One technical defense frequently raised by employees looking to break a non-compete agreement has to do with a change in ownership of the business. During the course of a business sale, the buyer conducts extensive due diligence regarding employee agreements and the availability of non-compete contracts, particularly as to key sales and executive employees.
The lack of valid non-compete agreements can impact the goodwill purchased in the transaction. Similarly, if those agreements are not assignable, the buyer's ability to protect customer relationships, and concomitantly a stream of sales revenue, will be detrimentally impacted. With that reality in mind, courts generally favor the assignment of non-compete covenants from a seller to a buyer. The rule is not absolute. Pennsylvania, for instance, requires a non-compete agreement to have an express assignment clause permitting the transfer.
Ohio is a more fact-specific state. Assignment of a covenant is not governed by a per se rule for or against the transfer. Rather, courts there continue to examine the facts bearing on the assignment if the non-compete agreement is silent on the issue. The precedents from Ohio are mixed.
In Michael's Finer Meats v. Alfery, the court sided with the employer on the assignment issue. Alfery began work as a sales representative with Michael's when it was a corporation owned entirely by Michael Bloch. Subsequently, Bloch merged the corporaton into a limited liability company with a Utah investor group. Bloch maintained a minority ownership interest. The merger was effectuated under Ohio law, and a certificate of merger was filed with the State pursuant to governing statute.
The court analyzed the facts and determined that the assignment was permissible for three main reasons: (1) the Bloch family remained in charge of day-to-day operations such that Alfery's line of reporting did not change significantly, (2) Alfery's job duties and sales responsibilities were not impacted significantly, and (3) assignment was necessary to protect the goodwill of the seller in the business transaction. In particular, the court stated: "nothing in Defendant's salary structure, his territory, his supervision or sales targets changed as a result of the sale of business."
Additionally, the court found that Alfery's non-compete was overbroad as drafted. It barred him from competing with Michael's for a one-year period, but the geographic term was silent. Under Ohio's liberal modification doctrine, the court rewrote the contract to prohibit Alfery from making sales of competitive products within one county around Pittsburgh, where he was the "face of the company." Assisting the court was clear evidence that Alfery did in fact make such sales to his former accounts in violation of the covenant.
Court: United States District Court for the Southern District of Ohio
Opinion Date: 1/13/09
Cite: Michael's Finer Meats, LLC v. Alfery, 649 F. Supp. 2d 748 (S.D. Oh. 2009)