Tuesday, May 27, 2008, 10:24 AM

Buyer Beware: Non-compete agreements may not be assignable to buyers in asset-only purchases in North Carolina

For many years, no one seems to have paid much attention to the assignment of non-compete agreements in North Carolina. In the context of a sale of a business, practitioners have generally assumed that basic contract principles would make a non-compete agreement as assignable as any other contract. That assumption is no longer safe in North Carolina.

In a recent decision, the North Carolina Business Court emphasized that in an asset-only purchase, the buying company has two options when seeking to acquire employees with non-compete agreements with the seller. The buyer can either enforce the non-compete from the date of the purchase (presumably by not hiring the seller’s employees and preventing them from competing), or the buyer must enter into new non-compete agreements with the acquired employees.

In Covenant Equipment Corp. v. Forklift Pro, Inc., Case No. 07 CVS 21932 (N.C.Super. Ct. May 1, 2008), in an asset-only purchase, the buyer acquired an employee who had entered into a 2-year non-compete agreement with the seller. That employee continued his employment with the buyer, working under the same employment agreement with restrictive covenants that he had originally entered into with the seller. More than two years after the purchase, the acquired employee left and went into competition against the buyer. The buyer brought suit to enforce the restrictive covenant.

Building upon a decision it issued in late 2007, the Business Court refused to enforce the non-compete agreement, finding that it had already expired two years after the buyer's purchase. The Business Court stated that there is a "clear difference between an asset purchase and a stock purchase" and that it would not be fair to the acquired employees in an asset purchase to allow the assignment of the restrictive covenants. Rather, the buyer must choose to enforce the covenants from the purchase date, or enter into new agreements with the acquired employees. The Business Court reasoned that "[t]his policy is fair because the buyer may have a business which substantially changes the nature and scope of the restriction originally agreed to by the employee."

Obviously, this evolving trend in North Carolina regarding the assignment of non-compete agreements will provide a further basis for employees to challenge those agreements, and certainly adds another issue for buyers--and their attorneys--to be aware of in an asset purchase. In cases where the seller's employees are an important asset, it will be critical to review any restrictive covenants and renegotiate them. If there is an upside for the buyer, it may be that in those cases where the restrictive covenants originally entered into by the seller and its employees have drafting or enforcement problems, the asset purchase will provide an opportunity for the buyer to identify and correct those issues.

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