Enforcing Non-competition Agreements after the Sale of a Business

posted by Neil Klingshirn  |  Nov 4, 2010 1:27 PM [EST]  |  applies to Ohio

If an employer with non-competition agreements sells its business to a new buyer, the buyer does not necessarily acquire the old employer's/seller's rights in its non-competition agreements. The buyer's ability to enforce the seller's non-competition agreements depends on whether the seller sold its stock or its assets, and whether the law of the business's state gives the employee the right to withhold consent to the assignment.

Stock versus Asset Sales

To have the right to enforce the seller's non-competition agreements, the buyer must:

1. Buy the stock of the seller. In a stock sale, the buyers step directly into the seller's shoes and acquires the seller’s legal identity; or
   
   
2. Buy the seller's assets, including the non-competition agreements, and obtain an “assignment” of the seller's rights in the non-competition agreements.

Employee's Consent to an Assignment

In an asset sale, the seller may need the employee's consent to the assignment. Whether or not employees have the right to require consent depends on state law.

As a general rule, a party to a contract can assign it to an outside, third party, without the consent of the other party to the contract.  An exception to the this rule applies to “personal services” contracts.  Personal services refer to unusual, special or unique talents such as those of an artist, actor, writer, or professional. The rule requiring both parties’ consent to assignment of a personal service contract primarily protects the party receiving the services, such as the promoter of a rock concert. That is, the band cannot send in substitutes without the promoter’s permission.  

Some states, like Indiana, treat non-competes as “personal in nature.” Indiana applies the personal service rule to both parties and requires the employee’s consent to an assignment before enforcing it.  See SDL Enterprises, Inc. v. DeReamer, (Ind. Ct.App. 1997), 683 N.E.2d 1347, 1349, citing Jones v. Servel, Inc. (1962), 135 Ind. App. 171, 181, 186 N.E.2d 689. Illinois courts take a similar approach, treating non-competes as personal service contracts.

Most states, however, do not treat non-competes as contracts for personal services.  In those states one employer can assign its employees’ non-competes to another employer without the employee’s consent. Thus, the employee remains bound by the non-compete, even though working for a new employer.

Ohio takes a middle road.  If an Ohio non-compete agreement does not expressly state whether the parties consent to an assignment, Ohio courts look for the intent of the parties. If the parties used language suggesting that they did not intend assignment, such as describing a specific employer and defining the geographic restrictions in relationship to that specific employer, a court may find that the employee did not intend to allow the employer to assign it. In addition, the court may require the employer to show that assignability is necessary to protect the goodwill of the business being sold.

posted by Neil Klingshirn  |  Nov 4, 2010 1:27 PM [EST]  |  applies to Ohio