NORTH CAROLINA SUPREME COURT REJECTS ATTEMPT TO CHANGE BLUE-PENCILING RULES THROUGH CONTRACT

Under North Carolina law, a non-compete agreement entered in connection with the sale of a business is enforceable if: (1) it is reasonably necessary to protect the interest of the purchaser; (2) it is reasonable with respect to both time and territory; and (3) it does not interfere with the interest of the public. One issue that often comes up in the context of non-compete agreements is the extent – if any – to which a court may strike through or revise an otherwise overbroad restriction. A related issue is whether parties to a contract can negotiate around such rules.

Although the majority of states permit judges to revise or rewrite otherwise unenforceable non-compete agreements, North Carolina is among the strong minority that allow non competeonly the “blue-penciling” of such agreements. Under the “strict blue pencil doctrine” as adopted and applied in North Carolina, when considering an otherwise unenforceable restrictive covenant, a court may, but is not required to, enforce “divisible and reasonable” portions of a restrictive covenant, and may not otherwise take action to save the restriction. This means that a court applying North Carolina law may strike through overbroad restrictions contained in a non-compete agreement, but may not rewrite the agreement to make it enforceable. 

Until recently, the extent to which parties negotiating at arm’s length in connection with the sale of a business could contract around North Carolina’s blue penciling rules was unclear. Earlier this year, the Supreme Court of North Carolina addressed this issue in Beverage Systems of the Carolina, LLC v. Associated Beverage Repair, LLC, and held, in reversing the decision of the North Carolina Court of Appeals to the contrary, that parties cannot by contract give the court power to rewrite restrictive covenants. In that case, the geographic scope of the non-compete agreement – which included all of both North Carolina and South Carolina – was determined to be overbroad. However, the parties had entered into a Non-Competition, Non-Solicitation and Confidentiality Agreement as part of an asset purchase. As relevant to this post, the parties had agreed as follows in that contract: 

If … a court holds that the restrictions stated herein are unreasonable under circumstances then existing, the parties hereto agree that the maximum period, scope or geographical area that are reasonable under such circumstances shall be substituted for the stated period, scope or area, and that the court shall be allowed to revise the restrictions contained in [the agreement] to cover the maximum period, scope and area permitted by law. 

The purchaser argued that this language gave the trial court the power to rewrite the territorial limits to make them reasonable. The Supreme Court of North Carolina rejected the argument that this language could be used to avoid North Carolina law, finding that “parties cannot contract to give a court power that it does not have” and that “[a]llowing litigants to assign to the court their drafting duties as parties to a contract would put the court in the role of scrivener, making judges postulate new terms that the court hopes the parties would have agreed to be reasonable at the time the covenant was executed or would find reasonable after the court rewrote the limitation.” 

Based on this decision, it is now clear that North Carolina’s “strict blue pencil doctrine” applies to all restrictive covenants – whether those restrictions are part of an employment agreement or part of the sale of a business – and that parties cannot empower courts to rewrite such covenants in contravention of North Carolina law through contract.

This leaves contracting parties with several options. First, restrictive covenants should be drafted carefully to increase the chance that they will be found enforceable. Second, if the agreement will be governed by North Carolina law, drafters will likely want to consider using the “cascading” or “step” approach to drafting territorial restrictions. Under this approach, a series of gradually expanding territories will be included in the restrictive covenant, leaving ultimate responsibility for determining the reasonableness of any particular restriction on the court. One risk with this approach is that courts applying North Carolina law are not required to strike through unreasonable restrictions and may, instead, decline to enforce the restrictions. 

 For more information or assistance, please contact Denis Jacobson at (336) 271-5242 – djacobson@tuggleduggins.com or Alan Felts at (336) 271-5215 – afelts@tuggleduggins.com

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EEOC Issues Revised Pay Data Reporting Requirements for Employers

EEOCThe EEOC issued a revised deadline for compliance with the employers pay data reporting requirements.  Back in February, the EEOC unveiled its proposal requiring employers with more than 100 employees, including nonprofit employers, to report employee compensation and hours worked on the employer’s Employer Information Report (“EEO-1”).  The EEOC will use this data to address discriminatory pay practices and enforce federal anti-discrimination laws.  The proposal, which originally was set to take effect in 2017, has been delayed until March 31, 2018. However, employers have to begin tracking pay data beginning in January of 2017.  

Currently, EEO-1 forms require reporting employee sex, race, and ethnicity.  The proposed expansion of the EEO-1 reporting requirements would require employers to identify employee job category, pay data from the employee’s IRS Form W-2, and the total number of hours worked.  The pay data would be reported in ‘pay bands’ in an effort to protect employer’s confidentiality.  Employers would report how many employees, and each employee’s sex, race, and ethnicity, are in each pay band (e.g. $19,239 and under, $19,240-$24,439, etc.) for each EEO-1 job category.  The proposed EEO-1 is available here.  The EEOC plans to share the pay data with the Office of Federal Compliance Contract Programs (“OFCCP”) who will make this new pay data available to the public.   

The key revision to the July updated rule is the delay in implementation.  The 2016 EEO-1 reporting deadline, which does not require pay data information, is September 30, 2016. There will be a year and a half gap between the 2016 EEO-1 report deadline and the 2017 EEO-1 report deadline. The 2017 EEO-1 report will be due on March 31, 2018.  The deadline to submit comments on the proposed rule is August 15, 2016.  The final regulations will likely be released in late 2016 or early 2017.  

Key Takeaways:

  • If you do not currently file an EEO-1 report, you will not have to comply with the pay data reporting requirements.
  • There are some employers, such as federal contractors with 50-99 employees, that currently have to fill out EEO-1 report but these employers would not have to report pay data as they have fewer than 100 employees.
  • Employers would not have to report individual pay or salaries, but would instead report number of employees with salaries in each pay band.
  • Pay data is not included on the September 30, 2016 EEO-1 report.  Any changes would be implemented for the September 30, 2017 EEO-1 report.

For more information or assistance, please contact Denis Jacobson at (336) 271-5242 or djacobson@tuggleduggins.com

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UNIFORM COMMERCIAL CODE: TRAPS FOR THE UNWARY

Introduction and the Basics 

There are a myriad of potential “traps for the unwary” in the world of commercial transactions and the Uniform Commercial Code (the “UCC”).  This article is the first in a series of articles that will address a few of the most common pitfalls to be aware of when dealing with commercial transactions and the Uniform Commercial Code.  While specific pitfalls will be the focus of future articles, as a starting point, the focus of the remainder of this article will be a high level summary of the basics of the UCC. 

The Uniform Commercial Code is a comprehensive set of laws governing a wide variety of UCCcommercial transactions including the sale of goods, taking security interests in personal property, and bank and financing transactions.  Specific examples of common transactions in which the UCC applies range from a business buying or selling a product pursuant to a purchase order or supply agreement (which would be governed by Article 2 of the UCC), to a lender taking a security interest in a piece of equipment owned by a debtor as security for the repayment of the debtor’s loan (which would be governed by Article 9 of the UCC).   

As the name suggests, the goal in drafting and codifying the UCC was to establish a uniform treatment of commercial transactions across all 50 U.S. states in light of the prevalence of cross borders commercial transactions.  The UCC itself is only a model code and does not have any legal effect unless it is codified into state law.  Currently, the UCC has been adopted in all 50 states with some variations in form, though; substantively the state enacted UCC statutes are largely similar.  This series of articles and the information contained within will be based on the specific version of the UCC currently in place in the state of North Carolina. 

Should you have any questions concerning the uniform commercial code, commercial transactions, or any other related matter, please contact a member of our Business Services and Governmental Affairs practice group. 

For more information or assistance, please contact Natalie Folmar at (336) 271-5220 – nfolmar@tuggleduggins.com or Jesse Anderson at (336) 271-5208 – janderson@tuggleduggins.com

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Employers May be Liable for Hostile Work Environment Created by Anonymous Actor

Recently, the Fourth Circuit Court of Appeals published an opinion in Pryor v. United Air Lines, Inc. holding that an employer may be liable under Title VII for a hostile work environment created by an anonymous actor. 

Ms. Pryor, an African-American female, was employed by United Airlines.  In January of 2011, Ms. Pryor discovered a note in her company mailbox which contained racially motivated threats and racial slurs directed at Pryor.  The mailbox in question was located in a secure area accessible only to employees of United Airlines and other personnel authorized by the company.

Pryor reported this incident to her supervisor who stated that there was “not much” the company could do about the incident due to the absence of security cameras in the mail room.  HostilePryor was asked to fill out a form, but Pryor’s supervisor failed to report the incident to the company’s Employee Service Center as required by the company’s internal Harassment and Discrimination policy.  Pryor’s supervisor notified other members of management of the incident.  However, no manager reported the incident to the Employee Service Center as required by the company’s policy.  Additionally, United Management was aware of previous incidents of anonymous racial harassment including the spreading of rumors and the posting of racially discriminatory flyers in company break rooms.

Pryor herself ultimately reported the incident to the Employee Service Center and contacted the police.  United management eventually sent a “must read” email regarding the incident to their employees, two and a half months after it occurred.

In October of 2011, Pryor and a number of other African-American employees of United received a nearly identical note containing racial slurs and racially motivated threats in their mailboxes.  Pryor reported the incident to her supervisor, but her supervisor did little in response.  Pryor then reported the incident to the Employee Service Center, corporate security, and the police.  The company eventually conducted an investigation, but the harasser was not identified.

Pryor then filed with the EEOC alleging that United’s failure to investigate these incidents of racially motivated threats constituted discrimination. 

The elements of a discrimination claim under Title VII of the Civil Rights Act of 1964, 42 U.S.C. § 2000e, require that the alleged conduct be (1) unwelcome; (2) based on race; (3) sufficiently severe or pervasive to alter the condition of the employment and to create an abusive work environment; and (4) imputable to the employer.  The primary issue in this case was whether the anonymous harassment could be imputed to United.

The Court noted that, while employers are not strictly liable for acts of harassment that occur in the workplace, employers do maintain the responsibility to reasonably carry out the dual duties of investigation and protection.  The general rule is that an employer may be liable for a hostile environment created by a third party “if it knew or should have known about the harassment and failed to take effective action to stop it…by responding with remedial action reasonably calculated to end the harassment.”  The anonymous nature of a threat may heighten what it required of an employer, especially under circumstances where, as here, the harassment occurs in a closed space accessible only to those authorized by the employer.

The Court ultimately held that a reasonable jury could find that United’s response to the original threatening note was neither prompt nor reasonably calculated to end the harassment, noting that United did not call the police, report the matter to corporate security or the Employee Service Center, install cameras, or take other potential protective and investigative measures.  Therefore, the Court concluded that the district court erred by granting summary judgment for United and vacated and remanded the case.

Employers should take note of the Court’s holding in Pryor v. United Air Lines, Inc. in responding to reports of harassment by anonymous third parties, particularly in settings where harassment occurs in areas accessible only to other employees.  The fact that investigation may be difficult due to a lack of security cameras or other similar reasons will not allow an employer to avoid liability.  Anonymous harassment may be imputable to an employer if the response to anonymous harassment is not sufficient.  Employers should evaluate harassment complaints seriously and promptly investigate any such complaints.

The full opinion can be found here: http://www.ca4.uscourts.gov/Opinions/Published/141442.P.pdf 

For more information or assistance, please contact Denis Jacobson at (336) 271-5242 - djacobson@tuggleduggins.com or Ben Hintze at (336) 271-5247 –Bhintze@tuggleduggins.com  in the Labor & Employment practice group.

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TRID Effective as of October 3, 2015: Mortgage Disclosure Documents Simplified for the Next Generation of Homeowners

Of utmost importance to real estate professionals and consumers alike, the TRID (or TILA-RESPA Integrated Disclosures) became effective on October 3, 2015.  The Consumer Financial Protection Bureau enacted the TRID to simplify the numerous overlapping mortgage disclosure forms that consumers receive when applying for and closing a mortgage loan.  The TRID combines disclosures required under the Truth in Lending Act (TILA) and Real Estate Settlement Procedures Act (RESPA).  Since the implementation of the TRID, mortgage applications have plummeted as lenders respond to new requirements that change the way they have conducted mortgage transactions for over three decades.  

The TRID consolidated the former disclosure documents into two new forms: the Loan Estimate and the Closing Disclosure.  Under the TRID requirements, lenders must provmortgageide consumers with the Loan Estimate three business days after the consumer applies for a mortgage loan and must provide the Closing Disclosure three days before closing on the mortgage loan.   Prior to the enactment of the TRID, a consumer would receive the information now contained in the Closing Disclosure at closing or shortly before.  Providing additional time for consumers to compare terms and costs leaves them more informed going into a mortgage closing.  Further, key terms such as interest rates, monthly payments, and closing costs are presented on the first page of the new forms in order to make the information more accessible for new homeowners.

The increased time pressures on the sending of documents under the TRID raises additional concerns surrounding the security of emails and attachments exchanged during the real estate settlement process.  Given the sensitive financial information exchanged between lenders, agents, and borrowers during a real estate transaction, data breaches and fraud are unfortunately all too common.  Unencrypted emails are not secure, as both the content of the messages and the attachments are available and viewable to interceptors.  Real estate professionals should utilize an encrypted email service, whether through cloud-based encryption or automatic email encryption, to ensure data security. 

Within the real estate arena, Tuggle Duggins focuses on commercial real estate transactions, which are exempt from the TRID requirements.  However, at our firm, familiarizing ourselves with changes in the law is always a priority, as there is a possibility, albeit unlikely, that similar requirements could be imposed on commercial closings in the future.

For more information, please contact Bill Burgin at (336) 271-5241 or Brittany Teague at (336) 271-5249 in the Real Estate and Construction Law group.

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