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North Carolina Court of Appeals Upholds Use of Noncompete by Distressed Business

    Client Alerts
  • May 26, 2023

In order to seek enforcement of a noncompetition agreement in North Carolina, the plaintiff must show that it is protecting a legitimate business interest. What happens when the company seeking to enforce the agreement has ceased operations, or otherwise could not fulfill the needs of the customer that leads to the breach of the agreement? According to a new decision from the North Carolina Court of Appeals, absent a showing that the plaintiff has completely ceased doing business, it retains the right to seek enforcement of the noncompete.

In Precision Mach. Design, LLC v. JBD Holdings, Inc., the defendant sold his business to the plaintiff. As part of this transaction, the defendant signed a standard three-year noncompete that prohibited him from competing with the purchaser or aiding others in competing. The plaintiff encountered business issues as a result of the pandemic, vacating its leased premises and selling off equipment. Following these moves, the defendant began assisting customers and prospective customers of the plaintiff by referring them to other businesses to complete their projects. The plaintiff subsequently sued, claiming breach of the noncompete.

The North Carolina Court of Appeals affirmed the decision of the trial court upholding the noncompete. The court concluded that the plaintiff had not gone out of business, and therefore retained an interest in preventing the defendant from diverting its business, even if it was temporarily unable to fulfill its customers’ needs. This decision may have been affected by courts’ increased willingness to enforce noncompetes put in place in the context of a business sale. Had this case involved an employment noncompete, the employee’s loss of his or her job due to the employer’s business struggles could affect the ultimate decision as to enforceability.