Tuesday, June 1, 2010

Asset Purchase Agreement Did Not Transfer Right to Enforce Non-Compete (JSC Terminal v. Farris)

The transfer of a business, either by way of stock sale, asset sale or merger, always yields interesting issues concerning existing non-compete arrangements.

In many cases, employees who suddenly find themselves with new ownership may be saddled with unforeseen circumstances, such as reporting to a new manager and facing a cut in incentive pay. Usually, these changes do not allow an employee to break a valid covenant.

However, the issue of whether a covenant has been (or can be) assigned to a new business owner is a much more nuanced question of law. In some states, assignments are prohibited. In others, the employment contract must speak directly to the question and permit assignments. Finally, some states allow implied assignments.

But, as with anything else, contract language still governs. And that includes the underlying sale documents themselves. A perfect illustration arose when JSC Terminal bought the assets of MidWest Terminal. MidWest transferred to JSC all fixed assets and "all other assets, whether tangible or intangible, which are required and necessary to operate the business." Employee Paul Farris was fired by JSC, hired by a competitor, and sought to solicit JSC's accounts.

A federal court in Kentucky held that the language in the Asset Purchase Agreement between MidWest and JSC did not transfer employment agreement obligations. In particular, the court noted that non-compete arrangements, which are certainly valuable and favored in Kentucky, were not necessary to operate a firm's business.

The court may have been helped by two additional facts: Farris' contract permitted assignment only if MidWest's successors were related to the then-owners of the company and the APA indicated JSC had no obligations to MidWest's employees following closing. While the latter fact was certainly not dispositive of the assignment issue, it was suggestive of the clean break in employment relationships envisioned by the parties as of the closing date.

The key factor in the case, though, was the limited language in the APA concerning transfer of assets. What is interesting is how an employee like Farris would learn of the APA's terms before deciding on whether post-employment competition was permitted or prohibited.


Court: United States District Court for the Western District of Kentucky
Opinion Date: 5/27/10
Cite: JSC Terminal, LLC v. Farris, 2010 U.S. Dist. LEXIS 52481 (W.D. Ky. May 27, 2010)
Favors: Employee
Law: Kentucky

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