The seller’s employee unsuccessfully argued that his restrictive covenants could not be assigned to the buyer without his consent.
October 5, 2022
An asset buyer of a business wants the benefit of any restrictive covenants (such as nondisclosure, nonsolicitation and noncompetition covenants) that the seller has with his employees. However, the buyer faces risks that such restrictive covenants are unenforceable.
The seller employee in this deal was the founder and majority shareholder of a company that “invented and developed products related to veterinary surgeries, including orthopedic trauma products, internal fixation products, bone anchors, specialty plates, and advanced bio absorbable implants.” About five years after founding the company, the employee sold the assets of his business to the seller.
This founder and owner of the company agreed to work for the seller as the director, and lead product development engineer pursuant to the terms of an employment agreement that contained restrictive covenants.
The seller later sold the assets of this business to the buyer. The sold assets included the employee’s employment agreement.
The buyer unsuccessfully tried to hire the employee. And later sought to enforce the restrictive covenants that were contained in the employee’s employment agreement. The employee resisted, and the dispute ended up an Ohio federal district court.
The court held that the restrictive covenants were enforceable because the employment agreement’s assignment clause permitted the assignment of the employment agreement, including the restrictive covenants, from the seller to the buyer, without the employee’s consent: “nothing in the employment agreement or either restrictive covenant requires … (the employee’s) … consent to assignment. And Ohio law generally favors assignment except in circumstances not present here.”
See Wotton v. Veterinary Orthopedic Implants, LLC, Case No. 1:22-cv-01002, United States District Court, N.D. Ohio, Eastern Division, (September 22, 2022).
The result might have been different in a state which has a very negative view of restrictive covenants. In California, for example, the restrictive covenants may not have been enforceable if this employee had not originally given the restrictive covenants in connection with the sale of his business. In California, generally a noncompetition covenant is not enforceable unless given in connection with the sale of a business.
By John McCauley: I write about recent legal problems of buyer and sellers of small businesses.
Telephone: 714 273-6291
Check out my book: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles
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