Explore the complexities of enforcing restrictive covenants in M&A transactions through a real-life legal battle. Gain insights from the Wilbur-Ellis Company LLC v. Jens case, emphasizing the crucial need for clarity in employment agreements regarding the survival of restrictive covenants.
M&A Stories
December 6, 2023
Introduction: In M&A transactions, restrictive covenants play a vital role in safeguarding goodwill, yet enforcing them can pose challenges.
Background: In 2007, a buyer acquired assets from a South Dakota-based seller specializing in agricultural chemicals. An employment agreement, signed by one of the owners, had a three-year term ending on February 28, 2010. The employment agreement said that after February 28, 2010, either the buyer or the owner could terminate the employment relationship. The employment agreement also had a non-compete clause within a 100-mile radius for three years post-employment termination, along with restrictions on customer and employee solicitation.
Controversy: Upon the owner’s resignation in June 2023, he joined a direct competitor of the buyer.
Legal Actions: The buyer filed a lawsuit in a South Dakota federal district court, seeking a preliminary injunction against the owner’s competitive activities pending litigation.
The owner argued that the restrictive covenants expired on February 38, 2013, three years from the end of the employment agreement. The buyer argued that the three year restrictive covenant ran three years from the owner’s June 2023 resignation.
Key Findings: The court agreed with the owner and held the covenants unenforceable after February 28, 2013. The court said the three-year restriction would have started running when the owner quit in June 2023, if the agreement had expressly said that the restrictive covenants survived the February 28, 2010 end of the employment agreement term.
Implications: This case underscores the importance of explicitly stating in employment agreements that restrictive covenants survive the agreement’s term.
Case Reference: Wilbur-Ellis Company LLC v. Jens, No. 4:23-CV-04104-LLP United States District Court, D. South Dakota, Southern Division (November 28, 2023).
By John McCauley: I write about recent legal problems of buyers and sellers of small businesses.
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