The seller owner quits working for the buyer four years after closing and immediately goes to work for competitor. The seller argues that one year post employment noncompete in employment agreement was not valid because two years post-closing noncompete in noncompetition agreement was signed after the employment agreement.

M&A Stories

March 21, 2023

Introduction

An owner of a seller of a business often goes to work for the buyer after the closing. As part of the deal the owner often executes an employment agreement with the buyer that contains a noncompete. The owner often also agrees not to compete with the buyer for several years after the closing, either in a purchase agreement provision or in a separate noncompetition agreement.

The deal

The seller in this deal supplied water, wastewater, storm drainage, and fire protection products and services to commercial and governmental customers in Minnesota and South Dakota. It agreed to sell the assets of its business to the buyer.

A part of the deal a seller shareholder agreed to be a sales rep for the buyer in an employment agreement where he agreed to not compete with the buyer within 150 miles of the offices he worked out of,  for a year after termination of employment.

Also, as part of the deal, but four days later, the shareholder executed a noncompetition agreement where he agreed to not compete with the buyer for two years after the closing in Minnesota, Wisconsin, North Dakota, South Dakota, and Iowa.

The lawsuit   

The shareholder quit working for the buyer four years after the closing and immediately began to work for a competitor which was located withing 150 miles of one of the shareholder’s offices which he worked out of for the buyer.

The buyer sued the shareholder for breach of the noncompetition agreement. The shareholder asked the federal district court to dismiss the claim. It argued the noncompetition agreement expired two years earlier, and the one year post employment noncompete in the employment agreement was invalid because the noncompetition agreement was signed 4 days after he signed the employment agreement, and thus the noncompetition agreement superseded the restrictive covenants in his employment agreement.

The district court agreed with the shareholder and dismissed the claim. The buyer appealed to the Court of Appeal.  That court reversed and sent the case back to the district court for further litigation.

The appellate court said that the one year post employment noncompete provision was only invalid if the noncompetition agreement addressed the same buyer concerns. And there was a good chance that the two noncompetition covenants dealt with different buyer concerns.

The buyer probably wanted the one year post employment noncompete in the employment agreement to protect against the risk that the shareholder would quit and take buyer trade secrets to use in competing with the buyer withing a 150 mile radius of the offices the shareholder worked out of.

On the other hand, the buyer probably wanted a two year post-closing noncompete to protect the goodwill of the seller business that it had purchased. And the five state noncompetition area for protecting the goodwill, was much larger than the employment agreement’s 150 mile noncompete radius.

If that is the case, then the fact that the two year post-closing noncompetition agreement was signed four days after the employment agreement did not mean that the buyer intended the one year post employment noncompete in the employment agreement to be superseded by the noncompetition agreement.

See Core and Main, LP v. McCabe, No. 22-1138, United States Court of Appeals, Eighth Circuit (Submitted October 19, 2022. Filed March 1, 2023).

Comment 

The buyer could have included a provision in the later signed noncompetition agreement that said that it did not supersede the noncompete provision in the employment agreement.

Also, states like California, prohibit an employer from requiring an employee to agree not to compete after employment termination.

By John McCauley: I write about recent legal problems of buyer and sellers of small businesses.

Email:             jmccauley@mk-law.com

Profile:            http://www.martindale.com/John-B-McCauley/176725-lawyer.htm

Telephone:      714 273-6291

Podcasts https://www.buzzsprout.com/2142689/12339043

Check out my books: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles and Selling Assets of a Small Business: Problems Taken From Recent Legal Battles

Legal Disclaimer

The blogs on this website are provided as a resource for general information for the public. The information on these web pages is not intended to serve as legal advice or as a guarantee, warranty or prediction regarding the outcome of any particular legal matter. The information on these web pages is subject to change at any time and may be incomplete and/or may contain errors. You should not rely on these pages without first consulting a qualified attorney.

Seller outside sales reps agreed to arbitration. Buyer purchased seller’s assets. Buyer hired sales reps who later sue buyer for overtime. Buyer can’t use seller arbitration provision to force sales reps into arbitration.

M&A Stories

February 15, 2023

Introduction

Here is another problem for a business buyer that came out of the pandemic.

The deal

The seller in this deal was FTD, the floral wire service company. Two outside sales reps for the seller signed a FTD employment agreement that had a binding arbitration agreement.

The seller filed for bankruptcy in 2019 and sold its assets to the buyer. The sales reps were hired by the buyer.

The outside sales reps worked outside of the office until the pandemic. Then they were required to work remotely in their homes.

The lawsuit   

The sales reps ultimately left the buyer. They then filed a overtime lawsuit against the buyer in a Chicago federal district court. The sales reps were not entitled to overtime under the federal wage and hours law when working outside of buyer’s office. But they claimed that they were when they worked remotely out of their homes.

The buyer asked the court to order the sales reps into binding arbitration, pointing to the seller arbitration provision. The court denied the request because the sales reps had agreed to arbitration with claims against the seller, but not the buyer.

See Virgilio v. FTD, LLC, Case No. 1:22-CV-02628, United States District Court, N.D. Illinois, Eastern Division, (January 10, 2023).

Comment 

The court suggested that the seller’s arbitration provision may have bound the sales reps in this case had it also applied to seller’s successors and assigns. But it did not: “the relevant ‘employment relationship’ is between the employees and ‘the Company.’ … ‘Company’ refers to … (the seller) only, not to its assignees, successors, heirs, or transferees.”

A better lesson for the buyer? Have the sales reps sign new employment agreements with the buyer that contain a binding arbitration provision.

By John McCauley: I write about recent legal problems of buyer and sellers of small businesses.

Email:             jmccauley@mk-law.com

Profile:            http://www.martindale.com/John-B-McCauley/176725-lawyer.htm

Telephone:      714 273-6291

Check out my books: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles and Selling Assets of a Small Business: Problems Taken From Recent Legal Battles 

Legal Disclaimer

The blogs on this website are provided as a resource for general information for the public. The information on these web pages is not intended to serve as legal advice or as a guarantee, warranty or prediction regarding the outcome of any particular legal matter. The information on these web pages is subject to change at any time and may be incomplete and/or may contain errors. You should not rely on these pages without first consulting a qualified attorney.