N. Star Mgmt. v. Sedlacek , 235 N.C. App. 588 ( 2014 )

NO. COA13-1427
NORTH CAROLINA COURT OF APPEALS
Filed: 19 August 2014
NORTHERN STAR MANAGEMENT OF
AMERICA, LLC,
Plaintiff,
v. Guilford County
No. 13 CVS 7584
MARK SEDLACEK,
Defendant.
Appeal by Defendant from order entered 4 September 2013 by
Judge David L. Hall in Guilford County Superior Court. Heard in
the Court of Appeals 24 April 2014.
Nelson Levine de Luca & Hamilton, by David G. Harris II,
David L. Brown, and John I. Malone, Jr., for Plaintiff.
Carruthers & Roth, P.A., by Mark K. York and J. Patrick
Haywood, for Defendant.
DILLON, Judge.
Mark Sedlacek appeals from the trial court’s order
enjoining him from violating non-compete provisions contained in
an agreement he entered into with his former employer, Northern
Star Management of America, LLC (“Northern Star”). For the
following reasons, we vacate and remand for further proceedings
consistent with this opinion.
I. Factual & Procedural Background
-2-
Northern Star is a company which specializes in the design,
development and administration of insurance products. Its
principal place of business is located in North Carolina, though
its parent company, Northern Star Management, Inc., is based in
New Jersey. Mr. Sedlacek, a North Carolina resident, has worked
in the insurance industry since 1982 and specializes in
“creating and managing insurance products for and on behalf of
commercial carriers related to collateral recovery
(repossession), automobile transporters, and towing.”
In early 2010, Mr. Sedlacek was an officer and part-owner
of AEON Insurance Group, Inc., when AEON was purchased by
Northern Star. Mr. Sedlacek thereafter worked for Northern
Star, on and off, until June 2013. During this time, Mr.
Sedlacek and Northern Star entered into three agreements, each
of which contained non-compete and confidentiality provisions
(hereinafter referred to generally as the “covenants”), whereby
Mr. Sedlacek agreed to refrain from engaging in certain
activities in the insurance business within certain territories
for a specified period of time.
The parties entered into the first two agreements
(collectively, the “2010 Agreements”) around the time of
Northern Star’s purchase of AEON, and each included a provision
-3-
designating New Jersey law as governing the agreements. Mr.
Sedlacek signed the first agreement (the “Asset Purchase
Agreement”) as an owner of AEON, agreeing to sell AEON’s assets
and liabilities to Northern Star and to refrain from using
Northern Star’s confidential information and from engaging in
certain activities in the insurance business with Northern Star
“worldwide.” In the second agreement (the “Consulting
Agreement”), Mr. Sedlacek agreed to work as a consultant for
Northern Star and further agreed not to engage in certain
activities in the insurance business and not to use Northern
Star’s confidential information outside his relationship with
Northern Star for a certain period in the United States and its
territories.
The parties entered into the third agreement (the
“Severance Agreement”) in February 2013, when Mr. Sedlacek
temporarily separated from Northern Star. Pursuant to this
agreement, Mr. Sedlacek accepted a severance payment and
acknowledged that his obligations under the prior agreements
would continue in accordance with their terms. The Severance
Agreement contained a provision designating North Carolina law
as governing that agreement. Mr. Sedlacek was rehired by
Northern Star the day after the parties executed the Severance
-4-
Agreement and continued his employment with Northern Star for
approximately four additional months before resigning on 23 June
2013.
Northern Star commenced the present action in August 2013,
within two months of Mr. Sedlacek’s resignation, alleging that
Mr. Sedlacek had engaged in competitive activities in violation
of the covenants contained in the 2010 Agreements. Northern
Star requested an injunction proscribing Mr. Sedlacek from
further violation of the covenants.
At the preliminary injunction hearing, Northern Star
introduced evidence that Mr. Sedlacek had violated the
covenants. Mr. Sedlacek asserted that the covenants imposed
overly broad restrictions, rendering them unenforceable under
North Carolina law. Northern Star countered that New Jersey law
governed and that, accordingly, even if the covenants were
overly broad as written, the court possessed the authority to
modify the covenants to bring them into compliance with New
Jersey law.
By order entered 4 September 2013, the trial court
concluded that New Jersey law applied with respect to its
interpretation of the covenants; granted Northern Star’s request
for a preliminary injunction; and directed that Mr. Sedlacek
-5-
refrain from further violation of the covenants contained in the
2010 Consulting Agreement. The trial court also indicated in
its order that Northern Star had presented sufficient evidence
to establish that it would likely prevail on the merits of its
claims against Mr. Sedlacek and, moreover, that Northern Star
would likely sustain irreparable loss absent the injunction.
From this order, Mr. Sedlacek appeals.
II. Jurisdiction
The trial court’s preliminary injunction order is
interlocutory in nature, in that it “does not dispose of the
case, but leaves it for further action by the trial court in
order to settle and determine the entire controversy.” Veazey
v. City of Durham, 231 N.C. 357, 361-62, 57 S.E.2d 377, 381
(1950). This Court has jurisdiction over an interlocutory
appeal where the order “‘affects some substantial right claimed
by [the] appellant and will work injury to him if not corrected
before an appeal from the final judgment.’” Stanford v. Paris,
364 N.C. 306, 311, 698 S.E.2d 37, 40 (2010) (citation omitted).
We have stated that “[i]n cases involving an alleged breach of a
non-competition agreement[,] North Carolina appellate courts
have routinely reviewed interlocutory court orders both granting
and denying preliminary injunctions . . . .” QSP, Inc. v. Hair,
-6-
152 N.C. App. 174, 175, 566 S.E.2d 851, 852 (2002); see also
Copypro, Inc. v. Musgrove, __ N.C. App. __, __, 754 S.E.2d 188,
191 (2014) (“[W]hen the entry of an order granting a request for
the issuance of a preliminary injunction has the effect of
destroying a party’s livelihood, the order in question affects a
substantial right and is, for that reason, subject to immediate
appellate review.”). We accordingly proceed to address the
merits of Mr. Sedlacek’s appeal.
III. Standard of Review
In order to obtain a preliminary injunction, the movant
must demonstrate (1) that it will likely succeed on the merits
of its case; and (2) that it will likely sustain irreparable
harm absent the injunction. Ridge Cmty. Investors, Inc. v.
Berry, 293 N.C. 688, 701, 239 S.E.2d 566, 574 (1977). Mr.
Sedlacek does not challenge any of the trial court’s factual
findings; rather, he takes issue with the trial court’s legal
conclusions, which this Court reviews de novo on appeal.
Copypro, Inc., __ N.C. App. at __, 754 S.E.2d at 191 (stating
that where “the ultimate question for our consideration is
whether the trial court correctly applied the applicable law to
the undisputed record evidence, [we] utilize a de novo standard
of review”).
-7-
IV. Analysis
Mr. Sedlacek raises three primary contentions on appeal:
(1) the trial court erred in applying New Jersey law instead of
North Carolina law; (2) the trial court erred in concluding that
the covenants contained in the Asset Purchase Agreement apply;
and (3) the trial court erred in concluding that the terms of
the covenants were valid and enforceable as written. Upon
careful review of the record and the parties’ arguments, we
conclude that the trial court did not err in applying New Jersey
law and in determining that the Asset Purchase Agreement was
applicable. We further conclude, however, that in applying New
Jersey law the trial court should have determined whether the
scope of the covenants was overly broad and, if so, should have
appropriately narrowed the restrictions and tailored the
preliminary injunction accordingly. Thus, for the reasons set
forth below, we vacate the trial court’s order and remand to the
trial court for entry of findings and conclusions concerning the
scope of the preliminary injunction consistent with this
opinion.
A. Choice of Law
Mr. Sedlacek argues that the trial court incorrectly
applied New Jersey law, in that the choice-of-law provision in
-8-
the Severance Agreement – which designates North Carolina law as
governing that agreement – effectively supersedes the choice-of-
law provisions in the Asset Purchase Agreement and the
Consulting Agreement, both of which designate New Jersey law as
governing.
“Whenever a court is called upon to interpret a contract
its primary purpose is to ascertain the intention of the parties
at the moment of its execution.” Lane v. Scarborough, 284 N.C.
407, 409-10, 200 S.E.2d 622, 624 (1973). The intent of the
parties “is to be ascertained from the expressions used, the
subject matter, the end in view, the purpose sought, and the
situation of the parties at the time.” Gould Morris Elec. Co.
v. Atl. Fire Ins. Co., 229 N.C. 518, 520, 50 S.E.2d 295, 297
(1948). Where “a contract is ‘in writing and free from any
ambiguity which would require resort to extrinsic evidence, or
the consideration of disputed fact,’ the intention of the
parties is a question of law[.]” Vue-Charlotte, LLC v. Sherman,
__ N.C. App. __, __, 719 S.E.2d 161, 163 (2011) (citation
omitted).
Mr. Sedlacek relies on paragraph 16 of the Severance
Agreement which provides as follows:
16. Governing Law. This Agreement and any
amendments hereof shall be governed and
-9-
interpreted in accordance with the laws
(both substantive and procedural) of the
State of North Carolina and without regard
to any conflict of laws provisions. Each of
the parties to this Agreement irrevocably
consents to the exclusive jurisdiction and
venue of any state or federal court of the
State of North Carolina permitted by law to
have jurisdiction over any and all actions
between or among any of the parties, whether
arising hereunder or otherwise, except as
otherwise directed by such court. . . .
Mr. Sedlacek asserts in his brief that this provision “clearly
states that North Carolina law will apply substantively and
procedurally to any and all actions between the parties, whether
arising under the Severance Agreement or otherwise.” We
disagree.
We interpret paragraph 16 as indicative of the parties’
intent that “This Agreement,” i.e., the Severance Agreement, “be
governed and interpreted in accordance with” North Carolina law.
Further, the language “any and all actions between or among any
of the parties, whether arising hereunder or otherwise” – to
which Defendant directs this Court’s attention – does not
support Defendant’s position that North Carolina law will govern
any action between or among the parties. Rather, this provision
reveals only that the parties intended North Carolina courts to
have “exclusive jurisdiction and venue” over any such action.
In other words, this provision evidences the parties’ intent
-10-
that any action between or among them be heard in North
Carolina, not that any such action be governed by North Carolina
law.
This interpretation is reinforced when construing paragraph
16 in conjunction with paragraph 8, which provides as follows:
8. Non-disparagement, Non-Solicitation, Non-
Competition, and Confidentiality. In
connection [with Mr. Sedlacek’s]
termination, [Defendant] . . . understands
and acknowledges that all of his duties as a
consultant of [Northern Star] ceased on the
Separation Date, except that all
obligations, including all non-disclosure,
non-solicitation and non-competition
obligations, that [Mr. Sedlacek] owes to
[Northern Star], under law or any agreement
[Mr. Sedlacek] has with [Northern Star],
will continue after the Separation Date
pursuant to the terms of those laws and/or
agreements.
We believe the language in paragraph 8 reflects the parties’
intent that Mr. Sedlacek remain bound by all previously assumed
“non-competition obligations,” including, but not limited to,
the covenants in the 2010 Agreements. We note that neither this
provision nor any other provision in the Severance Agreement
seeks to redefine Mr. Sedlacek’s “non-competition obligations”;
rather, as paragraph 8 states, such obligations “will continue .
. . pursuant to the terms of those . . . agreements.” (Emphasis
added). Both 2010 Agreements specify that Mr. Sedlacek’s “non-
-11-
competition obligations” are to be defined with reference to New
Jersey law, which includes the approach employed by New Jersey
courts of permitting the trial court to rewrite an otherwise
unreasonably restrictive covenant. Thus, to accept Mr.
Sedlacek’s position that the Severance Agreement superseded the
prior agreements would also require this Court to accept the
unlikely proposition that Northern Star intended to remove the
non-compete covenants from the purview of New Jersey’s flexible
approach in favor of North Carolina’s more restrictive approach,
which does not permit the trial court to rewrite an overly broad
restrictive covenant. See, e.g., 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.”). Thus, respecting the intent of the
parties as manifested in the terms of their agreements, we hold
that the trial court correctly concluded that New Jersey law
governed its determination concerning the enforceability of the
parties’ non-compete covenants.
B. Covenants in Asset Purchase Agreement
Mr. Sedlacek argues that the trial court erred in
concluding that the covenants included in the 2010 Asset
Purchase Agreement applied because they were superseded by the
-12-
covenants set forth in the 2010 Consulting Agreement. We do not
believe that this issue is properly before us, since the trial
court only enjoined Mr. Sedlacek from continued violations of
the covenants contained in the Consulting Agreement.
Specifically, the trial court enjoined Mr. Sedlacek in three
ways, ordering that he “refrain from (i) soliciting, servicing,
selling, designing, developing, producing, forming, purchasing,
administering, or procuring for third-parties Local,
Intermediate and Long Haul Commercial Auto, Garage, Towing,
Collateral Recovery (Repossession), Auto Dismantlers and
Automobile Transporters insurance products . . . within the
Restricted Area as defined by the 2010 Consulting Agreement;
(ii) furnishing, divulging and/or making accessible to others
Confidential Information as defined in the 2010 Consulting
Agreement; and (iii) continuing to be a member of a partnership
or a stockholder, investor, officer, director, employee, agent,
associate or consultant or persons and entities engaging in the
foregoing activities [described in the Consulting Agreement].”
Accordingly, this argument is dismissed.
C. Enforceability of Non-Compete Covenants
Finally, Mr. Sedlacek argues that the covenants are not
enforceable, even under New Jersey law. Under New Jersey law, a
-13-
covenant not to compete is enforceable to the extent that it is
“reasonable under the circumstances.” Solari Indus., Inc. v.
Malady, 55 N.J. 571, 585, 264 A.2d 53, 61 (1970). To be deemed
reasonable under the circumstances, a non-compete covenant (1)
must be reasonably necessary to protect the employer’s
legitimate interests; (2) must not cause undue hardship on the
former employee; and (3) must not be contrary to the public
interest. Id. New Jersey courts have stated that an “employer
has no legitimate interest in preventing competition as such,”
Whitmyer Bros., Inc. v. Doyle, 58 N.J. 25, 33, 274 A.2d 577(1971), and, therefore, will not enforce “a restrictive
agreement merely to aid the employer in extinguishing
competition . . . from a former employee.” Campbell Soup, 58
F.Supp.2d at 489. However, New Jersey courts will enforce a
non-compete provision where doing so is necessary to protect
legitimate interests of the employer, for instance, the
“employer’s interest in protecting trade secrets, confidential
information, and customer relations.” Ingersoll–Rand Co. v.
Ciavatta, 110 N.J. 609, 628, 542 A.2d 879 (1988). Further, the
New Jersey Supreme Court has recognized that “employers may have
legitimate interests in protecting information that is not a
trade secret or proprietary information, but highly specialized,
-14-
current information not generally known in the industry, created
and stimulated by the research environment furnished by the
employer, to which the employee has been exposed and enriched
solely due to his employment.” Id. at 638, 542 A.2d 879(internal quotation marks omitted).
Here, Mr. Sedlacek argues that the trial court’s order
enforces a non-compete covenant that is overly broad as a matter
of law. Northern Star counters that the non-compete covenant is
not overly broad and that, in any event, Mr. Sedlacek’s
contentions to the contrary are “premature because the Trial
Court has not ruled that any of the restrictive covenants at
issue are to be enforced in their entirety.”
We do not believe that Mr. Sedlacek’s challenges with
respect to the enforceability of the non-compete covenant set
forth in the Consulting Agreement are premature. See, e.g.,
Coskey’s T.V. & Radio Sales v. Foti, 253 N.J. Super. 626, 602
A.2d 789 (App. Div. 1992) (further limiting the scope of a non-
compete covenant – after trial court had trimmed the covenant’s
scope – upon review of the trial court’s preliminary injunction
order). Accordingly, we address each portion of trial court’s
injunction order.
First, the trial court enjoined Mr. Sedlacek from engaging
-15-
in certain insurance-related business activities within the
areas described in the Consulting Agreement, namely, the fifty
states, the District of Columbia and Puerto Rico. While the
uncontested findings support the restrictions on the activities
described, they do not support the geographic scope of those
restrictions. Specifically, the trial court made no findings
with respect to the geographic regions where Northern Star
competes for business. Accordingly, we vacate and remand this
portion of the injunction order for entry of findings with
respect to the reasonableness of the geographic scope of the
covenants as set forth in the Consulting Agreement, and to
tailor the geographic scope of the restrictions to that area
that is reasonable under the circumstances as supported by the
court’s findings.1
Second, the trial court’s order enjoins Mr. Sedlacek from
1
We note that the covenants at issue contain a provision
assigning a duration of ten years to the restrictions set forth
therein. If North Carolina law were applicable, it would be
appropriate to consider the reasonableness of this ten-year
duration at the preliminary injunction stage of these
proceedings. That is, if the ten-year duration were determined
to be unreasonable, then, applying North Carolina law, the
covenants would be unenforceable and a preliminary injunction
would be inappropriate. Here, however, New Jersey law applies,
and the preliminary injunction enforces the covenant only until
the propriety of a permanent injunction is presented for
consideration by the trial court. It will be necessary at that
time for the trial court to inquire into the reasonableness of
the ten-year duration of the covenants.
-16-
divulging confidential information of Northern Star. However,
Mr. Sedlacek does not make any argument challenging this portion
of the injunction as unreasonable, and we accordingly do not
address this portion of the order.
Third, the trial court’s order enjoins Mr. Sedlacek from
participating in essentially any capacity in any entity engaged
in the activities described in the first portion of the
injunction, supra. This portion of the order appears overly
broad, in that, for instance, it prohibits Mr. Sedlacek from
owning stock as a passive investor in a publicly traded company
that engages in any of the insurance businesses described in the
Consulting Agreement. We therefore vacate and remand this
portion of the injunction order for entry of findings and
conclusions with respect to the reasonableness of the scope of
these restrictions.
V. Conclusion
In light of the foregoing, we vacate the trial court’s
preliminary injunction order and remand for further proceedings
consistent with this opinion.
VACATED AND REMANDED.
Judge STROUD and Judge HUNTER, JR. concur.