John M. Kirby
Recent Case -- Non-Compete Agreement -- Sale of Staffing Business
A person who purchases a business from another person often enters a "non-compete" agreement with the seller, which prohibits the seller from competing with the buyer. (These non-compete agreements are also used to prevent employees from competing with their employer. The law of trade secrets is also implicated here.) These agreements are enforceable if they are reasonable, which requires a fact-specific inquiry.
In a recent case (Phelps Staffing v. S.C. Phelps, Inc. (December 20, 2011)), the Court of Appeals affirmed the dismissal of an action for breach of a non-compete agreement. The facts of the case are rather complicated, but essentially Ms. Phelps owned a staffing company which was successful. Her husband also performed services for the company. Mr. El-Kaissi wanted to purchase the business. Ms. Phelps waswilling to sign a non-compete agreement, but Mr. Phelps refused to sign such an agreement. The buyer ultimately purchased the business, and Ms. Phelps signed a non-compete agreement (which also had, e.g., various confidentiality provisions). Subsequently, however, Mr. Phelps started a competing company, and began to acquire customers of the buyer's business. The buyer then sued the Phelps under various theories, including breach of the non-compete agreement.
The facts and analysis from the opinion are rather complicted, but the court essentially ruled that Mr. Phelps did not sign the non-compete agreement and that therefore he was not bound by its terms. The court distinguished a case from another state on the basis that, among others, Mr. Phelps refused to sign the agreement and did not promise to not compete. The court also held that Ms. Phelps could not be sued because there was insufficient evidence that she promoted Mr. Phelps business.
This case demonstrates the importance of a buyer in obtaining a solid non-compete agreement. The buyer in this case paid approximately $1.5 million for the business.
This website contains other recent North Carolina cases.