Labor & Employment – Severance Agreement – Breach of Contract – Conflict of Interest

McKinnon v. CV Industries. (Lawyers Weekly No. 11-07-0718, 24 pp.) (Robert N. Hunter Jr., J.) Appealed from Catawba County Superior Court. (Ben F. Tennille, J.) N.C. App. Click here for the full-text opinion.

Holding: An employer who failed to pay severance benefits did not breach its contract with the plaintiff since the plaintiff was not entitled to Plan A benefits when he ceased continuous competition with his employer in 2001.

The trial court’s grant of the defendant’s motion for summary judgment is affirmed.

Background

This dispute arises out of a disagreement over payment of severance benefits between the plaintiff and CV Industries, Inc. Plaintiff, formerly President and CEO of CVI, entered into a severance agreement with CVI upon his resignation from the company to pursue a position at Joan Fabrics Corporation, a competitor. Plaintiff alleges that, by failing to pay his severance benefits, CVI breached its contract, engaged in fraud, and violated N.C. unfair and deceptive trade practices statutes.

CVI acts as a holding company for Century Furniture, LLC and Valdese Weavers, LLC. CVI is an Employee Stock Ownership Plan (ESOP) company that permits employees of CVI to take an equity ownership interest in the company. Century manufactures high-grade furniture, and Valdese manufactures mid to high quality jacquard fabric for use by furniture manufacturers. Valdese also funded the textile research of Frank Land, an inventor with a scientific background who was developing a fire-resistant yarn to be used in upholstery for furniture manufacturing.

Plaintiff became president of Valdese on Aug. 8, 1978. Over the next two decades, plaintiff served in several managerial roles within CVI and its subsidiary companies. By 2000, the plaintiff was president and CEO of CVI. On May 3, 2000, the plaintiff notified CVI that he intended to resign in order to take a new job and acquire an ownership interest in Joan Fabrics and its affiliate Mastercraft Fabrics, Corp. Throughout the course of his employment with CVI, the plaintiff negotiated four employment agreements and incentive plans (Plans A, B, C, and D) in which he benefited.

On June 23, 2008, the plaintiff contacted CVI to notify them of his withdrawal from continuous competition and to demand his Plan A benefits. At that time, CVI’s ESOP stock price had exceeded its Dec. 31, 1999 value. Between June 23, 2008 and Oct. 10, 2008, the plaintiff exchanged several communications with Richard Reese, Chief Financial Officer of CVI, discussing the plaintiff’s eligibility for the Plan A benefits. On Oct. 10, 2008, the plaintiff received a letter from CVI stating that the company refused to pay the Plan A benefits. CVI alleged that he ceased continuous competition with CVI when he resigned from Doblin, EBM, and Circa on Nov. 26, 2001. CVI argued that since its ESOP stock price was below the Dec. 31,1999 value of $9.90 at that time, it did not owe the plaintiff any benefits under the Severance Agreement.

On March 11, 2009, the plaintiff sued for breach of contract, specific performance, fraud, and unfair and deceptive trade practices. CVI’s motion for summary judgment was granted on June 3, 2010. This appeal followed.

Discussion

The contract in question, the May 25, 2000 Severance Agreement, states that the plaintiff’s Plan A benefits will be suspended until he is no longer “employed by any other competitor of and is not engaged in competition with CVI or any of its subsidiaries.” If the value of CVI’s ESOP stock exceeds its Dec. 31, 1999 value at the time the plaintiff ceases continuous competition, he will receive Plan A benefits.

Determination of the existence of a breach of contract in the present case thus hinges on the definition of “competition.” We define “competition” as entailing more than mutual existence in a common industry or marketplace; rather, it requires an endeavor among business entities to seek out similar commercial transactions with a similar clientele. Under this definition, the plaintiff did not continuously engage in competition with CVI between the May 25, 2000 Severance Agreement and his June 23, 2008 claim for Plan A benefits, so CVI did not breach the Severance Agreement by refusing to pay the plaintiff’s Plan A benefits.

When the plaintiff first resigned his position at CVI and began working for Joan Fabrics and Mastercraft, he was competing with CVI. After he resigned his position at Joan Fabrics and Mastercraft on Feb. 12, 2001 to become president and CEO of Doblin, with management responsibility for Joan Fabrics affiliates EBM and Circa, he still engaged in continuous competition with CVI. Doblin, EBM, and Circa all produced jacquard fabric for sale to furniture manufacturers; similarly, CVI subsidiary Valdese produced jacquard fabric for sale to furniture manufacturers to use in upholstery.

Nevertheless, when the plaintiff resigned from Doblin, EBM, and Circa on Nov. 26, 2001 to pursue a business opportunity with Land, he ceased continuous competition with CVI. Mere business involvement in a common or related industry does not necessarily rise to the level of competition. The evidence thus demonstrates that, although the plaintiff’s business venture with Land operated in an industry related to that of CVI, the plaintiff and CVI were not in competition as they did not seek to sell similar goods or provide similar services to similar clientele. In short, the plaintiff’s clients were yarn manufacturers and fabric manufacturers, while CVI’s clients were furniture manufacturers and consumers. Additional circumstantial evidence supports our holding that the plaintiff was not in competition with CVI during his business involvement with Land.

On appeal, the plaintiff contends that even if he was not in continuous direct competition with CVI until June 23, 2008, he was still in continuous indirect competition.

We decline to adopt such a broad understanding of “competition.” Under the plaintiff’s definition of “indirect competition,” any producer of a material used in furniture manufacturing might be in competition with a furniture manufacturer or fabric manufacturer such as CVI-including timber companies and cotton producers. We find this definition unpersuasive and excessively broad.

Consequently, we conclude the plaintiff ceased continuous competition with CVI when he began his business venture with Land in 2001. Undisputed evidence demonstrates that the price of CVI’s ESOP stock remained below its Dec. 31, 1999 price until Dec. 31, 2007. Thus, the plaintiff was not entitled to Plan A benefits when he ceased continuous competition with CVI in 2001, and there are no genuine issues of material fact as to the plaintiff’s breach of contract claim. Since no breach of contract occurred, he is not entitled to specific performance. We affirm the grant of summary judgment to the defendant.