Providing Legal Services For More Than 125 Years

Non-Compete May Be Enforced By Employer’s Successor

On Behalf of | Jun 14, 2017 | Employment Law

Employment non-competes are generally not looked upon favorably.  New Hampshire has a statute that requires non-competes given to new employees to be provided before they accept the position. Under both New Hampshire and Massachusetts law, employment non-competes are narrowly construed to protect the legitimate business interests of the employer.

Usually non-competes also have what is called a non-solicitation provision.  Non-solicitation provisions prohibit an employee for a limited period of time, often one year after leaving the company, from soliciting customers she worked with at the former employer.  The court will often look more favorably at those non-solicitation provisions and strictly enforceable them unlike the non-compete that prohibits a former employee from working in the industry for a period of time in a certain geographical area.

Sometimes the employer that entered into the non-competition agreement with the employee may later sell the company.  The issue then becomes whether the successor can enforce the non-compete.  On June 1, 2017 that issue was addressed in a New Hampshire federal court case of HCC Specialty Underwriters, Inc. v. John Woodbury.   The federal court judge denied Woodbury’s Motion to Dismiss in which he argued that HCC was not the one he entered into the non-compete contract with in that his actual non-compete was with American Specialty Underwriters as part of an Employment, Incentive Compensation, Confidentiality and Non-Competition Agreement he signed,  who sold its company to HCC before Woodbury left the company.  In that case, Woodbury worked for American, or its successors including HCC, for 20 years. After he resigned he began working for a direct competitor allegedly diverting business from HCC, interfering with HCC’s business relationships, and setting up competing facilities as well as accessing several confidential HCC documents prior to and after his resignation.  Woodbury argued the HCC as an assignee of the contract could not enforce it. The Court denied Woodbury’s Motion to Dismiss.  The Court first stated that it appeared from the record that HCC might have actually been the successor in a merger with American, but even if that was not the case, the law was unclear whether non-competition and confidentiality provisions are unenforceable by an assignee.  This New Hampshire federal court case was decided in accordance with Massachusetts contract law yet a similar analysis should occur under New Hampshire law.  Basically, if there is a merger of two companies, the successor of the companies has the legal rights and obligations of the predecessor.  Therefore under this case, American’s contractual rights and liabilities would be transferred over to HCC and HCC could enforce the non-compete against Woodbury.  If American sold its assets to HCC rather than merging with it, American probably assigned the Woodbury contract and other valuable contracts to HCC as part of the transaction. However the court stated the record was not clear whether HCC received the contract in a merger or assignment. A third possibility, although evidently not argued in this case,  is that since the Employment, Incentive Compensation, Confidentiality and Non-Competition Agreement was not just a non-compete but also an employment agreement between American and Woodbury, if HCC bought American’s assets rather than merging with it, HCC may not had required an assignment of the Woodbury  Employment, Incentive Compensation, Confidentiality and Non-Competition Agreement since it might not had wanted to commit to the employment and incentive compensation portions of the agreement without having an opportunity to decide whether Woodbury was worth the agreement and then after the sale the assignment never occurred because Woodbury kept working and HCC kept paying him. As the judge stated the record at that early stage in the litigation was unclear. While the Court did not address this in the Decision, if the non-compete expressly stated that it was enforceable in favor of American, and its successor and assigns, if HCC had actually received an assignment of the Woodbury and American Employment, Incentive Compensation, Confidentiality and Non-Competition Agreement that permissive assignment language should have effectively removed Woodbury’s defense that he has no non-compete with HCC.

In other situations the courts have also held that the scope of a non-compete that prohibits working in an industry upon which the company does business cannot be broadened by an assignment to a company that works in more industries.  For example:  If a non-compete is signed with one employer that provides specialized software for dental practices and the employee, who signed the non-compete, is a sales representative and technical support for the dental practice software and the employee’s company is sold to a larger company that provides software for not only dentists, but accountants, lawyers, and other professional, so long as the employee is still only working solely in the area of the dental practice software when he leaves his current company, it would be unlikely that a court would enforce a non-compete prohibiting him from working in the areas of software for accountants and lawyers.  The Court might also only enforce the non-compete to prohibit him from soliciting or accepting business from his former customers at that company but not prohibit him from selling or providing technical support for dental practices for which he did not do business with while at his former employer.

J. Daniel Marr is a Director and Shareholder at Hamblett & Kerrigan, P.A. His legal practice includes counseling businesses and individuals on a variety of legal issues and advocating on their behalf. Attorney Marr is licensed and practices in both New Hampshire and Massachusetts. Attorney Marr can be reached at [email protected].