employment agreement

North Carolina Business Court Weighs in on Enforceability of Non-Compete and Confidentiality Agreements Post-Merger

           It is well-settled law that adequate consideration is required to create binding restrictive covenants such as non-compete agreements.  Generally, such agreements are entered at the start of an employment relationship, and the new employment itself constitutes consideration.  In North Carolina, continued employment following a merger of two companies does not satisfy the consideration requirement.  In a recent decision, the North Carolina Business Court (“NCBC”) confronted the very issue.[1]

 

          In January 2012, AmeriGas Propane, Inc., a propane company that services over two million residential and commercial customers nationwide, merged with Shaw L.P. Gas. Ermon Coffey, an employee of Shaw, and later AmeriGas, who delivered propane, signed a Post-Employment Agreement with AmeriGas following the merger.  Shaw’s former employees were not required to sign the Post-Employment Agreement, but those who did became eligible for wage increases and bonuses.  Coffey did not receive a bonus, increased benefits, or further training until nine months after signing the Post-Employment Agreement.

 

           Coffey’s Post-Employment Agreement contained a non-compete provision, a non-solicitation provision, and a non-disclosure provision. The non-compete provision provided that Coffey “will not directly or indirectly sell or provide propane or any other goods or services sold or provided by AmeriGas as of the date of the termination of [his] employment to any AmeriGas customer….”  The non-solicitation provision prohibited Coffey from “directly or indirectly solicit[ing] the business of any AmeriGas customer” for two years after the termination of his employment.  The non-disclosure provision required Coffey to “protect the [c]onfidential [i]nformation of AmeriGas … [and] not, during or after [his] employment, divulge such [c]onfidential [i]nformation or use it for the benefit of any person or entity not associated with AmeriGas.”

 

        While employed at AmeriGas, Coffey had access to customer information, including the names, addresses, usage history, credit information, and prices charged for every customer.  This information was stored in a password-protected database accessible to Coffey and a printout was also kept at the office.  AmeriGas terminated Coffey’s employment in May 2013, and Coffey subsequently secured employment with Marsh L.P. Gas, Inc. as a sales associate and delivery driver.  Following Coffey’s termination, the customer printout list was discovered missing from the AmeriGas office.  Between May 2013 and January 2015, Marsh obtained 288 new customers in North Carolina and about two-thirds of those customers were former customers of AmeriGas.  AmeriGas initiated a lawsuit against Coffey, alleging, inter alia, that Coffey used confidential information acquired during the course of his employment with AmeriGas, and from purportedly stealing the customer list printout, to solicit their customers for Marsh in contravention of the Post-Employment Agreement.

 

         The North Carolina Business Court began its analysis by scrutinizing whether the non-compete and non-solicitation provisions were supported by sufficient consideration to be enforceable.  Coffey’s job title and duties as a delivery representative remained substantially the same following the merger, thus additional consideration beyond his continued employment was necessary to bind him to the restrictive covenants.  AmeriGas argued Coffey’s eligibility for bonuses and wage increases, which was contingent on his signing the Post-Employment Agreement, constituted adequate consideration.  The NCBC disagreed.

 

       North Carolina law recognizes that “a raise, bonus, or other change in compensation; a promotion; additional training; … or some other increase in responsibility or number of hours worked” constitutes new or separate consideration adequate to uphold a restrictive covenant if an employment relationship already existed.[1]  However, mere eligibility for discretionary raises does not constitute consideration.  At the time Coffey signed the Post-Employment Agreement, AmeriGas was under no obligation to increase his wages or pay him a bonus.  In fact, Coffey did not receive increased wages until nine months after signing the Post-Employment Agreement.  Accordingly, the NCBC concluded the non-compete and non-solicitation provisions in the Post-Employment Agreement were unenforceable for lack of consideration.

 

          The Court then examined the enforceability of the non-disclosure provision by assessing whether the non-disclosure agreement constituted a restraint on trade.  A North Carolina federal district court recently held that when a non-disclosure agreement “does not restrain trade, but rather seeks to prevent disclosure or use of confidential information … new and additional consideration is not required.”[2] Although phrased as an agreement not to disclose or use confidential information, the NCBC determined that AmeriGas’s purpose in prohibiting Coffey’s disclosure of customer identities was similar if not identical to the purpose of the unenforceable non-solicitation agreement: to protect AmeriGas’s customers from solicitation by Coffey or his new employer.  These restrictions constitute a restraint on trade.  As such, the non-disclosure provision was subject to the same scrutiny as the non-solicitation agreement.  Since the non-disclosure provision was incorporated in the same Post-Employment Agreement, it similarly lacked sufficient consideration, rendering it unenforceable.

 

            This decision serves as a reminder to companies that there must be additional consideration to support any restrictive covenants with employees, even if those employees recently joined a company through a merger.  Since restrictive covenants are generally disfavored in North Carolina, courts strictly scrutinize their fairness when assessing enforceability.  Perhaps most importantly, if a non-disclosure agreement operates in such a fashion to restrain one’s ability to engage in trade or commerce, additional consideration is needed before it can bind the restricted party lest that provision be similarly ruled unenforceable.

 

 

[1] Hejl v. Hood, Hargett & Assocs., 196 N.C. App. 299, 304, 674 S.E. 2d 425, 428-29 (2009).

[2] Sirona Dental, Inc. v. Smithson, No. 3:14-cv-714-RJC-DSC, 2015 U.S. Dist. LEXIS 6080 (W.D.N.C. Jan. 20, 2015).

 

[1] AmeriGas Propane, L.P. and AmeriGas Propane, Inc. v. Ermon Clark Coffey and Marsh L.P. Gas, Inc., No. 14-CVS-376, 2015 NCBC 93 (October 15, 2015).

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