Explore a recent M&A case where a court ruled a non-compete clause in an employment agreement unenforceable. Delve into key details, including the background, agreements, termination, legal dispute, court’s decision, severance dispute, and trade secret allegations.
M&A Stories
September 17, 2018
In a recent M&A case, a court ruled that a non-compete clause in the employment agreement between the seller’s owner and the buyer was unenforceable. Here’s a concise breakdown of the key details:
Background:
The seller, a Portland, Maine-based business offering data and consulting services for the tire and automotive industry, was purchased by a buyer from Duluth, Minnesota in 2010. The buyer aimed to expand its business, particularly with a shared client who conducted more business with the seller.
Agreements:
The deal was formalized through two contracts: an asset purchase agreement and an employment agreement. The asset purchase agreement outlined a $100,000 down payment, followed by monthly payments and an annual earn-out. The employment agreement included a $150,000 annual payment until December 31, 2020, along with a non-compete clause.
Termination and Legal Dispute:
Relations soured, leading to the buyer terminating the seller’s owner in 2013 without specific documented issues. The buyer ceased all payments and, post-termination, accused the seller’s owner of soliciting clients.
Court’s Decision:
The court found the non-compete clause unenforceable for several reasons: The covenant applied to “prospective” clients, with the court deeming it impractical for the seller’s owner to identify them. The non-compete was overly broad, not restricting competition to customers related to the seller’s owner’s employment, which was significant due to the buyer’s involvement in other industries. The 5-year term was considered unreasonable under Minnesota law without evidence of special training, which was not provided.
Severance Dispute:
The court highlighted that the buyer failed to fulfill its obligations under the employment agreement, as the $2,500 severance offered fell short of the agreed $25,000 for termination without cause.
Trade Secret Allegations:
The court dismissed claims of trade secret violation, emphasizing that the buyer made no effort to keep its customer list confidential.
Conclusion:
While some states, like California, may not enforce non-competes against former employees, this case underscores the importance of ensuring the reasonableness of terms such as territory, duration, and customer scope in M&A agreements.
Case Reference:
Riddle v. Geckobyte.com, Inc., Civ. No. 17-623 (PAM/LIB), United States District Court, D. Minnesota (June 22, 2018).
https://scholar.google.com/scholar_case?case=11631639566197381577&hl=en&as_sdt=1000006
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