The seller’s employee unsuccessfully argued that his restrictive covenants could not be assigned to the buyer without his consent.
M&A Stories
October 5, 2022
Introduction
In the world of mergers and acquisitions, when a buyer purchases a business, they often seek to benefit from any restrictive covenants existing between the seller and their employees. However, there are risks involved in enforcing these covenants. In a recent case, a buyer acquired a veterinary surgical business and faced a legal challenge regarding the transfer of restrictive covenants.
The Deal
The seller employee in this case was the founder and majority shareholder of a company specializing in veterinary surgical products. After operating the business for about five years, the employee sold its assets to the seller. As part of the transaction, the employee agreed to continue working for the seller as a director and lead product development engineer, subject to an employment agreement that included restrictive covenants.
The Lawsuit
Subsequently, the seller sold the business assets, including the employee’s employment agreement, to the buyer. The buyer attempted to hire the employee but encountered resistance when they sought to enforce the restrictive covenants outlined in the employment agreement. This disagreement escalated to an Ohio federal district court.
Court Decision The court ruled in favor of the buyer, determining that the restrictive covenants were enforceable. The employment agreement’s assignment clause allowed for the transfer of the agreement, including the restrictive covenants, from the seller to the buyer without the employee’s consent. The court emphasized that neither the employment agreement nor the covenants required the employee’s consent for assignment. Furthermore, Ohio law generally supports assignment unless specific circumstances are present.
See Wotton v. Veterinary Orthopedic Implants, LLC, Case No. 1:22-cv-01002, United States District Court, N.D. Ohio, Eastern Division, (September 22, 2022).
Key Consideration
It’s important to note that the outcome may have differed in a jurisdiction with a more unfavorable view of restrictive covenants, such as California. In California, noncompetition covenants are generally unenforceable unless they are given in connection with the sale of a business. Thus, if the employee had not initially agreed to the covenants when selling their business, they might not have been enforceable in California.
By John McCauley: I write about recent legal problems of buyer and sellers of small businesses.
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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