Explore a case study where a fraud carve-out provision played a crucial role in protecting a buyer’s interests in an M&A deal. Learn about the legal intricacies surrounding employee non-solicitation claims and exclusive remedy provisions.
October 19, 2019
Introduction:
Many acquisition agreements state that their indemnification clauses are the only solution for contractual breaches. However, they often exempt fraud claims from this rule.
The Deal:
This case involved the purchase of assets from a trampoline park in Bakersfield, California. The managing member of the seller agreed not to recruit the park’s employees away from the buyer.
The Lawsuit:
After the deal, the buyer discovered that the managing member of the seller had hired the buyer’s park general manager and was trying to hire other buyer employees for a competing trampoline park managed by the seller’s member. The buyer sued the managing member in a Sacramento federal district court, alleging a breach of the nonsolicitation covenant.
The buyer argued that a fraud carve-out in the exclusive remedy provision of the Asset Purchase Agreement (APA) allowed their claim. The court agreed, denying the motion to dismiss the buyer’s claim.
In this case, the court found that the managing member of the seller had intentionally breached the nonsolicitation covenant by luring away employees and attempting to conceal his actions.
Comment:
Exclusive remedy and fraud carve-out provisions are usually left to lawyers to negotiate, but they can be crucial if disputes arise after a deal closes. In this situation, the buyer faced potential revenue loss due to the departure of key employees to a competitor, all because of the seller’s member breaching the nonsolicitation covenant.
While the APA’s exclusive remedy provision initially appeared to offer no solution, the fraud carve-out, combined with allegations of a cover-up, ultimately protected the buyer’s interests.
Case Reference:
This case is referred to as Rush Air Sports, LLC v. RDJ Group Holdings, LLC, No. 1:19-cv-00385-LJO-JLT, United States District Court, E.D. California (October 2, 2019)
By John McCauley: I help companies and their lawyers minimize legal risk associated with small U.S. business mergers and acquisitions (transaction value less than $50 million
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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