KOHLER COMPANY, INC.,
Plaintiff,
v
.
Mecklenburg County
No. 03 CVS 17744
THOMAS H. MCIVOR,
Defendant.
Ogletree, Deakins, Nash, Smoak & Stewart, P.C., by John D.
Cole and Kelly S. Hughes, for plaintiff-appellee.
Ferguson, Stein, Chambers, Adkins, Gresham & Sumter, P.A., by
John W. Gresham, for defendant-appellant.
HUDSON, Judge.
On 14 October 2003, plaintiff Kohler Company, Inc, (“Kohler”)
filed a complaint and moved for a temporary restraining order
(“TRO”), alleging that defendant Thomas H. McIvor was in breach of
a non-competition agreement (“the agreement”). The court issued
the TRO ex parte, enjoining defendant from working in violation of
the agreement. Following another ex parte hearing on 21 October
2003, the court entered a preliminary injunction against defendant.
Defendant moved for relief from the preliminary injunction, which
motion the court denied. On 21 November 2003, defendant moved to
stay the injunction, which motion the court also denied. Defendant
appealed the preliminary injunction order and the order denyingrelief, and moved this Court for a temporary stay, which we
allowed. One week after defendant filed his brief with this Court,
Kohler voluntarily dismissed its action with prejudice, rendering
the appeal moot.
Plaintiff then moved for sanctions pursuant to Rule 11 and for
attorney fees. After a hearing, the trial court denied defendant's
motion for sanctions and fees. Defendant appeals. As explained
below, we affirm.
In November 2000, defendant began working for Kohler, a
plumbing manufacturer, as a sales representative and signed a non-
compete agreement. The agreement precluded defendant from selling
products that compete with Kohler in all of North America for one
year after defendant's separation from the company. Defendant's
sales territory included South Carolina, part of western North
Carolina, the Charlotte region, and Augusta, Georgia. On 18
September 2003, defendant notified his manager that he planned to
resign, move to southern California, and join another plumbing
manufacturer. After returning materials and equipment to Kohler,
defendant began working in southern California, but ultimately
resigned his position there due to Kohler's lawsuit.
On 22 September 2003, before he left for California, defendant
gave his attorney's business card to his manager at Kohler. Kohler
did not serve the pleadings on defendant's counsel, and gave no
notice to defendant or his counsel of the TRO hearing. At the
hearing, Kohler's counsel stated that defendant was served in North
Carolina, although defendant had actually been served in Californiaonly four days prior to the hearing. Kohler's counsel also stated
that
On Friday (October 17, 2003), you called his
house and his voice mail answers the phone.
Today (October 21, 2003), if you call that
number's been cancelled. So he's [defendant]
been scurrying to erase any sign of residence
here as quick as he can. I suppose to support
this motion to dismiss . . . .
In fact, defendant's phone bill shows that his Charlotte phone
number was disconnected on 22 September 2003. During the hearing,
the court misread the agreement's geographic restriction as
“nationwide,” when it actually extended to all of North America.
Kohler's counsel did not correct the court's error.
Neither defendant nor his counsel attended the preliminary
injunction hearing, which actually took place several hours prior
to its scheduled time. At the hearing, Kohler's counsel stated
incorrectly that defendant was involved in national deals and
worked with national contractors. Defendant's manager, who was
present at the hearing, did not correct the misstatements.
Defendant first argues that the court erred in denying his
motion for sanctions pursuant to Rule 11. We disagree.
Rule 11 provides, in pertinent part:
Every pleading, motion, and other paper of a
party represented by an attorney shall be
signed by at least one attorney of record. . .
. A party who is not represented by an
attorney shall sign his pleading, motion, or
other paper. . . . The signature of an
attorney or party constitutes a certificate by
him that he has read the pleading, motion, or
other paper; that to the best of his
knowledge, information, and belief formed
after reasonable inquiry it is well grounded
in fact and is warranted by existing law or agood faith argument for the extension,
modification, or reversal of existing law, and
that it is not interposed for any improper
purpose, such as to harass or to cause
unnecessary delay or needless increase in the
cost of litigation.
N.C. Gen. Stat. § 1A-1, Rule 11(a) (2003). Pursuant to Rule 11, a
signer must certify “that the pleadings are: (1) well grounded in
fact, (2) warranted by existing law, 'or a good faith argument for
the extension, modification, or reversal of existing law,' and (3)
not interposed for any improper purpose.” Grover v. Norris, 137
N.C. App. 487, 491, 529 S.E.2d 231, 233 (2000). Failure as to any
one of these requirements constitutes a violation of Rule 11.
Bryson v. Sullivan, 330 N.C. 644, 655, 412 S.E.2d 327, 332 (1992).
This Court reviews a trial court's denial or imposition of Rule 11
sanctions de novo and
must determine (1) whether the trial court's
conclusions of law support its judgment or
determination; (2) whether the trial court's
conclusions of law are supported by its
findings of fact; and (3) whether the findings
of fact are supported by a sufficiency of the
evidence.
Renner v. Hawk, 125 N.C. App. 483, 491, 481 S.E.2d 370, 375, disc.
review denied, 346 N.C. 283, 487 S.E.2d 553 (1997).
In analyzing whether a complaint meets the first certification
requirement, we must determine: “(1) whether the plaintiff
undertook a reasonable inquiry into the facts and (2) whether the
plaintiff, after reviewing the results of his inquiry, reasonably
believed that his position was well grounded in fact.” McClerin v.
R-M Industries, Inc., 118 N.C. App. 640, 644, 456 S.E.2d 352, 355
(1995). “[I]n determining compliance with Rule 11, courts shouldavoid hindsight and resolve all doubts in favor of the signer.”
Twaddell v. Anderson, 136 N.C. App. 56, 70, 523 S.E.2d 710, 720
(1999), disc. review denied, 351 N.C. 480, 543 S.E.2d 510 (2000)
(internal quotation marks and citations omitted).
Here, defendant contends that discovery materials demonstrate
that Kohler and its counsel knew their filings contained incorrect
factual allegations and unsupported legal assertions and were aware
that pleadings were filed for an improper purpose. Defendant
contends that the complaint misstates his job duties and territory
by alleging that defendant was the primary contact to Kohler's most
important Mid-Atlantic region. Defendant acknowledges that he had
responsibility for parts of North and South Carolina, and Georgia.
Although plaintiff does not address this issue, we conclude
that the term “Mid-Atlantic” is imprecise and defined quite
differently by different entities. For example, while the United
States Census Bureau defines the Mid-Atlantic region as New Jersey,
New York, and Pennsylvania, the Environmental Protection Agency
defines the Mid-Atlantic region as including Delaware, District of
Columbia, Maryland, Pennsylvania, Virginia, and West Virginia. The
Mid-Atlantic Seagrant Program, part of the National Sea Grant
College Program, includes North Carolina in the Mid-Atlantic
region, as does Joe Surkiewicz, the author of a book entitled
Mountain Bike! Mid-Atlantic States: South Carolina to Washington
DC. As these examples demonstrate, the term “Mid-Atlantic” simply
is not well-defined enough to support an allegation of factual
insufficiency under Rule 11 when it is used to refer to NorthCarolina. Defendant does not present any definition in his brief
of the term “Mid-Atlantic” which would support his contention.
Defendant also contends that the complaint makes false
allegations without qualification regarding the misappropriation of
trade secrets and confidential information. However, Kohler
responds that the allegations in question were made upon
information and belief. Defendant cites Static Control Components,
Inc. v. Vogler as supporting sanctions in this case. 152 N.C. App.
599, 568 S.E.2d 305 (2002). We find Static Control distinguishable
because the employer in that case “admitted that [the employee] had
not violated the agreement, as was alleged in the complaint, and
that there was no evidence that [the employee] was unwilling to
abide by the agreement.” Id. at 606, 568 S.E.2d at 310. Here, in
contrast, Kohler never made such an admission.
In addition, “[t]he trial court's findings of fact are
conclusive on appeal if supported by competent evidence, even when
the record includes other evidence that might support contrary
findings . . . . [and] findings of fact to which plaintiff has not
assigned error and argued in his brief are conclusively established
on appeal.” Id. at 603, 568 S.E.2d at 308. Defendant here has not
challenged findings that he was the local contact for local
divisions of national builders, that he had access to proprietary
information or that when reminded of the agreement's terms, he
responded that he believed it was unenforceable and that he
welcomed any attempts to stop him from competing. These findings,which are conclusive before this Court, support the trial court's
denial of Rule 11 sanctions. We overrule this assignment of error.
Defendant next argues that Kohler's complaint and memorandum
in support of the motion for TRO were legally insufficient and
require Rule 11 sanctions. We disagree.
As discussed above, “findings of fact to which plaintiff has
not assigned error and argued in his brief are conclusively
established on appeal.” Id. Here, defendant failed to assign
error to the following findings:
2. Because Rule 11, however, should “not have
the effect of chilling creative advocacy,
courts should [avoid hindsight] and resolve
all doubts in favor of the signer.” Cross &
Cross Properties, Ltd. v. Everett Allied Co.,
886 F.2d 497, 504 (2d Cir. 1989).
***
4. For purposes of Rule 11, “[a] legal
contention is unjustified when a reasonable
attorney would recognize [it] as frivolous.”
Forrest Creek Assocs. Ltd. v. Mclean Sav. &
Loan Ass'n, 831 F.2d 1238, 1245 (4th Cir.
1987). Put differently, a legal position
violates Rule 11 if it “has absolutely no
chance of success under the existing
precedent.” Brubaker v. City of Richmond, 943
F.2d 1363, 1373 (4th Cir. 1991)(quoting
Cleveland Demolition Co. v. Azcon Scrap Corp.,
827 F.2d 984, 988 (4th cir. 1987))(emphasis
added).
***
6. Plaintiff's Verified Complaint and
supporting Affidavits satisfy the
certification requirements of Rule 11. On
their face, these papers set out facts
alleging that [defendant] (a) accepted
employment with one of Plaintiff's direct
competitors in violation of the non-compete
provision of the Agreement; and (b) improperly
retained a variety of confidential informationthat should have been returned to Kohler, in
violation of the Agreement and North Carolina
statutory law.
***
9. North Carolina law on this issue is simple
enough: “In deciding which law should govern
interpretation of a contract, North Carolina
follows the principle of lex loci contractus,
which provides that the law of the state where
the last act occurred to form a binding
contract should apply.” NAS Surety Group v.
Precision Wood Products, 271 F. Supp. 776, 780
(M.D.N.C. 2003). Accord Walden v. Vaughn, 157
N.C. App. 507, 510, 579 S.E.2d 475, 477
(2003). Applying it to the muddled facts of
this case, however, would test the most
seasoned of choice of law practitioners, given
that three jurisdictions (Virginia, North
Carolina, and Wisconsin) arguably fit the
bill.
***
11. While the Court is tempted to tackle this
bar exam puzzler, the critical question, for
purposes of Rule 11, is whether Plaintiff and
its counsel made a “reasonable inquiry” before
settling on their choice of North Carolina
law. The Court concludes that they did. In
particular, on the date Plaintiff filed its
Verified Complaint, Kohler and its counsel had
adequate grounds for believing, based on the
documents available to them, that McIvor had
accepted Plaintiff's offer of employment in
North Carolina on November 6, 2000, and that
this acceptance was the last act necessary to
make the Agreement binding.
12. Defendant complains that he included the
North Carolina address of his girlfriend (now
wife) at Plaintiff's behest so as not to
confuse Plaintiff's Human Resources
Department, presumably because Defendant was
being hired to work in North Carolina.
Nevertheless, there is no evidence that
Plaintiff knowingly kept this information from
its attorneys, or that it even maintained
records from which it could cull this obscure
fact almost three years later.
13. In short, neither a reasonable client nor
its attorneys would be expected to discern the
choice of law machinations resulting from the
bizarre execution of an employment agreement
by a mid-level sales executive and a
multinational conglomerate, which occurred
nearly three years before the filing of the
Verified Complaint. As a result, Kohler's
decision to advocate for the application of
North Carolina law was reasonable.
14. Defendant also argues that Plaintiff's
interpretation of North Carolina law (as set
forth in Plaintiff's Memorandum) is patently
unreasonable and therefore warrants Rule 11
sanctions. As to the legal sufficiency of a
paper under Rule 11, the relevant inquiry is
not the relative merits of the parties'
positions, but instead (1) whether the paper
is facially plausible, and, if not (2) whether
the alleged offender undertook a reasonable
inquiry into the law and thereafter formed a
reasonable belief that the paper was warranted
by existing law, judged as of the time the
paper was signed. Mack v. Moore, 107 N.C.
App. 87, 91, 418 S.E.2d 685, 688 (1992).
***
16. Defendant spends much time disputing
Plaintiff's recitation of Defendant's duties
and geographic areas of responsibilities while
a Kohler and TOTO employee. Since Plaintiff's
claims were not resolved on the merits,
however, the Court is left with dueling
affidavits and deposition testimony on these
and many other factual issues. Rule 11,
however, is not an end-around the crucible of
a trial to conclusively determine the facts,
nor does it authorize the award of sanctions
where the evidence is in conflict.
***
18. On this question of law, reasonable judges
have differed depending on the facts. Cf.
Triangle Leasing Co. v. McMahon, 327 N.C. 224,
393 S.E.2d 854 (1990)(affirming two-year non-
solicitation agreement applicable in North
Carolina or any other state or territory where
Plaintiff conducts business); A.E.P.
Industries, Inc., v. McClure, 308 N.C. 393,302 S.E.2d 754 (1983)(applying New Jersey law,
which the Court determined was similar to
North Carolina law, and approving 18-month
non-competition agreement applicable
throughout the U.S.); Harwell Enterprises,
Inc., supra; Dunbar Ins. Agency, Inc. v.
Barber, 147 N.C. App. 463, 556 S.E.2d 331
(2001)(approving two-year agreement
prohibiting employee from soliciting any
customers, irrespective of prior contact);
Farr Assocs., Inc., v. Baskin, 138 N.C. App.
276, 530 S.E.2d 878 (2000)(rejecting five-year
agreement where prohibition extended to all
clients in most of the U.S. and four
countries, regardless of client location or
employee's prior contact with them); Market
America, Inc., supra; Hartman, 117 N.C. App.
at 313-17, 450 S.E.2d at 917-20 (rejecting
five-year non-competition agreement that
extended beyond Defendant's business
operations and was not tied to Defendant's
customers); Electrical South, Inc., v. Lewis,
96 N.C. App. 160, 385 S.E.2d 352 (1989), rev.
denied, 326 N.C. 595, 393 S.E.2d 876
(1990)(rejecting two-year world wide non-
competition restriction because it failed to
focus on legitimate goal of preventing
employee's competition for employer's
customers in a relevant territory; and
Manpower of Guilford County, Inc., v.
Hedgecock, 42 N.C. App. 515, 257 S.E.2d 109
(1979)(rejecting one-year non-competition
agreement; length of restriction was
reasonable but restrictions included
geographic areas where plaintiff's business
did not extend).
19. Given its breadth and scope, the Court
finds that the Agreement toes the line of
facial plausibility under North Carolina law.
Nevertheless, three prior judges of this Court
preliminarily determined that the Agreement
was enforceable. North Carolina cases provide
facially plausible support for this view, just
as other cases compellingly support the
contrary conclusion. Such a reasonable
difference of opinion, however, necessarily
defeats Defendant's claim for Rule 11
sanctions. Simply put, Defendant has not
shown that Plaintiff's legal argument had
“absolutely no chance of success under theexisting precedent.” Brubaker, 943 F.2d at
1373.
***
22. Nor did Plaintiff violate the “improper
purpose” prong of Rule 11. While Plaintiff is
perhaps guilty of using the legal equivalent
of a sledgehammer to swat a fly, Plaintiff
instituted this suit for a proper purpose_to
vindicate its rights under the Agreement. The
Court also concludes that Plaintiff acted in
good faith by dismissing its claims within a
reasonable period after Defendant resigned his
employment with TOTO (in effect providing
Plaintiff the primary relief sought in this
litigation).
Based upon the findings quoted above which are conclusive before
this Court, Kohler's complaint and memorandum are legally
sufficient, and defendant is not entitled to sanctions pursuant to
Rule 11.
Defendant also argues that Kohler's complaint and memorandum
were interposed for an improper purpose, requiring Rule 11
sanctions. We disagree.
“[F]indings of fact to which plaintiff has not assigned error
and argued in his brief are conclusively established on appeal.”
Id. Here, defendant failed to assign error to finding 22 quoted
above. This finding, which is conclusive before this Court, fully
supports the conclusions that Kohler's complaint and memorandum
were not interposed for an improper purpose, and that defendant is
not entitled to sanctions pursuant to Rule 11 on that ground.
Finally, defendant argues that the trial court abused its
discretion in failing to grant his motion for attorney fees
pursuant to N.C. Gen. Stat. § 6-21.5. We disagree. The statute provides, in pertinent part:
In any civil action or special proceeding the
court, upon motion of the prevailing party,
may award a reasonable attorney's fee to the
prevailing party if the court finds that there
was a complete absence of a justiciable issue
of either law or fact raised by the losing
party in any pleading.
N.C. Gen. Stat. 6-21.5 (2003). “The decision to award or deny the
award of attorney fees [pursuant to N.C. Gen. Stat. § 6-21.5] will
not be disturbed on appeal unless the trial court has abused its
discretion.” Area Landscaping, L.L.C. v. Glaxo-Wellcome, Inc., 160
N.C. App. 520, 528, 586 S.E.2d 507, 513 (2003). Defendant relies
on the arguments discussed and rejected supra to establish the lack
of any justiciable issues of law and fact. Having previously
determined that those arguments lack merit, we likewise overrule
this assignment of error.
Affirmed.
Judges BRYANT and CALABRIA concur
Report per Rule 30(e).
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