At some point, most businesses will find themselves on one side of the following scenario: a company’s key employee who had access to proprietary and confidential information leaves and begins working for a competitor. Businesses try to minimize their risk in these scenarios through non-compete and nondisclosure agreements, and they may decide to bring a lawsuit when they believe a former employee has breached such an agreement.
When a business is deciding whether to bring a lawsuit to enforce a non-compete agreement, or on the defending side of such a lawsuit, one important question is what court will be able to hear the dispute.
The North Carolina Business Court is a popular venue for business litigation in this state for several reasons. All five of the state’s Business Court judges have backgrounds in business law. In the Business Court, each case stays before the same judge over time, which allows the judge to become deeply familiar with the issues in that case. The court is technologically up-to-date, with electronic filing and the ability to hold hearings via videoconference. The Business Court may be especially attractive to companies in the Triad region, since two of the state’s five Business Court judges are located in the area. Judge Michael Robinson has a courtroom in Winston-Salem, and Chief Judge James Gale has a courtroom in Greensboro.
State law dictates what kinds of cases the Business Court can hear. The Business Court is authorized to hear cases dealing with issues of:
• corporate governance
• securities
• antitrust law
• trademark and intellectual property law
• trade secrets
• tax law
• contract disputes over $1 million
A lawsuit for breach of a non-compete or nondisclosure agreement will sometimes fall within these categories, but not always. A recent opinion from the Court offers some guidance on when these types of cases can be heard by the Business Court.
“Confidential Information” is Not Enough for NC Business Court
In Stay Alert Safety Services, Inc. v. Pratt, which the Business Court decided last month, the plaintiff company brought a lawsuit against its competitor and a former employee, alleging that the former employee was breaching his non-compete and nondisclosure agreements. The competitor and the former employee asked the Business Court to hear the lawsuit, and they reasoned that this was an appropriate case for the Business Court because it involved questions about the plaintiff’s intellectual property and trade secrets.
The Business Court disagreed, and noted that cases based on “more generalized allegations of the employer’s loss of confidential or proprietary information” typically do not fall within the categories of cases the Business Court is authorized to hear. After reviewing the Complaint, the Court noted that the plaintiff only alleged that the former employee was wrongfully using its “confidential information,” and there were no specific allegations about the plaintiff’s trade secrets or intellectual property. Because “confidential information need not necessarily be a trade secret,” the Court decided that this was not a case that the Business Court could hear.
The Stay Alert opinion suggests that a business will have a difficult time getting a non-compete case into the Business Court if there’s not also a claim for—or at least detailed allegations about—trade secret or intellectual property violations. The competitor and former employee in Stay Alert argued to the Court that their case was similar to an older case, Union Corrugating Co. v. Viechnicki, which was allowed to proceed in the Business Court.
Trade Secrets Claim May Not Be Required for NC Business Court
Like Stay Alert, Union Corrugating, a manufacturer and distributor of metal building materials, involved a company’s lawsuit for breach of non-compete and nondisclosure agreements. Union’s complaint did not bring an actual claim for misappropriation of trade secrets, but it did describe in detail the trade secrets and confidential information that the company had sought to protect through its nondisclosure agreement.
The trade secret information include detailed databases of industry contractors and distributors, as well as proprietary training and installation programs. The complaint also alleged that the employee either had or inevitably would disclose the plaintiff’s trade secrets. Even though the complaint only brought a claim for breach of contract, the court decided that the case would necessarily involve the court’s determination of whether the information described in the complaint was a trade secret protected by the nondisclosure agreement. The case was allowed to proceed in the Business Court.
A Stricter Inquiry for the NC Business Court in Recent Years
Although the Union Corrugating case was allowed to stay in the Business Court, it appears that case was an exception rather than the rule. With several cases, including Stay Alert, the Business Court has rejected attempts to bring cases that appear similar to Union Corrugating.
Cornerstone Health Care, P.A. v. Moore involved two doctors who left Cornerstone—their former practice¬—and began working elsewhere in the area. Cornerstone filed a lawsuit to enforce their non-compete agreements and asked the Business Court to hear the case.
Cornerstone did not bring any claims for trade secret misappropriation, but the complaint described certain “confidential information” that was at issue in the non-compete agreement. However, the confidential information was described in broad language as “current technologies, business practices, and strategies.” The court also noted that the Cornerstone complaint didn’t mention trade secrets once. For these reasons, the court decided this case was not like Union Corrugating and was a “straightforward contract action” that was not appropriate for the Business Court.
The Business Court took a similar position in another case named E.G. Forrest Company v. Porter. The plaintiff in that case was a food service distribution company, which brought a lawsuit against its former employee and competitor for breach of the former employee’s non-solicitation and non-disclosure agreement.
The former employee and the competitor asked the Business Court to hear the lawsuit, and they argued that, like Union Corrugating, the court would have to decide issues of trade secrets in the case. The non-disclosure agreement even defined the company’s “confidential information” by referencing North Carolina’s Uniform Trade Secrets Act. However, after reviewing the complaint, the Court concluded that the complaint did not discuss trade secrets as a meaningful part of the lawsuit. The court decided that this case was similar to Cornerstone Health Care and should not be heard in the Business Court.
Key Takeaways About the NC Business Court and Non-Competes
Straightforward claims for breach of non-compete or nondisclosure agreements are not enough on their own to bring a case to the Business Court. However, these sorts of agreements naturally implicate concerns about a company’s trade secret and confidential information. The Stay Alert case, as well as Cornerstone and E.G. Forrest, show that the Business Court is increasingly skeptical of cases that allege breach of contract without also bringing a claim for trade secret misappropriation. A company seeking to bring one of these cases to the Business Court should make sure that either there is an actual claim under the Trade Secrets Act or the complaint discusses the trade secret implications in great detail.
About the Author – Derek Bast
Derek Bast is an attorney at the law firm of Bell, Davis & Pitt. Bast focuses his practice on civil litigation and construction litigation. Prior to joining Bell, Davis & Pitt earlier this year, Bast served as a law clerk to the Honorable Louis A. Bledsoe, III, Special Superior Court Judge for Complex Business Cases, on the North Carolina Business Court. While at Wake Forest University School of Law, Derek also completed an internship with the Honorable James L. Gale, Chief Judge of the Business Court.
Derek Bast
Bell, Davis & Pitt, P.A.
dbast@belldavispitt.com
(704) 227-9832
