A Connecticut federal court recently issued a significant decision concerning the rights of a buyer of a business to enforce non-competition agreements against employees who previously worked for the seller under New York law.
In 2003, Milso and each of its employees signed an employment agreement expressly governed by New York law. The agreement contained confidentiality, non-solicitation and non-competition covenants enforceable for 18 months after termination of employment, but assignability was not mentioned. In 2005, the employer, a casket company, sold its assets, expressly assigning all employment agreements. At the closing of the purchase and sale transaction, the seller terminated its employees, and then the purchaser re-hired them on substantially similar terms. The purchaser asked its employees to acknowledge that they remained subject to the covenants. Three years later, two of the purchaser’s employees, who had worked for the seller but never executed the acknowledgement, resigned and began working for a competitor. The purchaser sued them in a Connecticut federal court for breach of contract, misappropriation of trade secrets, and similar causes of action. They responded by filing a declaratory judgment counterclaim asserting that, for purposes of the employment agreement covenants, they were terminated at the closing of the assets purchase and sale transaction which was more than 18 months before they began competing.
On cross motions for summary judgment, the court held that if the signatories to the employment agreements intended for the agreements to be assignable, the covenants were enforceable against employees who accepted comparable continuous employment by the purchaser. Here, the issue of the parties’ intent with regard to assignability requires a trial. Milso Indus. Co. v. Nazzaro, Case No. 3:08CV1026 (AWT) (D. Conn., Aug. 30, 2012).
The purchaser also accused the departed employees of misappropriating trade secrets, namely, a customer list and a “confidential business plan.” The court ruled that those items could qualify as trade secrets if they have “independent economic value” and reasonable efforts were undertaken to maintain their confidentiality. A trial is necessary to determine whether the list and plan here qualified as trade secrets.
The Connecticut federal court’s decision is particularly instructive with regard to the right of an assignee of an employment agreement, which contains no provision regarding assignability, to enforce covenants in the agreement. The court concluded that the dispositive question is: Did the parties to the agreement intend for it to be assignable. The assignee’s burden is to prove that the signatories to the agreement — the assignor and the assignors’ employee — understood at the time the agreement was signed that it was assignable.
Companies involved in buy-sell transactions or mergers need to take special care to ensure that there are enforceable non-compete/restrictive covenant agreements in place with employees who remain with the buyer after the transaction is complete –that may include relying upon existing non-compete agreements between the seller and the employees or new agreements between the buyer and the employees depending upon the law in the applicable jurisdiction. John Marsh’s Trade Secret Litigator blog has an excellent summary of two recent cases from Ohio and Florida concerning the assignment of non-competes agreements. Also, please consider watching our webinar on Key Considerations Concerning Trade Secrets and Non-Competes in Business Transactions for more information on this important topic.