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North Carolina Business Court Says Employee Non-Compete Cannot Be Assigned through Asset Sale

    Client Alerts
  • November 09, 2007

On November 1, a North Carolina Superior Court decision refused to enforce a non-competition agreement between an employee and a successor employer to the entity that originally entered into the agreement.  In Better Business Forms and Products, Inc., v, Craver, the defendant originally entered into a non-compete agreement when hired in 1997.  Subsequent to beginning work, he twice shifted to new employers through successive asset sale transactions.  Each sale included provisions whereby the old employer transferred all rights and obligations in existing employment agreements.  However, in both cases, the employee never signed new employment agreements with the purchasers.


The employee eventually quit and immediately began competing with his former employer.  When sued to enforce the terms of the non-compete, the employee contended that it was unenforceable because such agreements are not assignable in North Carolina.  The case was assigned to a Superior Court Judge Tennile, who handles complex business litigation.  Judge Tennile acknowledged that this case was the first in North Carolina to consider the issue of assignability of non-compete agreements through asset transactions.


The court found that the agreement was unenforceable.  As a matter of law, non-competition agreements with employees are disfavored.  The agreement was not assignable because after the asset sale, its application to the business of the new employer could have been substantially broader than that considered by the employee when he signed the original agreement.  The court distinguished this case from assignable covenants between sellers and purchasers of a business.


In order to get an effective non-compete after the sale, the court made clear that the purchaser has to negotiate a new employment agreement with the employee, and provide consideration for the new non-compete.  The court did not discuss whether hiring alone by the asset purchaser into the employee’s same job would be adequate consideration to support the non-compete.


At best, the asset purchaser could seek to enforce the terms of the non-compete running from the date of closing of the transaction.  In other words, if the purchaser does not negotiate a new employment agreement, it could seek to prevent the employee from violating the agreement made with his old employer for the established period of time and territory.  The old non-compete would run from the closing of the asset sale, and not beginning from the subsequent date of separation from employment with the purchaser.


Superior Court decisions generally do not have precedential value, and this decision may be appealed to the North Carolina Court of Appeals.  However, as the complex business dispute court, Judge Tennile’s decisions are often highly respected by appellate and other Superior Court decision makers.  Unless reversed on appeal, North Carolina employers engaged in asset purchases should assume that they will need to enter into new agreements with employees of the seller after the transaction closes in order to obtain effective non-competition or confidentiality agreements.