Monday, February 16, 2009
Drafting Oversight Voids Employee's Non-Compete Agreement in Sale of Business (Herring Gas v. Pine Belt Gas)
Most non-compete are ancillary either to an employment relationship or a sale-of-business transaction. Regarding the latter, a party seeking to escape any competitive restrictions usually meets with little success if its effort is based on protectable business interests or reasonableness as to the contract's scope. A fair number of sale-of-business cases, therefore, turn on the contract language and whether a restrictive covenant survives an acquisition.
The Supreme Court of Mississippi recently held that an employee's non-compete agreement was not enforceable when the governing asset purchase agreement made no reference to existing non-compete agreements as a "purchased asset." In Herring Gas Co., Inc. v. Pine Belt Gas, Inc., the buyer sought to enforce a non-compete covenant against Jimmy Rutland, an employee of Broome LP Gas, the entity which sold its assets to Herring Gas. The deal closed on April 19, 2006, and Rutland quit to join a competitor five days afterwards. A few weeks later, Broome assigned Rutland's non-compete agreement to Herring Gas.
About a month after the closing, Herring Gas wrote a cease and desist letter to Rutland challenging his decision to work for another purveyor of propane gas within the restricted territory (75 miles from Purvis, Mississippi). Herring Gas chose not to file suit for another six months.
The trial court held that Herring Gas, as the entity acquiring Broome's assets, could not enforce the covenant against Rutland. The Supreme Court affirmed for two reasons: (1) the language of the asset purchase agreement precluded enforcement by Herring Gas; and (2) the assignment failed because Rutland had already quit.
The first issue demonstrates the care with which counsel should approach employee non-compete agreements during the due diligence and closing phases of a transaction. The definition of purchased assets mentioned nothing about employment contracts or non-competes, and there was a specific exclusion of all other assets not identified in the contract of sale. Moreover, the parties failed to effectuate any assignment of the employment agreements at the time of closing. These facts ultimately precluded enforcement by Herring Gas.
In most jurisdictions, when a key employee signs a restrictive covenant concurrent with the sale of assets, that contract - even though styled as an employment agreement - will be examined in accordance with the more lenient enforceability standard where a protectable interest is virtually presumed.
However, this rule will not apply when the non-compete is an existing obligation that arose well before the sale date. The problem with Rutland's contract could have been avoided had the issue been addressed specifically in the closing documents.
Court: Supreme Court of Mississippi
Opinion Date: 2/12/09
Cite: Herring Gas Co., Inc. v. Pine Belt Gas, Inc., 2009 Miss. LEXIS 65 (Miss. Feb. 12, 2009)