Does an employee’s non-competition or non-solicitation agreement remain enforceable if the employing company undergoes a change in ownership? Over the years, a substantial number of Federal and State court judges have addressed the issue. Despite the proliferation of cases, no clear answer has emerged. The answer, in the vernacular, is as clear as mud.
The leading case to date remains Saliterman & Associates v. Finney (Minn. Ct. App. 1985), involving a suit brought by a dentist’s former employer against a dentist to enforce a non-compete signed while the dentist was employed there. In opposing the employer’s motion for an injunction barring competition, the defendant dentist argued the non-compete was rendered void by the former employer’s sale of the business to another dental practice. In what the court deemed a case of “first impression” (meaing a lack of binding legal precedent), the court rejected the employee’s policy based argument, ruling that despite their disfavored status, non-competes under Minnesota law may be transferred or assigned to a successor employer as a part of the company’s “goodwill,” necessary to protect its business. The court gave short shrift to defendant dentist’s second argument against enforceability, namely that he had not consented to the assignment of his non-compete. Consent is basically automatic where, as in Saliterman, the agreement contains an express assignment clause indicating that the rights contained therein inure to the benefit of the parties’ successors or assigns. (The language in the Saliterman case read as follows: “[the agreement will] bind the successors if any in interest to the parties.”) Such language is common in Minnesota non-competes, but far from universal.
Two subsequent federal court cases have attempted shed light on what all of this means. In Great America Leasing Corp. v. Dolan (D. Minn. 2011), Federal District Court Judge John Tunnheim refused to grant an employer’s motion for an injunction to bar its former employee from competing on the basis that the employee’s non-compete lacked a “successors and assigns” clause of the kind within the contract at issue in Saliterman. The court, for the first time, read Saliterman to contain two freestanding requirements for assignability of a non-compete: (1) an actual assignment; and (2) employee consent. Federal District Court Judge Richard Kyle has ruled otherwise, indicating that the consent is not required, concluding that the consent analysis in Saliterman was non-binding dicta, i.e. a gratuitous statement of judicial opinion that is not actually part of the court’s decision. Metro Networks Commc’ns Ltd. P’ship v. Zavodnick (D. Minn. 2003).
More recently, Federal District Court Judge Patrick Schiltz in Wells Fargo Ins. Servs. v. King (D. Minn. 2016) granted a former employer’s injunction motion under similar circumstances. As in the Dolan case, the employment agreement was found to have been assigned. In King, not through the sale of the business but rather through a merger in which the surviving company by operation of law obtained all the “rights and privileges” of the merged company. On the issue of employee consent, Judge Schlitz stated that whereas both interpretations of Saliterman – one requiring consent and another not – are “reasonable,” he concluded that it is “more likely” that consent is not needed, based on his reading of the law. He went on, however, to rule that even if the law required consent, consent existed in King because the defendant employee countersued to enforce rights under the same agreement (underpayment of commissions), thereby in the Court’s opinion, acknowledging the continuing validity of the agreement as a whole. This ruling in my view is dubious. Under longstanding Minnesota law, agreements containing non-competes are severable, such that judicial voiding of restrictive covenants (i.e., non-compete or non-solicitation provisions) will not render the remainder of the contract unenforceable. Sewing further confusion, the decision leaves unresolved the question of whether (in Judge Schiltz’s view) the mere act of continued employment will constitute consent to the non-compete under different ownership. Under Minnesota law, continued employment does not constitute consideration for a non-compete signed after the onset of employment. In between the time of the Dolan and King opinions, one Minnesota state appellate court did obliquely touch on the issue in a non-compete case, enforcing a non-compete on behalf of a successor corporation in name only: there had been no change in ownership, just a name change of the business. Ochsner v. Relco Unisystems Corp. (Minn. App. 2014). On that basis, the court had no occasion to determine whether an assignment in fact took place, or whether employee consent was needed. The court’s observation that non-competes are assignable under Minnesota law, without mentioning employee consent, is hardly dispositive because based on the written court opinion, the employee did not raise any lack of consent defense.
The takeaway for employers is to make sure to include an express assignment clause in your employees’ non-competes, and to specifically assign non-competes to a successor company in the event of a sale, and to make clear in the agreement’s restriction that the employee consents to the terms in favor of both the current employer and any successors or assigns. A change in ownership structured as a sale of shares or corporate name change should not risk voiding of a non-compete. Even without a specific reference to the seller’s non-competition and non-solicitation agreements, though, a corporate acquisition structured as a sale of assets in which all contracts are assigned should result in a successful assignment of the non-compete.
Before leaving the issue, a cautionary note is required. Federal decisions construing Minnesota law, such as those discussed above, are not binding on Minnesota state courts. Nor (for that matter) federal courts judges in future cases. Determination of whether employee consent is required to enforce an assigned non-compete rests alone with the Minnesota state appellate courts or the Minnesota Legislature, as the case may be. Until then, the law will remain as clear as mud.