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North Carolina Business Court: Employment Agreements Automatically Terminate Upon the Sale of a Company

          A recent decision by the North Carolina Business Court held that an employment agreement automatically terminates upon the asset sale of one company to another, despite continued employment with the purchasing company.[1]

         In 2001, Andrew Lund executed an employment agreement with his then-employer, Southern Staircases of North Carolina, Inc. The agreement contained several post-employment restrictions regarding disclosing confidential information and soliciting current and future customers.  The agreement also contained a duty of loyalty provision to “devote his entire working time, attention, and energies to the business of the Company and . . . [to] not be engaged in any other business activity.”

 

           In June 2009, Southern Staircases sold all or substantially all of its assets to Artistic Southern, Inc.  While Lund was offered options to purchase Artistic Southern stock as part of a severance and non-compete agreement, he never entered into such an agreement with the Artistic Southern.  In April 2012, Lund notified Artistic Southern of his intent to resign and begin his own competing business. The company asked Lund to continue to work with them until his current customer accounts were transferred to other sales representatives within the company.  During this interim period, it was discovered that Lund fraudulently billed many customers in excess of their purchase orders and pocketed the difference between April 2011 and February 2012.  Artistic Southern subsequently initiated a lawsuit against Lund, alleging he breached the covenants in his employment agreement, particularly the non-solicitation agreement, non-disclosure agreement, and the duty of loyalty.

 

          The North Carolina Business Court reiterated North Carolina precedent that “the acquisition of another company through an asset purchase – as opposed to a purchase of ownership interest – terminates the seller’s existing employment relationships.”[2]  Since the employment relationship is terminated along with the right to enforce restrictive covenants upon the date of the sale, any post-employment time restrictions begin to run at that time.  Essentially, after an asset sale, the purchasing company’s right to enforce existing employment agreements are the same rights the selling company had at the time of the sale, unless new agreements are executed between the purchasing company and employees.

 

           In this case Lund’s employment agreement with Southern Staircases terminated upon the sale of the company to Artistic Southern in June 2009.  Although Artistic Southern attempted to negotiate a new agreement with Lund by offering him stock options, Lund never entered a new agreement.  As a result, the time periods for the post-employment restrictions contained in the agreement began to run as of the date of the sale.  The one-year prohibition on Lund’s solicitation of current and prospective clients expired in June 2010 and the two year prohibition on Lund’s use or disclosure of confidential information expired in June 2011.  Artistic Southern did not allege Lund breached his contract until April 2011, therefore only their claim of Lund’s breach of the covenant not to disclose was allowed to continue.  As for the duty of loyalty provision, it terminated along with Lund’s employment in June 2009.  Since Artistic Southern did not allege any breach prior to that time, the NCBC dismissed that claim.

 

          If this decision sounds familiar, it’s because the North Carolina Business Court recently decided a case with comparable facts in October 2015 (which we summarized HERE).[3]  In that case, the Court held that “acquisition of another company by asset purchase will act as a termination of existing employment relationships, and existing employees of the acquired business do not necessarily become employees of the acquiring entity.”[4]  However, in the October decision, the employee signed a new agreement with the purchasing company and the question before the court was whether the agreement was supported by sufficient consideration to be enforceable.  Both cases serve as a reminder to companies that restrictive covenants are generally disfavored in North Carolina and courts strictly scrutinize their fairness when assessing enforceability.

 

 

[1] Artistic Southern Inc. v. Lund, No. 12-CVS-11789, 2015 NCBC 15 (Dec. 9, 2015).

[2] Id. (citing Calhoun v. WHA Med. Clinic, PLLC, 178 N.C. App. 585, 597, 632 S.E. 2d 563, 571 (2006)).

[3] AmeriGas Propane, L.P. and AmeriGas Propane, Inc. v. Ermon Clark Coffey and Marsh L.P. Gas, Inc., No. 14-CVS-376, 2015 NCBC 93 (October 15, 2015).

[4] Id.

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