The seller owner quits working for the buyer four years after closing and immediately goes to work for a competitor. The seller argues that a one-year post-employment noncompete in the employment agreement was not valid because two years post-closing noncompete in the noncompetition agreement was signed after the employment agreement.
M&A Stories
March 21, 2023
Introduction
In mergers and acquisitions (M&A) deals, it is common for the owner of a business being sold to join the buyer’s team after the transaction is completed. This often involves signing an employment agreement with a noncompete clause. Additionally, the owner may agree not to compete with the buyer for a specific period, either in the purchase agreement or a separate noncompetition agreement.
The deal
In this specific case, a seller was engaged in providing water, wastewater, storm drainage, and fire protection products and services to commercial and governmental clients in Minnesota and South Dakota. The seller decided to sell its business assets to a buyer.
As part of the agreement, a shareholder of the seller became an employee of the buyer, working as a sales representative. In the employment agreement, the shareholder agreed not to compete with the buyer within a 150-mile radius of their office for one year after employment termination. Additionally, four days later, the shareholder signed a noncompetition agreement, committing not to compete with the buyer for two years after the closing of the deal in multiple states: Minnesota, Wisconsin, North Dakota, South Dakota, and Iowa.
The lawsuit
Four years after the closing, the shareholder left the buyer and started working for a competitor located within 150 miles of one of the offices they worked at for the buyer. The buyer filed a lawsuit, alleging a breach of the noncompetition agreement. The shareholder, however, argued that the noncompetition agreement had expired two years earlier and that the employment agreement’s one-year post-employment noncompete clause was invalid because the noncompetition agreement superseded it.
Court Proceedings: The district court sided with the shareholder, dismissing the buyer’s claim. However, the buyer appealed the decision, and the Court of Appeal reversed the ruling, sending the case back to the district court for further litigation.
The Appellate Court’s Decision: The appellate court determined that the one-year post-employment noncompete provision would be invalid only if the noncompetition agreement addressed the same concerns as the employment agreement. It was likely that the two noncompetition agreements served different purposes for the buyer. The employment agreement’s one-year noncompete aimed to prevent the shareholder from leaving and using the buyer’s trade secrets to compete within a 150-mile radius of their previous office. On the other hand, the two-year post-closing noncompete sought to safeguard the goodwill of the seller’s business, covering a broader five-state region.
See Core and Main, LP v. McCabe, No. 22-1138, United States Court of Appeals, Eighth Circuit (Submitted October 19, 2022. Filed March 1, 2023).
Comment
If the buyer intended to supersede the employment agreement’s noncompete provision with the later-signed noncompetition agreement, they could have included a clause explicitly stating so. It’s worth noting that some states, like California, prohibit employers from requiring employees to agree to noncompete clauses after termination of employment.
By John McCauley: I write about recent legal problems of buyer and sellers of small businesses.
Email: jmccauley@mk-law.com
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