Asset Buyer Can’t Enforce Employee Nonsolicitation Covenants

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Oklahoma federal court refuses to enforce several employee non-solicitation post-employment covenants because they were either non-assignable, had no term, applied to indirect solicitation or were not restricted to established customers.

M&A Stories

April 11, 2021

Introduction

One buyer M&A risk is for seller’s employees to walk out the door after the closing taking seller customers. One tool to manage this risk is get the employees to sign an agreement promising to not solicit the seller’s customers after employment termination. However, the enforcement of a non-solicitation provision depends upon applicable state law, which varies from state to state.

The deal

The buyer in this deal is a national lawncare company that provides residential and commercial customers across the United States with lawn, tree and shrub care, among other services. The target was an Oklahoma based competitor.

The target agreed to sell its assets to the buyer pursuant to an asset purchase agreement. The transaction closed October 9. 2019.

Prior to entering into the APA, Seller had its employees sign non-solicitation agreements. Some seller employees signed an agreement prohibiting the employee from directly soliciting seller’s established customers for two years after employment termination. The other form of agreement prohibited an employee from directly or indirectly soliciting any customer who the employee had been in contact with. These agreements were part of the assets acquired by the buyer.

The buyer also had all seller employees it hired sign agreement which prohibited the employee from directly or indirectly soliciting a buyer customer which the employee had actual contact for 1 year after employment termination.

After the closing several seller employees who were hired by buyer, left and competed against the buyer. Some of these employees signed one version of the seller nonsolicitation agreement and others signed the other seller nonsolicitation agreement. They all signed the buyer nonsolicitation agreement.

The lawsuit

The buyer sued these former employees in federal district court claiming that they violated a seller nonsolicitation agreement and the buyer nonsolicitation agreement.

The former employees asked the court to dismiss the nonsolicitation claims and the court granted their request.

The court noted that a nonsolicitation provision is only enforceable in Oklahoma for the prohibition of “direct” solicitation of “established” customers. The buyer’s provision failed because it prohibited “indirect” solicitation which would include for example advertising or meeting a former customer at a trade show.

The one seller nonsolicitation agreement failed because it had no term; the other because the seller could not assign it to the buyer without the 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). 

Comment

Be careful to comply with local law if you want to restrict seller customers competing against you.

The buyer also had a noncompete provision which under Oklahoma law is only permissible when the noncompete is 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 

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Posted in nonsolicitation of employees and customers, nonsolicitation of former customers Tagged with: ,

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