Beverage Systems of the Carolinas, LLC v. Associated Beverage Repair, LLC

IN THE SUPREME COURT OF NORTH CAROLINA
No. 316A14
Filed 18 March 2016
BEVERAGE SYSTEMS OF THE CAROLINAS, LLC
v.
ASSOCIATED BEVERAGE REPAIR, LLC, LUDINE DOTOLI, and CHERYL
DOTOLI
Appeal pursuant to N.C.G.S. § 7A-30(2) from the decision of a divided panel of
the Court of Appeals, ___ N.C. App. ___, 762 S.E.2d 316 (2014), reversing an order
granting summary judgment for defendants entered on 3 October 2013 by Judge A.
Robinson Hassell in Superior Court, Iredell County, and remanding for additional
proceedings and for trial. Heard in the Supreme Court on 31 August 2015.
Jones, Childers, McLurkin & Donaldson, PLLC, by Kevin C. Donaldson and
Dennis W. Dorsey, for plaintiff-appellee.
Eisele Ashburn Greene & Chapman, PA, by Douglas G. Eisele, for defendant-
appellants.
Higgins Benjamin PLLC, by Jonathan Wall; and Winslow Wetsch, PLLC, by
Laura J. Wetsch, for North Carolina Advocates for Justice, amicus curiae.
EDMUNDS, Justice.
The trial court in this case declined to enforce a covenant not to compete, even
though the parties expressly agreed in their contract that a court could rewrite
overbroad temporal and territorial limitations that would otherwise render the
covenant unenforceable. We agree that the trial court correctly refused to amend the
BEVERAGE SYS. OF THE CAROLINAS, LLC V. ASSOCIATED BEVERAGE REPAIR, LLC
Opinion of the Court
covenant. In addition, we conclude that the trial court properly entered summary
judgment in defendants’ favor on plaintiff’s claims for tortious interference with
contract, tortious interference with prospective economic advantage, and unfair and
deceptive practices. Accordingly, we reverse the decision of the Court of Appeals
reversing the trial court.
Elegant Beverage Products, LLC (“Elegant”) and Imperial Unlimited Services,
Inc. (“Imperial”) were two businesses that supplied, installed, and serviced beverage
products and beverage dispensing equipment in parts of North Carolina and South
Carolina. Elegant sold premium coffee and tea, and Imperial serviced soft drink
dispensers. At the time these companies were sold to plaintiff, Thomas Dotoli owned
Imperial, while Thomas’s wife Kathleen and their son Loudine Dotoli1 owned
Elegant. Both Imperial and Elegant operated out of Statesville, North Carolina.
Mark Gandino entered into negotiations with Thomas and Kathleen Dotoli to
purchase the business and the assets of both companies. Gandino organized plaintiff
Beverage Systems of the Carolinas, LLC (“Beverage Systems” or “plaintiff”) under
North Carolina law in May 2009, and on or about 20 July 2009, Gandino purchased
Elegant and Imperial to operate as Beverage Systems. Specifically, Beverage
Systems entered into an Asset Purchase Agreement with Thomas, Kathleen, and
Loudine Dotoli, and with Elegant and Imperial to purchase the assets, customer lists,
1Throughout their pleadings and briefs, the parties refer to the son as both “Ludine”
and “Loudine.” We will follow the spelling used by Loudine in his affidavit.
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equipment, existing inventory, and associated real property of Elegant and Imperial
for $650,000.
The closing, sale, and purchase were completed on 30 September 2009. That
same day, the parties executed a “Non-Competition, Non-Solicitation and
Confidentiality Agreement” (“the Agreement”) in which Loudine and his parents
agreed not to compete with plaintiff’s business in either North or South Carolina
before 1 October 2014. Paragraph six of the Agreement contained a provision
permitting the trial court to revise its temporal and geographic limits should a court
find them to be unreasonably broad. The Dotoli family members, Elegant, and
Imperial received $10,000 of the purchase price as consideration for the Agreement.
Defendant Cheryl Dotoli, Loudine’s wife, was not a party to either the purchase
contract or the Agreement. In 2011, Cheryl formed defendant Associated Beverage
Repair, LLC (“Associated Beverage”). Associated Beverage began to install and
service beverage dispensing equipment in parts of North and South Carolina, thus
operating in a manner similar to Imperial. Gandino learned of Associated Beverage’s
existence in March 2011 when Thomas Dotoli communicated to representatives of
Bunn-O-Matic, one of Imperial’s former customers, that Imperial had been sold to
Beverage Systems, which had vacated the building that Imperial previously had
occupied. Thereafter, Bunn-O-Matic elected to conduct business with defendant
Associated Beverage rather than plaintiff Beverage Systems.
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After plaintiff’s requests that defendants cease and desist went unanswered,
Beverage Systems filed a complaint on 14 June 2012 in Superior Court, Iredell
County, against Loudine, Cheryl, and Associated Beverage, seeking injunctive relief
and damages. Plaintiff alleged against Loudine breach of the Agreement not to
compete. Plaintiff also alleged claims against all defendants for tortious interference
with contract, tortious interference with plaintiff’s prospective economic advantage,
and unfair and deceptive practices. Defendants filed their answer on 4 October 2012.
Although defendants asserted multiple defenses, they admitted that Associated
Beverage “with the help of L[o]udine Dotoli, intends to compete with Plaintiff,” but
“denied that such competition violates any Non-Competition Agreement.”
Defendants contended, inter alia, that neither Cheryl Dotoli, the sole member in
Associated Beverage, nor Associated Beverage signed the Agreement not to compete,
and therefore they were not bound by its terms. Defendants also asserted that the
Agreement was unenforceable by virtue of being overly broad in geographic scope.
On 11 September 2013, defendants moved for summary judgment on all issues. After
conducting a hearing, the trial court entered an order on 3 October 2013 granting
defendants’ motion for summary judgment in all respects. Plaintiff appealed.
In a divided opinion, the Court of Appeals reversed the trial court’s order.
Beverage Sys. of the Carolinas, LLC v. Associated Beverage Repair, LLC, ___ N.C.
App. ___, ___, 762 S.E.2d 316, 326 (2014). Addressing first the Agreement not to
compete, the majority found that the Agreement’s five-year temporal restriction was
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reasonable, id. at ___, 762 S.E.2d at 320-21, but that its geographic scope was
unreasonable because it included areas beyond those “necessary to maintain
plaintiff’s customer relationships,” id. at ___, 762 S.E.2d at 321. The Court of Appeals
then observed that paragraph six of the Agreement expressly authorized the trial
court to revise the unreasonable territorial restriction. Id. at ___, 762 S.E.2d at 321.
Addressing the effect of paragraph six, the Court of Appeals, citing Welcome Wagon
Int’l, Inc. v. Pender, 255 N.C. 244, 248, 120 S.E.2d 739, 742 (1961), acknowledged that
North Carolina has adopted the “strict blue pencil doctrine” under which a court
cannot rewrite a faulty covenant not to compete but may enforce divisible and
reasonable portions of the covenant while striking the unenforceable portions.
Beverage Sys., ___ N.C. App. at ___, 762 S.E.2d at 321. Here, though, the majority
found that the limitations of the blue pencil doctrine did not apply because the
Agreement gave the trial court carte blanche to rewrite all the geographical terms of
the covenant. Id. at___, 762, S.E.2d at 321. Nevertheless, relying on paragraph six
of the Agreement and reasoning that the parties to the contract and the Agreement
had relatively equal bargaining power, the Court of Appeals concluded that the trial
court erred by declining to revise the Agreement pursuant to that paragraph “to make
it reasonable based on the evidence before it.” Id. at ___, 762 S.E.2d at 322. The
Court of Appeals remanded the case to the trial court to revise the territorial scope of
the Agreement. Id. at ___, 762 S.E.2d at 326. In addition, the majority also concluded
that plaintiff forecast sufficient evidence of all remaining claims to survive
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defendants’ motion for summary judgment and remanded the case for trial. Id. at
___, 762 S.E.2d at 326.
The dissenting judge agreed with the majority that the geographic scope of the
Agreement was overbroad. Id. at ___, 762 S.E.2d at 326 (Elmore, J., dissenting).
However, the dissenter argued that the blue pencil doctrine applied because the
language of paragraph six limited the trial court’s power to revise the Agreement to
those measures “permitted by law.” Id. at ___, 762 S.E.2d at 327. This limitation
meant that the trial court lacked the authority to rewrite the restrictions set out in
the Agreement that were not reasonable. Id. at ___, 762 S.E.2d at 327. Since the
Agreement contained no reasonable territorial restrictions, the dissenter would
affirm the order of the trial court granting summary judgment in defendants’ favor
as to breach of the covenant not to compete, despite the provisions in paragraph six
of the Agreement. Id. at ___, 762 S.E.2d at 327.
The dissenting judge also argued that plaintiff presented insufficient evidence
of implied contracts with third-party customers, id. at ___, 762 S.E.2d at 328, or that,
but for defendants’ actions, contracts with third-party customers would have been
formed, id. at ___, 762 S.E.2d at 328-29. Concluding that there were no genuine
issues of material fact as to plaintiff’s remaining claims for relief, the dissenter would
have affirmed the trial court’s order granting summary judgment in favor of
defendants on all of plaintiff’s remaining claims. Id. at ___, 762 S.E.2d at 329.
Defendants appeal as a matter of right.
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We review an opinion of the Court of Appeals for errors of law. N.C. R. App. P.
16(a); State v. Brooks, 337 N.C. 132, 149, 446 S.E.2d 579, 590 (1994). When an appeal
is based on a dissent, our review is limited to “consideration of those issues that
are . . . specifically set out in the dissenting opinion.” N.C. R. App. P. 16(b). Here, we
review the trial court’s grant of defendants’ motion for summary judgment. To
prevail on a motion for summary judgment, the moving party must show that, viewed
in the light most favorable to the nonmovant, Dalton v. Camp, 353 N.C. 647, 651, 548
S.E.2d 704, 707 (2001) (citation omitted), no genuine issue exists “as to any material
fact and that any party is entitled to a judgment as a matter of law.” N.C. R. Civ. P.
56(c).
Contending that the Court of Appeals erred when it remanded this matter to
the trial court to revise the geographical terms of the Agreement, defendants first
argue that the Agreement is too broad in territorial scope to be enforceable and that
neither paragraph six of the Agreement nor the blue pencil doctrine empowers the
trial court to amend that aspect of the Agreement. We begin by considering the
territorial limits set out in the Agreement.
This Court will enforce a covenant not to compete made in connection with the
sale of a business “(1) if it is reasonably necessary to protect the legitimate interest
of the purchaser; (2) if it is reasonable with respect to both time and territory; and (3)
if it does not interfere with the interest of the public.” Jewel Box Stores Corp. v.
Morrow, 272 N.C. 659, 662-63, 158 S.E.2d 840, 843 (1968) (citations omitted).
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Ordinarily, a covenant’s geographic scope will be found reasonable if it encompasses
the area served by the business that the covenant protects, Thompson v. Turner, 245
N.C. 478, 481-82, 96 S.E.2d 263, 266 (1957), or, more specifically, if the protected
business had clientele in the area covered by the covenant, Noe v. McDevitt, 228 N.C.
242, 245, 45 S.E.2d 121, 123 (1947) (citations omitted) (finding the territorial
limitation of North and South Carolina unreasonable when the business’s services
were confined to eastern North Carolina); Manpower of Guilford Cty., Inc. v.
Hedgecock, 42 N.C. App. 515, 523, 257 S.E.2d 109, 115 (1979) (“A restriction as to
territory is reasonable only to the extent it protects the legitimate interests of the
employer in maintaining his customers.”).
Here, the Agreement prohibits defendants from engaging in a competing
business venture “in the states of North Carolina or South Carolina.” The record
indicates that, at the time the Agreement was executed, Imperial’s North Carolina
market did not extend east of Stanly County, while Elegant’s North Carolina market
did not extend east of Wake County. Neither company had a market west of
Morganton, North Carolina, or in the Sandhills. In South Carolina at that time,
neither Imperial nor Elegant operated east of the City of Rock Hill or south of the
City of Spartanburg. A glance at a map reveals that neither Imperial nor Elegant
had a presence in sizeable portions of either state. A primary purpose of the type of
covenant not to compete found in the Agreement is to provide some protection to the
seller for a defined time or space, or both, see, e.g., A.E.P. Indus., Inc. v. McClure, 308
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N.C. 393, 408, 302 S.E.2d 754, 763 (1983) (addressing covenants not to compete in
employment contexts), but when the Agreement was executed, Imperial and Elegant
had no customers to protect in large swaths of the area covered by the Agreement.
As a result, we agree with the Court of Appeals that this geographical restriction is
unreasonably broad.
We next consider whether the Agreement may be rewritten, blue-penciled, or
revised. As to the first alternative, when an agreement not to compete is found to be
unreasonable, we have held that the court is powerless unilaterally to amend the
terms of the contract. 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.”). If the parties have agreed upon territorial limits of
competition, these limits will be enforced “as written or not at all,” for courts will not
carve out reasonable subdivisions of an otherwise overbroad territory. Welcome
Wagon, 255 N.C at 251, 120 S.E.2d at 744 (Bobbitt, J., dissenting) (citing Noe, 228
N.C. at 245, 45 S.E.2d at 123).
Plaintiff argues that the blue pencil doctrine should save the Agreement. As
discussed above, blue-penciling is the process by which “a court of equity will take
notice of the divisions the parties themselves have made [in a covenant not to
compete], and enforce the restrictions in the territorial divisions deemed reasonable
and refuse to enforce them in the divisions deemed unreasonable.” Welcome Wagon,
255 N.C. at 248, 120 S.E.2d at 742 (majority opinion). That doctrine is unavailable
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here. The Agreement’s territorial limits cannot be blue-penciled unless the
Agreement can be interpreted so that it sets out both reasonable and unreasonable
restricted territories. Id. at 248, 120 S.E.2d at 742. We found above that the
restrictions to all of North Carolina and South Carolina, the only territorial
restrictions in the Agreement, are unreasonable. Striking the unreasonable portions
leaves no territory left within which to enforce the covenant not to compete. As a
result, blue-penciling cannot save the Agreement.
Finally, plaintiff argues that the parties gave the trial court the power under
paragraph six of the Agreement to revise its territorial limits to make them
reasonable. However, parties cannot contract to give a court power that it does not
have. Id. at 248, 120 S.E.2d at 742 (“The court is without power to vary or reform the
contract by reducing either the territory or the time covered by the restrictions.”); see
also Penn v. Standard Life Ins. Co., 160 N.C. 399, 402, 76 S.E. 262, 263 (1912)
(“Courts are not at liberty to rewrite contracts for the parties. We are not their
guardians, but the interpreters of their words. We must, therefore, determine what
they meant by what they have said—what their contract is, and not what it should
have been.”). Allowing litigants to assign to the court their drafting duties as parties
to a contract would put the court in the role of scrivener, making judges postulate
new terms that the court hopes the parties would have agreed to be reasonable at the
time the covenant was executed or would find reasonable after the court rewrote the
limitation. We see nothing but mischief in allowing such a procedure. Accordingly,
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the parties’ Agreement is unenforceable at law and cannot be saved.
We now consider plaintiff’s remaining claims. Plaintiff contends that the trial
court erred in granting defendants’ motion for summary judgment on its claims of
tortious interference with contract and tortious interference with prospective
economic advantage. The elements of a claim for tortious interference with contract
are:
(1) a valid contract between the plaintiff and a third person
which confers upon the plaintiff a contractual right against
a third person; (2) the defendant knows of the contract; (3)
the defendant intentionally induces the third person not to
perform the contract; (4) and in doing so acts without
justification; (5) resulting in actual damage to plaintiff.
United Labs., Inc. v. Kuykendall, 322 N.C. 643, 661, 370 S.E.2d 375, 387 (1988) (citing
Childress v. Abeles, 240 N.C. 667, 84 S.E.2d 176 (1954)). Interference with a contract
is “justified if it is motivated by a legitimate business purpose, as when the plaintiff
and the defendant, an outsider, are competitors.” Embree Constr. Grp., Inc. v. Rafcor,
Inc., 330 N.C. 487, 498, 411 S.E.2d 916, 924 (1992) (citing Peoples Sec. Life Ins. Co. v.
Hooks, 322 N.C. 216, 221-22, 367 S.E.2d 647, 650 (1988)).
Thus, plaintiff must first establish the existence of a valid contract between
plaintiff and its customers. Evidence in the record indicates that the industry custom
is for owners of beverage-dispensing equipment to engage companies providing
repairs to the equipment on an as-needed basis only, not via contract, and plaintiff
concedes that the Court of Appeals correctly found that no express contracts existed.
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Nevertheless, plaintiff argues that defendants interfered with implied-in-fact
contracts. To establish the existence of these implied contracts, plaintiff alleged in
its complaint that when it purchased Elegant and Imperial, the “contracts and
customers” of those companies “transferred to” plaintiff. In addition, plaintiff points
out that Gandino stated in an affidavit that plaintiff purchased “the business,
goodwill and equipment of Imperial and Elegant, specifically including, any and all
customers and customer lists,” giving plaintiff “the exclusive right to continue the on-
going business relationships that Imperial and Elegant had fostered with their
customers.” However, even considered in the light most favorable to plaintiff, this
evidence fails sufficiently to establish the evidence of implied-in-fact contracts. In
fact, the evidence does not establish any legal obligation of a third-party customer to
Elegant or Imperial that would have been transferred to Beverage Systems through
the Agreement. At most, this evidence indicates only a general business relationship.
Moreover, because defendants were not restrained by the covenant not to compete,
they were free to engage in routine business competition with Beverage Systems.
Accordingly, we conclude that the trial court properly allowed summary judgment as
to this issue.
Plaintiff argues that the trial court also erred when it allowed defendants’
motion for summary judgment on its claim for tortious interference with prospective
economic advantage. This tort arises when a party interferes with a business
relationship “by maliciously inducing a person not to enter into a contract with a third
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person, which he would have entered into but for the interference, . . . if damage
proximately ensues, when this interference is done not in the legitimate exercise of
the interfering person’s rights.” Spartan Equip. Co. v. Air Placement Equip. Co., 263
N.C. 549, 559, 140 S.E.2d 3, 11 (1965) (citations omitted). However, a plaintiff’s mere
expectation of a continuing business relationship is insufficient to establish such a
claim. Dalton, 353 N.C. at 655, 548 S.E.2d at 710. Instead, a plaintiff must produce
evidence that a contract would have resulted but for a defendant’s malicious
intervention. Id. at 655, 548 S.E.2d at 710.
Plaintiff alleged that defendants “sought after the customers of Beverage
System[s] which were previously transferred to Beverage Systems” and “purposely
and intentionally interfered with the contracts and agreements of Beverage Systems
with the intent to steal the customers away from Beverage Systems.” Plaintiff
contends that it “had an expectation to receive an economic advantage as a result of
its business relationship with the Customers.” However, plaintiff has not
demonstrated that any contract would have ensued but for defendants’ conduct, nor
has plaintiff identified a particular business with which it lost an economic
advantage. Instead, plaintiff appears to rely on the expectation that Elegant’s and
Imperial’s former customers would continue to do business with plaintiff, an
expectation insufficient to support a claim for either tortious interference with
contract or tortious interference with prospective economic advantage. Id. at 655,
548 S.E.2d at 710. Moreover, because the geographical limitations set out in the
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Agreement were unenforceable, its temporal limitations were applicable either
everywhere, plainly an absurd result here, or nowhere. As a result, defendants were
free to compete for customers with plaintiff. In the absence of evidence that
defendants’ conduct was maliciously motivated, any interference by defendants was
a legitimate exercise of their right to compete. Therefore, summary judgment was
also appropriate as to this claim.
Finally, plaintiff argues that defendants’ actions rise to the level of unfair and
deceptive practices under N.C.G.S. § 75-1.1, and that their conduct should be enjoined
based upon breach of the Agreement. Plaintiff’s section 75-1.1 claim presupposes
success of at least one of plaintiff’s contract claims. Because we hold that each of
those claims fails, plaintiff’s unfair and deceptive practices claim also fails. Similarly,
plaintiff’s request for injunctive relief hinges on the validity of the Agreement.
Because we have established that the Agreement is unenforceable, there is no basis
on which to enjoin defendant Loudine’s conduct.
The trial court correctly allowed defendants’ motion for summary judgment as
to all claims. Accordingly, we reverse the decision of the Court of Appeals.
REVERSED.
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