Tuesday, October 12, 2010

Non-Solicitation Agreements when Employers "Change Hands" - Missett I

This post kicks off non-solicitation agreement week here on Lawffice Space! It's really just one Pennsylvania Superior Court case, but it sheds light on a couple of important issues so it will be multiple posts. The case is Missett v. Hub Int'l Pennsylvania, LLC, 2010 PA Super 178, 2010 WL 3704984 (Pa. Super. Ct. Sept. 23, 2010).

Today's issue: Is a non-solicitation agreement enforceable when an employer changes hands. What do I mean by "changes hands?" Well, in Missett, the employee worked for an LLC under a non-solicitation agreement (there's some complicated background, but this is the basic gist). Then, a corporation:
entered into a Purchase and Sale Agreement with [the LLC], pursuant to which it acquired all of the issued and outstanding membership equity interests in [the LLC].
Assuming the non-solicitation agreement was enforceable before the acquisition, is it still enforceable after?

The Court gave a convenient rundown of how Pennsylvania courts have handled similar situations:
  • In Hess v. Gebhard & Co., Inc., 808 A .2d 912 (Pa.2002), the Court held that “a restrictive covenant not to compete, contained in an employment agreement, is not assignable to the purchasing business entity, in the absence of a specific assignability provision, where the covenant is included in a sale of assets.” Essentially, "an asset purchase results in an entirely new employer/employee relationship."
  • In J.C. Ehrlich Co., Inc. v. Martin, 979 A.2d 862 (Pa.Super.2009), the Court held that a covenant not to compete remained enforceable following the consolidation of two companies through a stock purchase agreement. Essentially, the "employer remained the same." (There were also some similar federal cases in the Third Circuit).
  • Back to Missett, the Court "conclude[d] that the sale... of the outstanding membership interests in [the LLC] and the subsequent name change was not a sale of assets and, thus, did not result in a change in the identity of Missett's employer."
In short, when an employer "changes hands" (that's the best catch-all phrase I could come up with), the form of the transaction matters.  Missett helps us by providing a rundown of previous decisions involving sales of assets, and stock purchase agreements. It also adds LLC sale of memebrship interests to the string of case law.

Next post, I'll get into the enforceability of the agreement after the employee gets terminated, now that we've established that the LLC membership sale does not render the agreement unenforceable.

Posted by Philip Miles, an employment lawyer with McQuaide Blasko in State College, Pennsylvania.