Noncompetition agreements are contracts between employers and employees where the worker agrees not to work for a competitor for a certain period of time following his or her departure.
They are often accompanied by other “restrictive covenants” like nonsolicitation agreements — where the employee pledges not to poach the employer’s clients or customers after leaving to pursue new opportunities — and nondisclosure agreements, which bar the employee from sharing proprietary company information.
Such agreements can be useful for businesses trying to maintain their edge in a competitive marketplace, but a recent Michigan case shows that they may not survive a change in the company’s circumstances.
In that case, Aaron Symonds, a shareholder with insurance brokerage Lighthouse Insurance Group, left to work for a direct competitor.
He also filed suit against Lighthouse, seeking a declaration from the court that the noncompete, nonsolicitation and nondisclosure agreements he signed when he became a shareholder were unenforceable.
A judge denied his request and issued an injunction allowing him to remain with his new company but with all restrictions in effect, which severely limited his ability to do meaningful work.
But the Michigan Court of Appeals reversed, at least with respect to the noncompetition agreement.
That’s because two months after Lighthouse secured the injunction, it sold nearly all its assets to an entity called “Lighthouse Group, an Alera Group Agency, LLC,” leaving Lighthouse Insurance Group (with whom Symonds had contracted) as an “empty shell.”
Because Alera purchased a collection of Lighthouse assets rather than Lighthouse stock, and Lighthouse itself now existed as an entity that did not sell insurance, Symonds could no longer compete with it by selling insurance, the court said.
The court did find, however, that the nonsolicitation and nondisclosure agreements still applied.
Lighthouse’s successor may have been able to save the noncompete agreement if it had structured the asset sale differently.
If you are thinking of buying or selling a company whose employees have restrictive covenants in place, be sure to consult with an employment attorney who can counsel you on how the purchase might impact them.