Limiting Access to Non-Specialized Suppliers Can Be a Legitimate Business Interest
Where a business’ non-compete employment agreement precluded its former employee from contacting its suppliers, such restriction could constitute a legitimate business interest. KNC Technologies v. Tutton, 2021 NCBC 25 (J. McGuire). This was so, the Business Court held, even though the items the supplier provided were available elsewhere in the marketplace.
Defendant was Plaintiff’s employee who, prior to ending his employment, allegedly took Plaintiff’s trade secrets and gave them to his soon-to-be new employer, a competitor of Plaintiff. Plaintiff sued Defendant, and the parties entered into a settlement agreement (“Agreement”) in which Defendant agreed that he would not contact any of Plaintiff’s customers or suppliers for a period of ten (10) years. After signing the Agreement, Defendant eventually started a new company, I-Tech. Through I-Tech, Defendant contacted several of Plaintiff’s customers and suppliers. Plaintiff sued for breach of the Agreement. Defendant filed a motion for summary judgment contending, inter alia, that the Agreement’s restriction on contacting suppliers was unenforceable because it did not further Plaintiff’s legitimate business interest.
The Business Court disagreed. Although all parties agreed that the products Defendant sought from the various suppliers could be obtained from other suppliers in the marketplace—and thus there was nothing unique about the supplier’s products—the Business Court nonetheless held that Plaintiff’s effort to limit the suppliers available to Defendant’s competing business could constitute a legitimate business interest (although the Business Court did not identify the actual interest at issue). As a result, Plaintiff’s restrictive covenant prohibiting Defendant from contacting certain suppliers was enforceable.
As a result of this decision, a business should carefully consider including certain of its suppliers (in addition to customers) within any employment agreements with an employee, as such restriction might hinder the employee from leaving and later competing against the business.
Additional legal points:
A ten-year restrictive covenant unrelated to the sale of a business is not enforceable as a matter of law (Opinion, ¶47).
A contract’s liquidated damages provision is enforceable only if damages are difficult to calculate and the listed amount is a reasonable estimate of damages caused by the breach (Id., ¶67-69).
A party’s intentional breach of a contract could support an unfair and deceptive trade claim even if the evidence of a legitimate business interest was “tenuous.” (Id., ¶59,89)