A Lesson in Succession Planning for Non-Compete Agreements
Companies change hands all the time. Asset sales, stock acquisitions, and mergers are frequent, if not expected, in a company’s lifecycle. If a company intends for its potential successors to step in and enforce its non-competes and other restrictive covenants, the contract language used to express that intent must be precise. Even so, it may be prudent for successors to layer a new agreement on top of the old to ensure at least one set of restrictive covenants is viable.
We see these issues play out in a recent case, Mechanical Construction Managers, LLC v. Paschka, No. 3:21-cv-302 (S.D. Ohio May 19, 2022). In Paschka, the defendant-employee worked for RPC Mechanical Services (“RPC”), an HVAC service business. The Thomas J. Dyer Company (“Dyer”) bought RPC in 2010, and after the purchase, RPC became a trade name for Dyer and ceased to exist as a legal entity.
But in November 2013, the employee signed a “Non-Compete Agreement for Employees of RPC Mechanical Services” (“RPC Agreement”). The RPC Agreement was given in exchange for employment with “RPC or one [of] its subsidiaries or affiliates,” and it prevented the employee from competing with “RPC.” The contract contained language that allowed it to be assigned “in the event of merger or consolidation of RPC,” or the “sale of all or substantially all of RPC’s business.” The employee later testified he was unsure if he was an employee of RPC or Dyer when he signed the RPC Agreement.
In 2020, Dyer sold the assets of its HVAC business to Mechanical Construction Managers, LLC d/b/a Rieck (“Rieck”), which included all of what was considered RPC. In connection with the asset sale, the employee joined Rieck and signed a new agreement containing restrictive covenants as a condition of his employment (“Rieck Agreement”).
The employee eventually resigned from Rieck in August 2021. Shortly thereafter, he found new employment as Director of Sales at an alleged competitor. Rieck sued the employee and sought a preliminary injunction to enforce the restrictive covenants in both the RPC Agreement and the Rieck Agreement.
Rieck relied on the assignment provision in the RPC Agreement, which allowed successors and assignees of “RPC” to enforce its restrictive covenants.
The court held that the assignment provision in the RPC Agreement only triggered in the event of (1) a “merger or consolidation of RPC” or (2) a “sale of all or substantially all of RPC’s business.” (Emphasis added). When Dyer sold its HVAC business to Rieck, “RPC” was not a legal entity. It was merely a trade name used by Dyer. The asset sale was only about 5% of Dyer’s business. The court held the unambiguous assignment provision in the RPC Agreement was not triggered when Dyer sold its HVAC business to Rieck, and therefore, Rieck could not enforce its non-compete provision or other restrictive covenants.
Nevertheless, the court held Rieck demonstrated a likelihood of success on the merits of its claims for breach of the Rieck Agreement, which it entered into anew on top of the RPC Agreement when the employee joined Rieck in 2020. The court entered a preliminary injunction, in part, to enforce the restrictive covenants in the Rieck Agreement.
Key Takeaways:
It can be difficult to keep track of trade names, “doing business as” names, and official legal names. It is critical to accurately identify parties in a contract with their legal name. Any assignment provision must also accurately reflect the legal relationship of the parties and the intended scope of the assignment.
Sometimes a “belt and suspenders” approach works best. Rieck had the employee sign a new restrictive covenant agreement upon hire in addition to the RPC Agreement. That decision ultimately helped Rieck obtain the injunctive relief it sought in court. If there is any question about whether a previous restrictive covenant agreement may be assigned or enforceable, the most diligent path may be to have a new agreement that intentionally does not supersede the prior contract. In that situation, counsel should tailor any merger clause to make clear that the prior agreement remains enforceable.