Fraud Carve-Out in APA’s Exclusive Remedy Provision Saves Buyer’s Employee Non-Solicitation Claim

Introduction

Most acquisition agreements provide that the agreement’s indemnification provisions are the exclusive remedy for a contractual breach. However, it is also common to exclude fraud claims from this excusive remedy provision.

The deal

This deal involved the acquisition of the assets of a Bakersfield, California trampoline park. The managing member of the seller of the park signed an agreement where he promised not to solicit the park’s employees to terminate their employment with the buyer.

The lawsuit

The buyer discovered after the closing that the managing member of the seller hired the general manager of the buyer’s park and was trying to hire other buyer employees to work for a competing trampoline park which was managed by the managing member of the seller. The buyer sued the managing member of the seller in a Sacramento federal district court.

The buyer claimed that the managing member of the seller violated his nonsolicitation covenant. The managing member of the seller asked the court to dismiss the claim because the buyer’s claim was not a claim for a remedy authorized in the APA’s exclusive remedy provision. The buyer disagreed saying that there is a fraud carve-out in the exclusive remedy provision that permits its claim.

The court agreed with the buyer and denied the managing member of seller’s motion to dismiss the buyer’s claim.

Here, the court said that the buyer alleged that the managing member of the seller breached his nonsolicitation covenant “by soliciting and inducing” employees of the seller’s park to terminate their employment, and recruiting those employees to work for another company managed by managing member of the seller in violation of his nonsolicitation covenant. In particular, the buyer alleged that the buyer’s park’s general manager abruptly resigned and assumed a similar general manager position at the trampoline park managed by the managing member of the seller. And that the managing member of the seller attempted to cover up his wrongful solicitation of employees in violation of his nonsolicitation covenant.

Accepting the buyer’s allegations as true, the court found that the allegations of a cover up provided enough indications that the managing member of seller engaged in intentional misconduct and willful breach of his nonsolicitation covenant.

This case is referred to as Rush Air Sports, LLC v. RDJ Group Holdings, LLC, No. 1:19-cv-00385-LJO-JLT, United States District Court, E.D. California (October 2, 2019)   

Comment

Exclusive remedy provisions and a fraud carve-out are boilerplate provisions that the businesspeople leave to the lawyers to hash out.

However, these provisions can be very important to the buyer and seller if shooting starts after the closing. In this case, the buyer was faced with a possibly serious drop in revenue caused by the loss of its general manager and possibly other employees to a competitor as a result of the managing member of the seller’s breach of his nonsolicitation covenant.

Apparently, the buyer’s potentially significant economic loss would have no remedy under the APA’s exclusive remedy provision. But an allegation of a coverup coupled with a fraud carve-out exception to the exclusive remedy provision saved the day.

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Posted in boilerplate provisions, fraud carveout, hiring seller's employees, nonsolicitation of employees and customers Tagged with: ,

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