Hudson v. NORTH CAROLINA FARM BUREAU, ETC.

209 S.E.2d 416 (1974)

23 N.C. App. 501

Elwood HUDSON v. NORTH CAROLINA FARM BUREAU MUTUAL INSURANCE COMPANY, INC.

No. 7410SC714.

Court of Appeals of North Carolina.

November 6, 1974.

Certiorari Denied January 7, 1975.

*417 Boyce, Mitchell, Burns & Smith by Robert E. Smith, Raleigh, for plaintiff appellant.

Broughton, Broughton, McConnell & Boxley, P. A. by Robert B. Broughton and Gregory B. Crampton, Raleigh, for defendant appellee.

Certiorari Denied by Supreme Court January 7, 1975.

VAUGHN, Judge.

Plaintiff, with some logic, attacks the agreement in question with the same arguments that are generally advanced to vitiate covenants not to compete contained in employment contracts. A covenant not to compete is a provision embodied in an employment contract whereby an employee promises not to engage in competitive employment with his employer after termination of employment. Such a covenant is valid and enforceable only if given for a valuable consideration and if the restrictions are reasonable as to terms, time and territory. Greene Company v. Kelley, 261 N.C. 166, 134 S.E.2d 166; Mastrom, Inc. v. Warren, 18 N.C.App. 199, 196 S.E.2d 528.

The Agreement here, however, is not one where the employee agrees to refrain from competitive employment. The retired employee may engage in competitive employment without interference from his employer. If he does so, however, he forfeits his right to participate in a retirement plan to which he has made no monetary contribution.

*418 A direct question as to the validity of the forfeiture clause under attack here does not appear to have been previously presented to the Courts of the Appellate Division of this State.

In the few cases from other jurisdictions where the question has been considered "[t]he strong weight of authority holds that forfeitures for engaging in subsequent competitive employment, included in pension retirement plans, are valid, even though unrestricted in time and geography." Rochester Corporation v. Rochester, 4 Cir., 450 F.2d 118, 122-123. The Courts conclude that the forfeiture provisions are designed to protect the employer against competition by former employees who might retire and obtain benefits while engaging in competitive employment, and that the employer, as part of a noncontributory plan, can provide for this contingency. Annot., 18 A.L.R.3d 1246, 1251; Van Pelt v. Berefco, Inc., 60 Ill.App.2d 415, 208 N.E.2d 858. The Courts additionally conclude that the forfeiture, unlike the restraint included in an employment contract, is not a prohibition on the employee's engaging in competitive work but is merely a denial of the right to participate in the retirement plan if he does so engage. "A restriction in the contract which does not preclude the employee from engaging in competitive activity, but simply provides for the loss of rights or privileges if he does so is not in restraint of trade [citations]." Brown Stove Works, Inc. v. Kimsey, 119 Ga.App. 453, 455, 167 S.E.2d 693, 695.

Other courts have reasoned, as does plaintiff, that although the employee has not made a financial contribution to the retirement plan, the pension rights have been earned by him and should not be divested by restrictions on future employment which would not be reasonable under the standards usually applicable to covenants not to compete. See Food Fair Stores, Inc. v. Greeley, 264 Md. 105, 285 A.2d 632; Mackie v. State Farm Mutual Automobile Ins. Co., 13 Mich.App. 556, 164 N.W.2d 777. See also Note, Forfeiture of Pension Benefits for Violation of Covenants Not to Compete, 61 Nw.U.L.Rev., 290 at 303 (1966-67). Forfeiture provisions have also been invalidated in states with statutes which, in broad terms, invalidate contracts which by penalty or otherwise restrain employment. Muggill v. Reuben H. Donnelley Corporation, 62 Cal. 2d 239, 42 Cal. Rptr. 107, 398 P.2d 147. Note, 50 Cornell L. Quarterly, 673, 675 (1964-65).

We concur in the distinctions the majority of the Courts have made between contracts that preclude the employee from engaging in competitive activity and those that do not proscribe competitive employment but provide that retirement benefits provided solely by the employer under the terms of the agreement will be payable only in the event the employee elects to refrain from competitive employment. We hold that the latter, though unrestricted in time or territory, are not subject to the same consideration of public policy as the first.

The judgment declaring the forfeiture clause in the contract under consideration to be valid and enforceable is affirmed.

Affirmed.

CAMPBELL and PARKER, JJ., concur.