City Electric Supply Co., No. COA09-108 (March 16, 2010), the North Carolina Court of Appeals found that a whistle blower’s unfair trade practices claim failed even though it was based on allegations that the defendant had engaged in illegal and fraudulent conduct. In that case, Combs, a former employee of City Electric Supply Company, was terminated from his position after he had objected to certain business practices of City Electric, which Combs alleged were illegal or fraudulent. Combs filed his complaint alleging wrongful discharge, tortious interference with his contractual rights and unfair and deceptive trade practices under Chapter 75-1.1. Combs alleged “that his employment was terminated in retaliation for reporting ‘that Defendant [w]as stealing from its customers’ accounts’.” Following a trial, the trial court directed a verdict in favor of the defendants on all counts. Combs appealed the decision.

On appeal, the Court found sufficient evidence of City Electric’s obtaining money by false pretenses from its customers and therefore found sufficient grounds for the wrongful discharge and tortious interference claims to go to a jury. The Court reversed and remanded those claims for a new trial.

The Court, however, was not so inclined when it came to the Chapter 75-1.1 claim. As to that claim, the Court affirmed the directed verdict for the defendants. Noting that a plaintiff must prove not only an “unfair or deceptive act or practice” under Chapter 75-1.1, but also that that act or practice was “in or affecting commerce” and “proximately caused injury to the plaintiff,” citing Dalton v. Camp, 353 N.C. 647, 656, 548 S.E.2d 704, 711 (2001), the Court found that Combs’ complaint “involved a simple employment dispute” and did not involve acts “in or affecting commerce.” Relying on precedent which establishes that the Act does not apply to general employer-employee relationships, the Court concluded that Combs’ claim did not affect commerce and did not fall within Chapter 75-1.1, regardless of the “whistle blowing” allegations.

Combs attempted to distinguish his claim from those found in ordinary employer-employee relationships, citing to Sarah Lee Corp. v. Carter, 351 N.C. 27, 519 S.E.2d 308 (1999) and Walker v. Sloan, 137 N.C. App. 387, 529 S.E.2d 236 (N.C. App. 2000), cases involving employer-employee relationships with Chapter 75-1.1 claims. The Court found Combs’ argument unconvincing, distinguishing both Sarah Lee and Walker from Combs’ situation.

“In both Sarah Lee Corp. and Walker, the Court focused upon conduct that constituted activity ‘affecting commerce’ that occurred between the employer and employee and held that N.C. Gen. Stat. 75-1.1 was applicable to those cases. . . . In the instant case, there was no evidence presented before the trial court of any conduct that would constitute activity ‘affecting commerce’ between plaintiff and City Electric. Plaintiff only asserts that he was fired in retaliation for ‘blowing the whistle’ on City Electric’s practice of not sending out negative balance statements at the end of each month.”

Based on this reasoning, the appellate court found Combs’ Chapter 75-1.1 claim to lack merit.

The City Electric case is interesting in several respects. First, an observation can be made that just because an act or practice is deceptive or unfair does not by itself mean that a claim under Chapter 75-1.1 can be brought. A proper nexus must be found with “commerce” for a claim to exist. Here, although the underlying alleged act of fraud gave rise to an alleged “whistle blowing,” because the crux of the claim involved a “simple employment dispute,” a Chapter 75-1.1 claim was not found.

A second, converse observation can be made: just because the underlying facts involve an employer-employee relationship does not necessarily mean that a Chapter 75-1.1 claim cannot be brought. Indeed, the Court noted both the Sara Lee and Walker cases as examples where a Chapter 75-1.1 claim existed even in the context of an employer-employee dispute. Another example, although not cited by the Court in City Electric, is Sunbelt Rentals, Inc. v. Head & Engquist Equipment LLC, 620 S.E.2d 222 (N.C. App. 2005).

In that case, Sunbelt alleged that the defendants had engaged in unfair and deceptive trade practices under Section 75-1.1 when they raided Sunbelt’s business for its employees and confidential, trade secret information. Following a trial, Sunbelt obtained a judgment in its favor on the unfair and deceptive trade practices act, even though the claims involved to some extent the employment relationships between Sunbelt and certain of its former employees. The Business Court found the claim valid due to the fact that the case involved claims of trade secret misappropriation and tortious interference with Sunbelt’s business relations and therefore a proper nexus was found between the deceptive acts and practices and commerce. Sunbelt’s judgment was affirmed on appeal.

So what do we take away from this discussion? Perhaps, that while a “whistle blower” may not have facts sufficient to make out a claim under the Act, the fact that a claim is in the context of an employer-employee relationship is not necessarily fatal to bringing an unfair and deceptive trade practices claim under Chapter 75-1.1. As in any legal matter, the facts matter.

Parker Poe represented Sunbelt Rentals in Sunbelt Rentals, Inc. v. Head & Engquist Equipment LLC, and Eric Welsh was part of the trial team.

In the Milliken & Co. v. Morin case, Milliken had employed Morin as a research analyst. As part of his employment, Morin signed an employment agreement with Milliken, which contained an inventions assignment provision, a non-compete provision and a confidentiality provision. In his position with Milliken, Morin allegedly developed an idea to create a high modulus multifilament polypropylene fiber. Milliken apparently did not pursue the idea of developing this fiber. Morin subsequently resigned from Milliken, created his own company, and filed a patent for a high modulus multifilament polypropylene fiber. Upon learning of Morin’s conduct, Milliken brought suit against him, alleging claims for, among other things, breach of contract with respect to the confidentiality provision and violation of South Carolina’s Trade Secrets Act. At the close of Milliken’s case at trial, Morin moved for a directed verdict, arguing that the confidentiality agreement was unenforceable. The trial court denied the motion and Morin appealed the decision.

The central issue in Morin’s appeal, which is of interest here, was whether the confidentiality provision satisfied “the same strict scrutiny” applied to non-compete agreements under South Carolina law. The appellate court, citing Carolina Chem. Equip. Co. v. Muchkenfuss, 471 S.E.2d 721, 723 (Ct. App. 1996) for the proposition that “a covenant not to divulge trade secrets had the effect of a covenant not to compete, and thus, was subject to the same strict scrutiny,” analyzed Morin’s confidentiality provision under standards applicable to non-compete agreements, and determined that the provision “did not substantially restrict Morin’s competitive employment activities” and was enforceable. In arriving at this conclusion, the court noted that the provision did not “prohibit Morin from disclosing or using any and all information he learned working at Milliken, or using the general knowledge and skills he learned while working there.” The court also found the provision reasonable as to time period and territory.

The Milliken case raises several important questions. First, should the Milliken decision be read to stand for the proposition that all confidentiality agreements must meet the standards set for non-compete agreements to be enforceable? While not expressly addressing the issue, the court suggests that may be the case. In its analysis, the Milliken court quickly jumped to the Muckenfuss decision, stating “In Muckenfuss, the court determined a covenant not to divulge trade secrets had the effect of a covenant not to compete, and thus, was subject to the same strict scrutiny.” However, the Milliken court did not initially address whether the confidentiality provision had this effect as to Morin. The court did not consider the competitive effect of the confidentiality provision as an initial matter and simply proceeded to an analysis under the non-compete standards. There certainly is a healthy question as to whether Muckenfuss should be read for the proposition that all confidentiality agreements, regardless of reach or effect, must be analyzed under the standards set for non-compete agreements.

Second, if Muckenfuss and now Milliken are to be read broadly to reach all confidentiality agreements, then one is left to ask about what that means for the enforceability of confidentiality provisions that prohibit an employee from disclosing confidential information of his former employer in a non-competitive setting. For example, if a former employee disclosed confidential information on the internet out of spite or revenge, such disclosure would not be in a competitive environment. Yet, the enforceability of the confidentiality provision, and redress for the wrong, might still turn on whether it met the “strict scrutiny” afforded to non-compete agreements. If the provision lacked any territorial limitation, would it nevertheless be found enforceable and a tool for redress against such conduct? Applying a broad reading to Muckenfuss and Milliken could lead to the conclusion that even in such a situation the confidentiality agreement may be found invalid.

With the adage “better safe than sorry,” the uncertainties surrounding confidentiality agreements in South Carolina suggest the need to draft confidentiality agreements in a manner that is compliant with the standards set for non-compete agreements. Among other things, confidentiality agreements should be kept narrow to avoid a charge that it would prevent the employee from “using the general skills and knowledge he gained” at the former employer. Carolina Chemical Equipment Co., Inc. v. Muckenfuss, 471 S.E.2d 721, 724. In this case, the “horse” may actually be a zebra, even though it lacks the stripes, and should be handled accordingly.