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Starkings Court Reporting Servs., Inc. v. Collins - 67 N.C. App. 540, 313 S.E.2d 614 (1984)

Rule:

A covenant not to compete is enforceable in equity if it is (1) in writing; (2) entered into at the time and as part of the contract of employment; (3) based on valuable consideration; (4) reasonable both as to time and territory embraced in the restrictions; (5) fair to the parties; and (6) not against public policy. 

Facts:

On Aug. 24, 1981, defendant Ruth E. Collins and plaintiff Starkings Court Reporting Services, Inc. ("Starkings") signed an Independent Contractor Agreement ("Agreement") whereby Collins agreed to take court reporting assignments from Starkings "as an Independent Contractor, not as an agent or employee." Collins agreed to pay her own taxes, liability insurance, and operating expenses. Fees generated pursuant to the Agreement belonged to Starkings, and Starkings agreed to pay 70 percent the fees to Collins. The Agreement purported to bind Collins to a covenant not to compete, which barred Collins from engaging in the court reporting business in Cumberland County or within a 50-mile radius of Cumberland County for two years from the termination of the parties' business relationship. The Agreement recited $ 100 as consideration for the covenant not to compete. 

On or about Oct. 21, 1982, Collins terminated her business relationship with Starkings. Soon thereafter, Collins established her own court reporting service in Cumberland County. On Jan. 27, 1983, Starkings filed a lawsuit against Collins in North Carolina state court seeking permanent injunctive relief against Collins for violating the covenant not to compete. After a bench trial, the trial judge denied Starkings injunctive relief and declared the covenant not to compete to be invalid, void and unenforceable. Starkings appealed.

Issue:

Was the covenant not to compete in the parties' Agreement valid? 

Answer:

No

Conclusion:

The appellate court affirmed the trial court's judgment. The court found that the covenant was an unreasonable restraint of trade and thus unenforceable for two reasons: (1) it was against public policy in that its practical effect was merely to stifle normal competition, and; (2) it provided for greater restraint on Collins than was reasonably required for the protection of Starkings. Collins truly was an independent contractor and not an employee of Starkings in that she used her own equipment; paid her own operating expenses; and was not subject to any regulation, direction, or control by Starkings as to format, timeliness, or method in performing her court reporting assignments. Collins had no access to trade secrets or unique information as a result of her business association with Starkings. It was clear, the court ruled, that the covenant not to compete was designed for only one purpose, namely, to restrain and inhibit normal competition.

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