Employer breach of employment agreement results in no enforcement of employee non-compete

Employee began his career in physical therapy in 1994. He worked as an independent contractor until joining Target as an employee in 2008 to manage a number of physical therapy clinics in southern Delaware.

In 2008, Employee and Target executed the employment agreement that provided Employee with an annual base salary of $200,000 and a quarterly EBITDA-based bonus. In the employment agreement, Employee promised to not compete against Target during the term of his employment plus one year.

In 2009, Employee and Target executed an amendment to the bonus structure, under which Employee would participate in the Target’s clinic incentive plan (as amended from time-to-time by the Target). The bonus plan entitled Employee to an incentive bonus based on the performance of the specific centers he managed.

Employee’s performance as a manager and a physical therapist enabled him to negotiate his considerable compensation and the bonus plan. Employee noted that his salary was substantially higher compared to what other physical therapists make because of overseeing other clinics and having a longstanding track record of performance in those clinics. Employee stated that that there were years where his bonus was up to $30K to $35K as a result of his management of the clinics, representing 15 to 18 percent of his salary at the time.

Buyer acquired Target through a stock purchase agreement in early 2016. After that, Target cancelled Employee’s bonus plan and never offered Employee a replacement plan.

On September 15, 2016, Employee resigned from Target. Employee explained that the absence of an incentive plan, along with disagreements with the Target’s new owner, caused his resignation.

Employee joined Competitor on September 18, 2016. At that time, Competitor was in the process of acquiring a location in Wilmington, and Competitor did not have any other Delaware operations. Within months, Competitor opened two new clinics in Milford and Seaford— restricted non-compete areas under Employee’s employment agreement.

On May 25, 2017, Target sued Employee in a Delaware court to stop him from competing against Target. Employee argued that he was excused from the non-compete restrictions because Target had done away with his bonus deal; which was a material part of his compensation.

The court agreed with Employee, finding that since Target materially breached the employment agreement, Target may not complain if Employee subsequently refused to perform its obligations under the non-compete provision.

This case is referred to as Physiotherapy Corporation v. Moncure, C.A. No. 2017-0396-TMR, Court of Chancery of Delaware (Decided: March 12, 2018).

Comment. Many states enforce employee non-competes. California does not but will enforce owner noncompete of a business selling its assets or a shareholder selling the stock of his or her company.

A takeaway here is that an employer may lose the right to enforce an employee non-compete if employer materially breaches an employment agreement, by for example, not paying a material amount of compensation due employee.

With 20/20 hindsight, Buyer might have negotiated a change in Employee’s bonus arrangement, if Buyer thought there was a risk in losing the right to enforce Employee’s non-compete.

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 covenant not to compete, employment agreement, stock purchase agreement

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