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North Carolina Business Court Rejects Claims for ESOP Payment by Former Executive

    Client Alerts
  • June 18, 2010

Earlier this month, the North Carolina Superior Court for Complex Business Cases granted summary judgment to an employer in a case involving the definition of post-employment competitive activities. Parker Poe represented the successful employer defendant in McKinnon v. CV Industries, Inc.

In this case, the plaintiff was the former president and CEO of the defendant. Upon departure from employment, his severance package stated that he would be eligible to receive payment of his shares under the employer's ESOP if the price of the shares exceeded an established level as of the date that he ceased working for a competitor. The plaintiff worked for the competitor for a number of years, but switched jobs in 2002, and began working for a vendor to his former employer. The defendant did not inform the plaintiff that it considered the ESOP valuation (which did not exceed the threshold level) to have been triggered at this point.

Upon leaving the vendor's employment years later, the plaintiff contended that he was entitled to a valuation of his ESOP shares at that point. The Business Court rejected this contention, concluding that the shares were appropriately valued in 2002 when the plaintiff departed employment with the defendant's direct competitor.

In its opinion, the court drew a clear distinction between competitors and suppliers. The court analyzed the plaintiff's employment agreement with the vendor and concluded that it would not have prohibited the plaintiff from rejoining the defendant. The definition of competing business indicated the true relationship between the vendor and one of its customers. The Business Court also used North Carolina non-compete law to reject the plaintiff's claims. His definition of a competing business would have been overbroad and unenforceable had it been applied to an executive employment agreement.

This case involved an unusual situation where an employer contended that its former executive was not engaged in competition. When applied to the facts at hand, the Business Court concluded that the clear terms of the severance agreement precluded additional claims for compensation.