Harwell Enterprises, Inc. v. Heim

173 S.E.2d 316 (1970) 276 N.C. 475

HARWELL ENTERPRISES, INC.
v.
Gary L. HEIM, Individually, and Gary L. Heim, and Dwight Ballard, Trading as Metro Screen Engraving Company.

No. 11.

Supreme Court of North Carolina.

April 15, 1970.

Whitener & Mitchem by Basil L. Whitener and Anne M. Lamm, Gastonia, for plaintiff appellant.

Horace M. DuBose, III, Gastonia, for defendant appellee Heim.

Hollowell, Stott & Hollowell by Grady B. Scott, Gastonia, for defendant appellee Ballard.

MOORE, Justice.

In passing upon the demurrer this Court must accept as true the facts alleged. Hence, for the present hearing these facts are deemed established: (1) Plaintiff is engaged in various business endeavors including all phases of silk screen processing, plastics, importing and various other ventures throughout the United States; (2) the parties entered into a written contract which provided, inter alia, that Heim would not engage in any business competitive with the plaintiff in the United States for a period of two years after termination of his employment with the plaintiff; (3) Heim voluntarily left the employment of plaintiff on 11 February 1968; (4) in violation of the terms of the agreement Heim entered into the silk screen processing business with Ballard, also a former employee of the plaintiff; (5) Heim acquired valuable trade and technical processes, customer lists, price information, and research and development data while employed by plaintiff; (6) Ballard knew of the contract between Heim and the plaintiff and conspired with Heim to violate it; and (7) defendants are presently engaged in the silk screen processing business, are actually soliciting business from plaintiff's customers, and are now supplying named concerns in North and South Carolina which were customers of plaintiff during Heim's employment.

Under the facts as alleged, Heim's conduct violated the terms of the restrictive covenant. The question for decision is whether the restrictive covenant is valid and enforceable. The defendants say its territorial scope (United States) is too large, and the business sought to be protected (any competitive business) is too broad; hence, it is void and unenforceable. We hold otherwise. The general rule for the interpretation of such covenant is well stated by Stacy, C. J., in Beam v. Rutledge, 217 N.C. 670, 9 S.E.2d 476:

"The test to be applied in determining the reasonableness of a restrictive covenant is to consider whether the restraint affords only a fair protection to the interest of the party in whose favor it is given, and is not so broad as to interfere with the rights of the public. [Citing authority.] The question is one of reasonableness—reasonableness in reference to the interests of the parties concerned and reasonableness in reference to the interests of the public. [Citing authority.] Such a covenant is not unlawful if the restriction is no more than necessary to afford fair protection to the covenantee and is not injurious to the interests of the public."

Such covenants will be enforced if they are no broader than reasonably necessary for the protection of the employer's business and do not impose undue hardship on the employee, due regard being given the interests of the public. Asheville Associates v. Miller and Asheville Associates v. Berman, 255 N.C. 400, 121 S.E.2d 593. If the covenant in this case is enforceable as to Heim, and Ballard knowingly entered into a conspiracy with Heim to violate it, he would be jointly liable with Heim for the breach. Sineath v. Katzis, 218 N.C. 740, 12 S.E.2d 671.

Defendants rely upon Comfort Spring Corp. v. Burroughs, 217 N.C. 658, 9 S.E.2d 473, to support their contention that the covenant in the present contract including "all the United States" is void in North Carolina because the territory covered is unreasonable. In that case the restrictive clause which was held void referred to a particular company, the Spring Products Corporation of New York City, or its successor, and provided:

"* * * [I]t is understood and agreed that for the period of five years immediately following the termination of this contract by either party for or without cause, the party of the second part shall not, directly or indirectly, enter into the employ of such corporation, or its successor, or represent same within the entire United States; and the said party of the second part agrees that for said period of five years and in the United States he will not represent or enter the employ of the said Spring Products Corporation in any manner whatsoever."

In passing upon the validity of this covenant, this Court said:

"It should first be observed that the only breach of the restrictive covenant alleged is that the defendant has accepted employment from the Spring Products Corporation and is calling upon the customers of the plaintiff. There is no allegation nor evidence as to the territory in which the defendant is calling upon the plaintiff's customers * * *. In truth, there is no allegation nor evidence as to over what territory the plaintiff's business extends. Therefore we are called upon to decide simply the question as to whether the covenant that the defendant would not accept employment as a salesman or otherwise from the Spring Products Corporation anywhere in the United States is unreasonable and oppressive, and in restraint of trade."

Comfort Spring Corp. is factually distinguishable from the instant case. In that case there was neither allegation nor evidence as to the territory over which the plaintiff's business extended or as to the territory in which the defendant was calling upon the plaintiff's customers. There were neither allegation nor evidence on which the Court could properly determine whether the restrictive covenant in question was reasonably necessary for the protection of the plaintiff's business. In the absence of such allegations or proof, the Court properly held the restriction "within the entire United States" was unnecessary for the protection of the plaintiff. In the present case, however, the plaintiff has specifically alleged that its business activities extend throughout the United States; that the defendants are actively engaged in soliciting business from the plaintiff's customers, among them being Wix Corporation, Gastonia, North Carolina; Charleston Rubber Company, Clover, South Carolina; Uniroyal Corporation, Gastonia, North Carolina; Homelite Corporation, Gastonia, North Carolina, and others; and that they are actually supplying silk screen processing equipment and material to said customers and various other customers of the plaintiff, and are using valuable trade and technical information concerning the plaintiff's business such as lists of plaintiff's customers, prices charged for services and equipment, the method in which plaintiff's business was conducted, manufacturing processes, and research and development information acquired by defendant Heim while employed by the plaintiff. Such conduct by Heim is exactly what the restrictive covenant sought to prevent and is contrary to the rule as approved in Asheville Associates v. Miller and Asheville Associates v. Berman, supra, stated as follows:

"The general rule with respect to enforceable restrictions is stated in 9 A.L.R. 1468: ``It is clear that if the nature of the employment is such as will bring the employee in personal contact with patrons or customers of the employer, or enable him to acquire valuable information as to the nature and character of the business and the names and requirements of the patrons or customers, enabling him by engaging in a competing business in his own behalf, or for another, to take advantage of such knowledge of or acquaintance with the patrons and customers of his former employer, and thereby gain an unfair advantage, equity will interpose in behalf of the employer and restrain the breach * * * providing the covenant does not offend against the rule that as to time * * * or as to the territory it embraces it shall be no greater than is reasonably necessary to secure the protection of the business or good will of the employer.'"

Because of the increased technical and scientific knowledge used in business today, the emphasis placed upon research and development, the new products and techniques constantly being developed, the nation-wide activities (even world-wide in some instances) of many business enterprises, and the resulting competition on a very broad front, the need for such restrictive covenants to protect the interests of the employer becomes increasingly important. If during the time of employment new products are developed and new activities are undertaken, reason would require their protection as well as those in existence at the date of the contract, and to a company actually engaged in nation-wide activities, nation-wide protection would appear to be reasonable and proper. For as 5 Williston on Contracts § 1639 (Rev. ed., 1937) states:

"* * * The decisions in the United States now follow the English test, whether the promised restraint is reasonably necessary for the protection of the employer's business, or of the business transferred. The old view that any restraint of trade covering the entire state or nation is invalid has almost disappeared, at least where the restraint is limited in time. * * *"

In the present case the defendants do not contend that the time limit of two years is excessive, and the allegations of the complaint as to business activities throughout the United States support the reasonableness of the restriction imposed as to the territory covered.

Courts throughout the United States have held contracts almost identical to the one here involved to be valid and enforceable. Irvington Varnish & Insulator Co. v. Van Norde, 138 N.J.Eq. 99, 46 A.2d 201; Eastman Kodak Co. v. Powers Film Products, 189 A.D. 556, 179 N.Y.S. 325, appeal denied 190 A.D. 970, 179 N.Y.S. 919; Eagle Pencil Co. v. Jannsen, 135 Misc. 534, 238 N.Y.S. 49; O. & W. Thum Co. v. Tloczynski, 114 Mich. 149, 72 N.W. 140; Annot., 43 A.L.R. 2d 94, 275.

Upon the allegations of the complaint, which the proof may or may not sustain, the court should have overruled both demurrers and permitted the defendants to answer and proceed to trial of the case on its merits.

For the reasons stated, the decision of the Court of Appeals affirming the trial court's action in sustaining the demurrer of Heim is reversed. The decision of the Court of Appeals dismissing the appeal of Ballard is affirmed.

As to Heim, reversed; as to Ballard, affirmed.