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Non-competition, non-solicitation and confidentiality agreements

Does an acquiring company have the right to enforce an employee non-compete agreement between the employee and the predecessor company that it acquired?

The answer largely depends on: (1) how the acquisition is structured; and (2) if the original agreement expanded the definition of “Company” to include the original company’s subsidiaries, affiliates and assigns.  A recent decision from the Business Litigation Session provided guidance for these two questions.

Regarding the structure of the acquisition, the court held that the non-compete is enforceable if the original employer had actually, through a series of mergers, become the legal successor to the last subsidiary that was entitled to enforce the non-compete agreement.

If that scenario does not occur, the court will look at how the term “Company” is defined in the original noncompetition agreement.  In this situation, the definition of “Company” was limited to subsidiaries and/or affiliates.  Importantly, the agreement did not include any assigns of the company or its affiliates or subsidiaries.  In that event, the employer can’t enforce the original non-compete agreement.

This case is a cautionary tale for both employers and employees. Employers need to include “assignees” in the definition of the company in the non-compete agreement.  Employees need to pay special attention to restrictive language in non-competition agreements.

The decision is NetScout Systems, Inc. v. Hohenstein.

Pamela A. Smith
Law Office of Pamela A. Smith
233 Needham Street, Suite 540
Newton, MA 02464
617-969-2900

pam@pamsmithlaw.com

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