Key Business Court Decisions

An Agreement’s Non-Disclosure Provision May Survive Even If The Restrictive Covenants Fail

Where a business’ employment agreement with its officer contained both a time-limited non-compete and an indefinite non-disclosure provision, the non-disclosure provision can survive even if the non-compete is deemed unenforceable.  NFH, Inc. v. Troutman, et al., 2019 NCBH 64 (J. Robinson).  As a result, the business could maintain a breach of contract claim against its former officer for his disclosure of the company’s confidential information.

Plaintiff NFH, Inc. (“NFH”) operates a funeral home in Iredell County.  Defendant Joseph Troutman (“Joseph”) started NFH with his now ex-wife in 1983 while they were still married. Following their divorce in 2003, Joseph sold his interest in NFH to his ex-wife and became NFH’s Vice-President.  At that time, Joseph signed an employment agreement that contained a five-year, post-termination non-compete provision as well as a provision not to disclose NFH’s confidential information at any time post-employment.  Defendant William Troutman (“William”) is Joseph’s son and was NFH’s treasurer. In 2018, Joseph and William both resigned from NFH after it was acquired by another entity.  Prior to his departure, William allegedly took NFH’s trade secrets and, along with Joseph, started a competing funeral home in Iredell County.  NFH filed suit asserting, among other claims, that Joseph had breached the non-compete provision and the non-disclosure provision by starting the new funeral home and sharing NFH’s confidential information with it. Joseph sought to dismiss the breach of contract claims, contending that both provisions were unenforceable.

The Business Court agreed in part, dismissing the breach of contract claim related to the non-compete provision on the basis that it had expired and was per se unenforceable.  Nonetheless, the Business Court denied the motion as it related to the non-disclosure provision. Unlike the non-compete provision which was scheduled to last for five years after Joseph’s employment ended, the Business Court found that the non-disclosure provision had no time limitation and therefore was in effect at the time Joseph allegedly shared the confidential information with his new business in 2018. Notwithstanding the fact that the agreement had been signed some fifteen (15) years earlier, the Business Court expressed no concern that an indefinite non-disclosure provision might be against public policy.

Based upon this decision, a business should consider including an indefinite non-disclosure provision in any of its employment agreements, as the same appear enforceable even though there is no end-point to the agreement.

Additional legal points from this decision:

  • The Business Court will not look to a separate agreement which has a distinct purpose to determine the intent of the parties to an unambiguous contract that has an entirely different purpose. (Opinion, ¶ 60).
  • A non-compete and/or non-solicitation that is not a part of an employment agreement will not be enforced.  (Id., ¶ 63).
  • Parties cannot circumvent a Court’s limitations on enforcing unreasonable covenants by including language in the agreement to the effect that the parties agree, “…this covenant is reasonable as to duration, geographic area and nature of business protected.” (Id., ¶65, fn.10).
  • Non-solicitation provisions that extended beyond an employer’s customers and preclude soliciting “any services” from anyone with whom the employer has done business are usually overly broad per se. (Id., ¶76).
  • To calculate the duration of a non-compete or a non-solicitation that “reaches back to include clients of the employer during some period in the past,” that period must be added onto the post-termination restrictive period when evaluating the duration of the covenant. (Id., ¶ 77).
  • A non-compete that prevents a former employee from working “indirectly” with a competitor is typically overly broad and not enforceable.  (Id., ¶78).
  • North Carolina does not recognize the doctrine of “inevitable disclosure” related to confidential and/or trade secret claims (i.e., that because of the similarity of the employee’s work for his former and present company, it is presumed that the employee will “inevitably” disclose the trade secrets of the former company).  Instead, North Carolina law requires a plaintiff to always directly prove the disclosure and/or misappropriation of the trade secret.  (Id., ¶¶86, 93, fn.13).
  • A close familial relationship is insufficient to impute knowledge of one family member’s post-contractual obligations to another family member.  (Id., ¶105).
  • When the restrictive employment covenants are unenforceable, there can be no tortious interference claims related to the unenforceable covenants.  (Id., ¶106).
  • Freely transferrable contracts can be the subject of a claim for tortious interference just like any at-will contract.  (Id., ¶ 110).
  • Where unenforceable restrictive covenants are a part of a larger agreement whose other terms remain binding, an unjust enrichment claim based upon the larger agreement is viable.  (Id., ¶132).

Leave a Reply