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."
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.