What Happens to your Non-Compete Contract When your Employer is Purchased?
We get this question frequently and the answer can be complicated.
In the most common situation, an employee signs a non-compete agreement with her employer (the ABC Company). The contract provides the employee will not leave the ABC Company (its subsidiaries or affiliates) and compete in the same industry or line of business for a period of 2 years. Next, the ABC Company is bought by the DEF Company and, as a part of the purchase, the ABC Company assigns all of its contracts, including employment and non-compete contracts, to the DEF Company. The employee works for the DEF Company for a period of time but then leaves and competes with the DEF Company and is sued for violating the non-compete.
In many situations the DEF Company loses this lawsuit. Why? Many non-compete contracts identify the “employer” without reference to a subsequent purchaser of the employer. In the situation described above, the DEF Company is the “successor” or “purchaser” of the ABC Company. It is not a subsidiary or affiliate of the ABC Company. It is also true that many non-compete contracts expire after the passage of a specific length of time after the employee leaves the company. In the situation above, if the employee remained with the DEF Company for more than two years after DEF purchased ABC, and did not sign a new non-compete with the DEF Company, then the original non-compete contract has expired and the DEF Company cannot prevent the employee from leaving and competing against it.
My Take: The “devil is in the details.” Just because another company bought out your old employer the non-compete contract may not be effective to prevent you from leaving and competing.