Northern Star Management of America, LLC v. Sedlacek

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

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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

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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

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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

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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,

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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”).

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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

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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

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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

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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-

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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

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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

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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,

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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

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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.

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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.