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North Carolina Court of Appeals Defines Competitive Activities for Purposes of Post-Employment Agreement

    Client Alerts
  • July 29, 2011

Non-competition and severance agreements with employees often condition benefits or restrictions on whether or not the former employee enters into competition with the company. Last week in a case in which Parker Poe represented the prevailing employer, the North Carolina Court of Appeals determined that for purposes of such agreements, competition means offering the same or similar services to the same range of potential customers.

In McKinnon v. CV Industries, the plaintiff was a former executive for a furniture manufacturer who upon his resignation executed a severance agreement with his former employer.  Among other things, the agreement provided that certain severance benefits were tied to the company's stock price as of the date that he ceased to be in competition with his former employer after departing.

Several years after leaving, the plaintiff moved from a position in direct competition with his former employer to one that involved a different segment of the furniture industry. The defendant determined that the stock price as of the date of this move did not trigger the severance obligations contained in the separation agreement. The plaintiff sued, claiming that his new job was in a related business that was in some degree of competition with his former employer.

The Court of Appeals disagreed, affirming summary judgment for the employer. In its decision, the court defined competition as an endeavor among business entities to similar commercial transactions with a similar clientele. Mutual existence in a common industry or marketplace is not enough. The court also rejected the plaintiff's attempt to create a definition of indirect competition, meaning different products, but ones that competed for the same limited customer dollars. This definition would define competitive activities as almost anything that supplies goods or services to the same industry.

Post-employment restrictions or obligations tied to competitive activities mean those similar goods and services that two business entities supply to the same customer base in the same geographic market. North Carolina courts will not read such language to apply to other activities that happen to occur in the same industry.