Tag: Contracts

Non-Compete Agreements Aren’t for Everyone: The Necessity of Proving a “Legitimate Business Interest”

Womble Carlyle

It is a longstanding tenet of North Carolina law:  A company must have a legitimate business interest to justify using non-competes in its employment agreements.

Employers often focus on specific language describing the scope of their non-competes – should it be six months, one year or two years?  Should it be citywide, statewide, or is a larger territory reasonable?  And although the scope of a non-compete is critical, two recent North Carolina court decisions emphasize that you can’t use a non-compete in just any situation.  There must be a legitimate business interest which merits its use.

What qualifies as a legitimate business interest?

In Pinehurst Surgical Clinic, P.A. v. DiMichele, the NC Court of Appeals enforced an employment agreement prohibiting the defendant physician from practicing medicine in competition with the plaintiff surgical clinic for two years within a 35-mile radius of its Pinehurst facility.

In reversing the trial court’s finding of no irreparable harm, and remanding the case with instructions to grant the PI, the Court focused on several key findings which demonstrated the employer had strong, legitimate and protectable business interests to justify the use of non-competes:

  • In its more than 60 years of existence, the clinic had invested many resources “cultivating relationships with patients, employees, and various entities in the region in which it does business.”
  • The clinic annually spent significant sums “to develop and maintain a loyal patient base and goodwill in the community.”
  • The clinic provided the physician with “extensive confidential information regarding all aspects of plaintiff’s medical practice and business affairs.”
  • The clinic also provided the physician with an extensive patient base and the support necessary to maintain a successful medical practice, reputation and goodwill in the community.

In contrast – and reaching a different result – in Phelps Staffing, LLC v. C.T. Phelps, Inc., the Court of Appeals found that a staffing company failed to establish a legitimate business interest supporting its use of non-competes.   A number of factors undermined the staffing company’s case:

  • The employees at issue were “general laborers”;
  • The employees did not have access to trade secrets or proprietary information; and
  • The staffing company admitted that the primary purpose of the non-compete was to prevent competition from other temporary staffing companies.

The Court had little trouble affirming the trial court’s finding that the non-compete was “merely an attempt to stifle lawful competition between businesses and that it unfairly hinders the ability of plaintiff’s former employees to earn a living.”

These North Carolina cases are in sync with the national trend.  For example, in Gastroenterology Consultants of the North Shore v. Mick S. Meiselman, an Illinois appellate court invalidated a physician’s non-compete because the former employer failed to show a legitimate protectable interest.  The evidence showed that the doctor had been practicing in the relevant territory for about 10 years before his employment with the practice, the practice did not introduce the doctor to his patients or his physician-referral sources, the practice did not advertise, promote or market the doctor’s practice, and the doctor maintained his own office and telephone number.  The practice merely provided some administrative support for the doctor.  As a result, the practice lacked a legitimate interest to justify the non-compete.

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Contractual Good Faith: Having Rights Doesn't Necessarily Mean You Can Use Them

Recently in The National Law Review an article by Anthony C. Valiulis and Melinda J. Morales of Much Shelist, P.C. regarding Contractual Rights:  

It can be a painful lesson to learn: just because you have discretion to do something under a contract does not mean you can exercise those rights anytime you want. Why is that? The covenant of good faith and fair dealing, implied in every contract, requires that a party vested with discretion exercise it reasonably and not arbitrarily, capriciously or in a manner inconsistent with the reasonable expectations of the parties. The purpose of this duty is to ensure that parties do not take advantage of each other in a way that could not have been contemplated at the time the contract was drafted or do anything that would destroy the other party’s right to receive the benefit of the contract.

The City of Woodstock learned this lesson the hard way in a recent Illinois Appellate Court decision. Reserve at Woodstock, LLC v. City of Woodstock, decided in September 2011, involved a 10-acre piece of property annexed to the City of Woodstock pursuant to a 1993 annexation agreement. In addition to zoning the property as residential (for 20 lots) and binding the parties for 20 years, the agreement contained a provision that no change could be made to any ordinance, code or regulation during the term of the agreement that would affect the zoning classification or uses permitted on the property. However, the agreement also gave Woodstock the right to re-zone the property for agricultural uses or de-annex the property if it was not developed within five years of annexation (i.e., the development window). Ultimately, the property was not developed within the specified period.

Reserve at Woodstock purchased the property from the original owner in 2005 and requested approval of a 20-lot plat in 2006. Woodstock’s Plan Commission issued a report stating that the plat complied with both the annexation agreement and relevant city ordinances, and recommended approval of the plat. However, the Woodstock City Council denied approval despite the fact that Reserve had invested hundreds of thousands of dollars in connection with its efforts to get the plan approved, met all of the municipality’s demands for impact studies and other assurances, and presented evidence that the plat was fully compliant.

Reserve sued the City of Woodstock, which responded by rezoning the property as agricultural and taking certain other steps that caused the property to be de-annexed. Although Woodstock had the right to take such action under the annexation agreement, the court nonetheless held that city’s actions violated the implied covenant of good faith and fair dealing.

What does this mean for you and your business? First, bear in mind that this implied covenant exists in every private contract, as well as those involving a municipality. And discretion is common in certain types of contracts, such as in contracts for the purchase and sale of goods. Thus, if you have an agreement that gives you the right to perform within certain parameters or limits, the covenant of good faith and fair dealing should guide how you exercise that right.

Ask yourself whether your decision will deprive the other party of their expectations under the contract, and think twice before acting. Relying on the contract language may not be enough, so it is wise to discuss the matter with legal counsel. When it comes to contracts, an ounce of prevention is always better than a pound of cure.

© 2012 Much Shelist, P.C.

How Lessors and Lenders Can Audit the Eurocontrol Accounts of Lessees

Recently posted in the National Law Review an article by attorney John I. Karesh of Vedder Price P.C. regarding  lessors will no longer receive an aircraft operator’s statement of account from Eurocontrol via e-mail.

Eurocontrol has implemented a change to the way lessors, lenders and security trustees can audit the Eurocontrol accounts of lessees. Effective September 1, 2011, lessors will no longer receive an aircraft operator’s statement of account from Eurocontrol via e-mail. In an attempt to provide better security, Eurocontrol will now provide such statements only upon the lessor’s request via a secured extranet system called CEFA (Central Route Charges Office Extranet for Airspace Users). We have been advised by Eurocontrol that lenders and security trustees also will be granted access to CEFA under the same protocol. In order to gain access, the requesting party needs to complete an Agreement (available on Eurocontrol’s website). Once the Agreement is completed and received by Eurocontrol, the requesting party can view an operator’s statement of account online 24/7. Access is free. However, requesting parties must obtain approval from each operator whose statement of account they wish to view by having the operator sign an Authorization Letter in the prescribed form.

Because lenders and lessors must execute the Agreement, they should take note that the Agreement contains various noteworthy provisions including the following: Article 4 provides that to the extent permitted by national law, in the event of a dispute, Eurocontrol’s data, including metadata, shall be admissible in court and shall constitute evidence of the facts contained therein unless contrary evidence is adduced. Section 9.2 provides that once a statement of account becomes available on CEFA, it shall be deemed received by the “Leasing Company,” which agrees to proactively and regularly check the CEFA site. Article 13 contains various provisions concerning confidentiality and protection of data. Section 14.2 requires the Leasing Company to indemnify Eurocontrol against any claims for damages made by third parties where the claims or damages are due to a fault of the Leasing Company. Article 15 provides that without prejudice to any mandatory national law, the transmission of electronic data under the Agreement shall be governed by Belgian law. Article 16 provides that any dispute arising out of or in connection with the Agreement shall be referred to the Brussels Court of First Instance (Belgium), which shall have sole jurisdiction.

Also, Section 17.3 provides that the Agreement is for an indefinite period, but either party may terminate it on not less than three months’ written notice, and that Eurocontrol is entitled to terminate or suspend the Agreement in a case foreseen under the confidentiality and protection of data provisions (Section 13.1) or if all authorizations to release Statements of Account to the lessor have been withdrawn. Section 17.4 provides that access to the Statements of Account of an Aircraft Operator will be terminated without notice in case of the withdrawal of the authorization to release such Statements of Account. However, the prescribed form of Authorization Letter provides that it may only be revoked or amended by written instructions from the operator and lessor.

The foregoing is merely a summary of a few of the provisions of the Agreement. All provisions should carefully be reviewed before signing. However, it appears the only way lessors, lenders and security trustees can obtain the statement of an operator’s account is by means of the Authorization Letter and signed Agreement.

© 2011 Vedder Price P.C.