Learn about a recent case in Oklahoma where a federal court refused to enforce certain employee non-solicitation post-employment covenants during an asset acquisition. Understand the importance of complying with local laws when implementing non-solicitation agreements in M&A deals to prevent potential legal challenges.
M&A Stories
April 11, 2021
Introduction:
When companies merge or acquire assets, there’s a risk that employees of the selling company might take customers with them after the deal. To address this risk, buyers often have employees sign agreements promising not to solicit the seller’s customers after leaving. However, the enforceability of these agreements depends on state law, which varies.
The Deal:
In this case, a national lawncare company (the buyer) acquired assets from a competitor based in Oklahoma (the seller) on October 9, 2019. Before the acquisition, the seller had its employees sign non-solicitation agreements, which were also acquired by the buyer. Some employees signed agreements that prohibited them from directly soliciting established customers for two years after leaving. Others had agreements that restricted direct or indirect solicitation of any customers they had contact with. The buyer also had all seller employees it hired sign an agreement that restricted solicitation of buyer’s customers they had contact with for one year after employment termination.
The Lawsuit:
After the acquisition, some former seller employees joined competitors and allegedly violated their nonsolicitation agreements with the seller and buyer. However, the court dismissed the buyer’s claims. The court clarified that in Oklahoma, non-solicitation provisions are enforceable only if they prohibit “direct” solicitation of “established” customers. The buyer’s provisions failed because they prohibited “indirect” solicitation, including methods like advertising or meeting a former customer at a trade show. Additionally, one seller’s nonsolicitation agreement failed because it lacked a specific term, while the other could not be assigned to the buyer without employee consent.
This case is referred to as TruGreen Limited Partnership v. Oklahoma Landscape, Inc., Case No. 20-CV-71-TCK-CDL, United States District Court, N.D. Oklahoma, (March 17, 2021).
Takeaway:
Companies must be mindful of local laws when implementing non-solicitation agreements to prevent former employees from competing against them. Noncompete provisions are permissible in Oklahoma only if given by someone selling a business.
By John McCauley: I help people manage M&A legal risks.
Email: jmccauley@mk-law.com
Profile: http://www.martindale.com/John-B-McCauley/176725-lawyer.htm
Telephone: 714 273-6291
Check out my book: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles
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