Buyer of stock of title and escrow company can enforce noncompete and nonsolicitation provisions in target’s employment agreements

Target was a title and escrow company located in West Jordan, Utah (greater Salt Lake City area). Target’s Manager and Target’s COO/general counsel signed employment agreements with Target. Target’s Manager’s employment agreement, executed in August 2003, stated that she would not compete against Target within a 40-mile radius of any of Target’s offices, during her employment with Target and for the following year. Target’s COO/general counsel’s employment agreement, executed in August 2004, limited Target’s COO/general counsel’s right to compete with Target during and after his employment there, and contained a nonsolicitation provision barring him from trying to recruit away Target employees. In May 2006 Target’s Senior VP of escrow operations signed an employment agreement with Target which contained nonsolicitation and noncompete provisions.

Between 2003 and February 2009, Buyer, a large southern California based company that provides comprehensive title insurance protection and professional settlement services for real estate transactions, acquired all of Target’s stock.

In later 2014, Target’s COO/general counsel’s created Competitor. He quit his job in March of 2015, when Competitor opened for business. The following day, Target’s Manager resigned and started at Competitor. Within two weeks, at least 25 other employees defected as well.

Buyer promptly sued Competitor, Target’s COO/general counsel, Target’s Manager, and Target’s Senior VP of escrow operations, alleging, among other things, breach by the former Target employees of their employment agreements. The lawsuit was filed in federal district court in Salt Lake City.

After a jury trial, the jury awarded Buyer $1.7 million in damages against the former Target employees, $1 million of compensatory damages against Competitor, $500K of punitive damages against Competitor and $2.9 million in attorney fees.

On appeal, the former Target employees argued that their signed employment agreements with Target terminated when Buyer purchased Target. Therefore, they argued, the agreements’ restrictive covenants were no longer valid and enforceable at the time the three former Target employees began working for Competitor.

The court rejected the argument saying that the law is clear that a purchase of a company’s stock does not terminate the company’s employment agreements it has with its employees.

This case is referred to as First American Title Insurance Company v. Northwest Title Insurance Agency, No. 17-4086, United States Court of Appeals, Tenth Circuit (October 9, 2018).

Comment. This case illustrates the difference between buying the assets of a business and buying the company that owns the business (stock of a corporation or the membership interests of an LLC).

When you buy the stock of a company, a company employment agreement is generally not terminated unless there is a “change of ownership” clause in the employment agreement.

Not so if you buy the assets of the business. In an asset deal it is more common to find a clause in the employment agreement (often in the assignment provision), that in effect, terminates the employment agreement if the seller tries to transfer the employment agreement to a buyer without the employee’s written consent.

A buyer is more likely to face getting a target employee’s consent involving an employment agreement in an asset deal than in a stock deal.

By John McCauley: I help people start, grow, buy and sell their businesses.

Email: jmccauley@mk-law.com

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

Telephone:      714 273-6291

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Posted in asset vs stock deal, covenant not to compete, nonsolicitation of employees and customers

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