States divided over asset purchases and non-competes

Apex Corporation is preparing to acquire almost all of the assets of Bee Corporation, including Bee’s goodwill. Apex intends to employ less than 10 percent of Bee’s sales force. However, Apex is concerned that those Bee employees whom it does not hire will accept jobs with competitors and begin soliciting Bee’s customers, drawing on the goodwill that Bee built up with those customers.

For this reason, Apex plans to acquire all the non-solicitation agreements between Bee and its sales employees, which preclude those sales employees from soliciting Bee’s customers for one year after their employment with Bee terminates.

After the sale, Apex plans to negotiate new non-solicitation agreements with the Bee employees whom it has hired. Apex also plans to notify the Bee sales employees whom it did not hire that they are still bound by their Bee non-solicitation agreements and that if they breach their Bee agreements, Apex will sue to enforce them in court.

But will courts permit Apex to enforce Bee’s non-solicitation agreements with its employees? If the non-solicitation agreements specifically authorize Bee to assign
them or if the agreements state that they “inure to the benefit of” Bee’s “assigns,” courts in almost every state likely will permit Apex to enforce Bee’s agreements, so long as the agreements are not unenforceable for other reasons.

However, if the non-solicitation agreements do not contain a provision authorizing Bee to assign them, whether Apex can enforce Bee’s agreements will depend on the law of the state governing the agreements.

Courts in New York, New Jersey, and Michigan, among many other states, have held that non-competition and non-solicitation agreements are assignable, even without the consent of the employee. In those states, Apex can enforce Bee’s agreements if Bee assigns the agreements to Apex, even if the agreements do not contain an assignment provision.

However, courts in a number of states, including Indiana, Ohio and Alabama among many others, have held that non-competition and non-solicitation agreements are “personal services” contracts that are not assignable without the consent of the employee. In those states, if a non-competition or non-solicitation agreement does not contain a provision authorizing assignment, the employer may not assign the agreement.

Or, to put it another way, courts in those states will not permit a third party to enforce an employer’s non-competition or non-solicitation agreement with its employee, even if the employer assigned or attempted to assign the agreement to the third party.

The New England states are divided on the issue. Courts in Maine and Connecticut have held that non-competition agreements are assignable even without an assignment provision. Courts in Vermont have held that, in the absence of the employee’s consent, non-competition agreements are not assignable.

In Massachusetts, neither the Supreme Judicial Court nor the Appeals Court has decided the issue, though at least two Superior Court judges have ruled that, in the absence of consent from the employee, non-competition and non-solicitation agreements are not assignable.

According to those judges, in Massachusetts Apex would not be permitted to enforce Bee’s non-solicitation agreements and Bee’s former employees would be free to solicit Bee’s former customers. There is no published opinion from a New Hampshire court on the issue.

Some options

What options are available to a company in Apex’s position if the governing law does not permit assignment of non-solicitation agreements? That is, what can an acquiring company do to ensure that it obtains the most value from the acquired company when the acquired company’s goodwill is compromised because non-competition or non-solicitation agreements with its employees cannot be assigned?

One option is to restructure the deal as a stock purchase. If Apex acquired all the shares of Bee’s stock, instead of selected assets of Bee, Bee could continue to exist, albeit under new ownership, and it could enforce its non-solicitation agreements. No assignment from Bee to Apex would be necessary.

A second option is to adjust the purchase price to reflect the reality that the value of Bee’s goodwill might be diminished to the extent that Bee’s former employees are permitted to utilize that goodwill on behalf of their new employers.

A third option is to negotiate a requirement that, prior to closing, Bee must enter into new non-solicitation agreements with each of its sales employees. The new agreements must contain assignment provisions. In many states, the new agreements will not be enforceable unless they are supported by consideration other than continued employment.

In those states, the employer must provide something of value to the employee other than continued employment in exchange for the promise not to solicit or else the promise not to solicit is not enforceable. In the example discussed here, Bee might provide a severance payment to those employees whom Apex does not intend to hire in exchange for signing a severance agreement containing an assignable non-solicitation obligation.

Almost certainly, other options are available. However, it is important that an acquiring company pay attention to the problem of assignment before the acquisition is complete, so that the problem is addressed while there is still time to devise a solution that satisfies both parties.

John R. Bauer is counsel with Robinson & Cole in Boston and practices in the business litigation section with a focus on intellectual property disputes. He can be contacted at (617) 557-5936, or by e-mail at [email protected].