Southeastern Outdoor Products v Lawson, (04-1545) 08/16/2005

Appeal by defendant from judgment entered 9 August 2004 by Judge Thomas D. Haigwood in Sampson County Superior Court. Heard in the Court of Appeals 8 June 2005.

Gregory T. Griffin for plaintiff-appellee.

    J. Gates Harris for defendant-appellant.



    CALABRIA, Judge.

    Henry Lawson, Jr. (“defendant”) appeals a preliminary injunction enforcing a covenant not to compete with Southeastern Outdoor Products, Inc. (“Southeastern”). We reverse.
    Southeastern is a North Carolina corporation that manufactures, sells, and installs metal carports and storage buildings. From Southeastern's incorporation on 18 September 1997 until 4 December 2002, defendant was the president of Southeastern, was one of only two corporate directors, and owned one-half of the corporation's stock. Owen Dana White (“White”) was Southeastern's other shareholder and director during this period. On 4 December2002, defendant and White approved the issuance of new stock to Thomas Edward Cook, III (“Cook”) and Thomas Calvin Gordon, Sr. (“Gordon”). Defendant, along with White, Cook, and Gordon thereafter each owned one-fourth of Southeastern's stock and Cook and Gordon became officers of the corporation.
    On the same date, each of the four men, as officers and employees of Southeastern, executed an agreement with Southeastern titled “Confidentiality and Covenant Not to Compete” (the “agreement”). Under “Section 9” (the “covenant not to compete”), the agreement provided the following:
        Covenant Not to Compete. Employee shall not during the term of this contract or for three (3) years immediately following the termination of this contract, regardless of who initiated the termination, for himself or on behalf of any other person, firm, partnership or corporation, engage in or provide any type of manufacturing of any product provided by Employer or similar to those provided by Employer within the geographical boundaries of North and South Carolina.
            Nor will he directly or indirectly for himself or on behalf of or in conjunction with any other person, firm, partnership or corporation, solicit or attempt to solicit the business or patronage of any person, firm, or corporation or partnership within such area for purposes of providing manufacturing services similar to those provided by Employer or perform such other incidental business service as Employer now engages in.

White testified that Southeastern serves customers in approximately sixty counties in the eastern two-thirds of North Carolina and approximately twenty to twenty-five counties in South Carolina.
    On 17 December 2002, defendant resigned his position with Southeastern and transferred his stock to the corporation. InFebruary 2004, defendant started working as a subcontractor for Newmart Builders, Inc. (“Newmart”) a Virginia corporation that also installs metal carports and storage buildings and competes with Southeastern in North Carolina and South Carolina. Defendant installed Newmart buildings in the ten to twelve county area surrounding Sampson County in eastern North Carolina. On 30 March 2004, legal counsel for Southeastern notified defendant of his violation of the covenant not to compete and directed defendant to cease installing Newmart buildings in North and South Carolina. Defendant continued installing Newmart buildings in eastern North Carolina. On 14 July 2004, Southeastern filed this lawsuit seeking a preliminary injunction, damages, and a permanent injunction against defendant.
    On 26 July 2004, the trial court entered a preliminary injunction against defendant and made the following pertinent findings of fact:
        25. [T]he Plaintiff's primary business is East of I-77 in the state of North Carolina from Virginia to South Carolina and each County in South Carolina that borders North Carolina from I-77 to the Atlantic Ocean.
        . . . .
        30. That the territory set out in the Covenant Not to Compete is the entire states of North Carolina and South Carolina and this territory is overly broad in that [Southeastern] does business in only 60 counties in North Carolina . . . and in that part of South Carolina north of Columbia, South Carolina.
        31. [Southeastern] has a legitimate business interest under the Covenant Not to Compete only in that part of North Carolina that lies east of I-77 and from Virginia to South Carolina that lies east of I-77 and that border North Carolina, and in its discretion,restricts this Order to only those territories.

Based on these findings, the trial court ordered a preliminary injunction against defendant encompassing “all North Carolina counties east of Interstate 77 from Virginia to South Carolina to the Atlantic Ocean . . . [and] all counties in . . . South Carolina East of Interstate I-77 to the Atlantic Ocean that border the State of North Carolina.” Defendant appeals.
    A preliminary injunction is interlocutory in nature in that it is not a final determination on the merits. A.E.P. Industries v. McClure, 308 N.C. 393, 400, 302 S.E.2d 754, 759 (1983). Therefore, the threshold issue presented by an appeal from an order granting a preliminary injunction is whether the appeal is properly before this Court. State v. School, 299 N.C. 351, 357-58, 261 S.E.2d 908, 913 (1980). A party may appeal an interlocutory order under two circumstances:
        (1) the order is final as to some claims or parties, and the trial court certifies pursuant to [N.C. Gen. Stat.] § 1A-1, Rule 54(b) [2003] that there is no just reason to delay the appeal, or (2) the order deprives the appellant of a substantial right that would be lost unless immediately reviewed.

Currin & Currin Constr., Inc. v. Lingerfelt, 158 N.C. App. 711, 713, 582 S.E.2d 321, 323 (2003). “In 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, holding that substantial rights have been affected.” QSP, Inc. v. Hair, 152 N.C. App. 174, 175, 566 S.E.2d 851, 852 (2002). In the instantcase, the preliminary injunction affects defendant's substantial right to work and earn a living in North Carolina and South Carolina. See Masterclean of North Carolina v. Guy, 82 N.C. App. 45, 47, 345 S.E.2d 692, 694 (1986) (holding a defendant would be deprived of a substantial right absent review of a preliminary injunction enforcing a covenant not to compete, “to wit: the right to work and earn a living in . . . North Carolina” and four other states.) Accordingly, defendant's appeal is properly before us.
    Defendant asserts the trial court erred by granting a preliminary injunction on the basis of a “blue penciled” covenant not to compete, which encompassed a territory smaller than the covenant. “The purpose of a preliminary injunction is ordinarily to preserve the status quo pending trial on the merits.” State v. School, 299 N.C. at 357, 261 S.E. at 913.
        A preliminary injunction is an extraordinary measure, to be issued by the court, in the exercise of its sound discretion, only when plaintiff satisfies a two-pronged test: (1) that plaintiff is able to show likelihood of success on the merits and (2) that plaintiff is likely to sustain irreparable loss unless the injunction is issued, or if, in the court's opinion issuance is necessary for the protection of a plaintiff's rights during the course of litigation.

Iredell Digestive Disease Clinic v. Petrozza, 92 N.C. App. 21, 24- 25, 373 S.E.2d 449, 451 (1988).
    “[A] covenant not to compete is valid and enforceable if it is '(1) in writing; (2) reasonable as to terms, time, and territory; (3) made a part of the employment contract; (4) based on valuable consideration; and (5) not against public policy.'” PrecisionWalls, Inc. v. Servie, 152 N.C. App. 630, 636, 568 S.E.2d 267, 272 (2002) (quoting Triangle Leasing Co. v. McMahon, 327 N.C. 224, 228, 393 S.E.2d 854, 857 (1990)).     A central purpose of a covenant not to compete is the protection of an employer's customer relationships. Hartman v. Odell & Assoc., Inc., 117 N.C. App. 307, 312, 450 S.E.2d 912, 917 (1994). Therefore, to prove that a covenant's territorial restriction is reasonable, “an employer must . . . show where its customers are located and that the geographic scope of the covenant is necessary to maintain those customer relationships.” Id. “If the territory is too broad, 'the entire covenant fails since equity will neither enforce nor reform an overreaching and unreasonable covenant.'” Id. (quoting Beasley v. Banks, 90 N.C. App. 458, 460, 368 S.E.2d 885, 886 (1988)). Accordingly,
        [w]hen the language of a covenant not to compete is overly broad, North Carolina's “blue pencil” rule severely limits what the court may do to alter the covenant. A court at most may choose not to enforce a distinctly separable part of a covenant in order to render the provision reasonable. It may not otherwise revise or rewrite the covenant.

Id., 117 N.C. App. at 317, 450 S.E.2d at 920.
    In the instant case, the trial court found that the covenant not to compete was overly broad. However, instead of denying the preliminary injunction because the covenant not to compete was overly broad, the trial court “rewrote” the covenant and granted a preliminary injunction based on this “blue-penciled” version. Accordingly, we reverse the trial court's order granting apreliminary injunction to plaintiff. Having so held, we need not address defendant's remaining arguments.
    Reversed.
    Judges ELMORE and GEER concur.
    Report per Rule 30(e).

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