Breach of Covenant Not to Compete

In Phelps Staffing, LLC v. Sheila Phelps, et al., decided December 20, 2011 the North Carolina Court of Appeals found that the sellers of a contract labor staffing business did not breach a non compete clause contained in the asset sale agreement.  After the business was purchased, one of the business owners opened up a competing contract staffing company and “flipped” many of the contract laborers and some of the customers who were working with the purchaser.

In finding that the sellers had not breached the contract, the Court of Appeals noted that one seller held no stock or other financial stake in the competing business even though she did receive payment of some of her personal expenses from that business.  The Court also appears to have placed great weight on the fact that that the seller was not actively involved in the management and had no entitlement to the payments.

IMPORTANT:  When you are selling or purchasing a business, be sure to work closely with a business lawyer.  Covenants not to compete are not favored by North Carolina courts and require careful preparation if they are to be enforced.