• Successor Corporations Win Right to Enforce Non-Compete Agreements
  • August 19, 2003 | Author: Stacy L. Gordon
  • Law Firm: Fisher & Phillips LLP - Fort Lauderdale Office
  • The Florida Supreme Court on April 13, 2003, strengthened the ability of Florida businesses to enforce non-compete agreements belonging to predecessor companies. The Supreme Court's decision brings much-needed clarity to this area of law and may influence the manner in which Florida companies chose to structure their business acquisitions in the future.

    Reversing several appellate court decisions, the Florida Supreme Court held that neither a 100 percent purchase of corporate stock nor a corporate merger affects the enforceability of a non-compete agreement executed by a predecessor corporation. Corporate Express Office Products Inc. v. Phillips, 2003 WL 1883697 (Fla. April 17, 2003). However, the Court held that when a corporation purchases only the assets of a predecessor, the successor can only enforce the non-compete with the employee's consent to an assignment. Id.

    The opinion has far-reaching impact for Florida businesses, who up until last week could not be certain whether non-compete agreements survived a corporate acquisition. Previously, several Florida appellate courts had held that non-compete agreements are considered personal service contracts that are generally not assignable without the parties' consent. See e.g., Strehlow v. Legen Equities Corp., 727 So.2d 1076 (Fla. 4th DCA 1999); Johnston v. Dockside Fueling of No. America, Inc., 658 So.2d 618 (Fla. 3rd DCA 1995); Schweiger v. Hoch, 223 So.2d 557 (Fla. 4th DCA 1969). Until last week, these decisions left corporate purchasers in Dade, Broward and Palm Beach Counties with little hope of enforcing their predecessor's non-compete agreements.

    However, the legal landscape has changed significantly. Now, corporations may be able to enforce their predecessor's non-compete agreements, depending on the type of business transaction used to make the corporate acquisition. Specifically, the Court held that the enforceability of the non-compete agreement will depend on whether the business transactions was 100 percent stock stale, a merger or an asset sale.

    With regard to a 100% stock sale, the Court held that unlike a partnership, a corporate entity is not dissolved by a change of ownership. "In fact, a foundation of corporate law is that, unlike a partnership or a sole proprietorship, the existence of a corporate entity is not affected by a change in its ownership or changes in management." Corporate Express, 2003 WL at *4. "With a stock purchase, the corporation whose stock is acquired continues in existence, even though there may be a change in its management." Id. The Court found a change in ownership or management of a corporation in a stock purchase does not affect the predecessor's contractual rights. Thus, the Supreme Court concluded that when there is 100% sale of corporate stock the successor corporation can enforce the predecessor's non-compete agreements.

    The Court next examined corporate mergers. Again, when two corporations merge both remain in existence -- simply joined into a single corporate entity. Therefore, the merged corporate has the right to enforce a non-compete agreement entered into with an employee of the merged corporation.

    The Supreme Court reached a different result when analyzing the purchase of corporate assets. Here, the Court found that when there is only a purchase of corporate assets there must be an express assignment of the non-compete agreement. The Court reasoned:

    In contrast to a sale of corporate stock, in a sale of corporate assets the transaction introduces into the equation an entirely different entity, the acquiring business. The asset sale to that entity may include some or all of the corporate assets, and the transferred assets may include tangibles such as machinery and intangibles such as accounts receivable. A corporation that sells its assets may continue in existence, may dissolve, or may merge with the entity that purchased its assets.

    Id. As a result, the Court concluded that when a corporation acquires the assets of another business entity, it does not, as a matter law, assume the right to enforce the non-compete agreements of the prior business. However, corporations involved in asset purchases may be able to enforce their predecessor's non-compete agreement under the following circumstances:

    1. the successor expressly or impliedly assumes the obligations of the predecessor;

    2. the transaction is a de facto merger;

    3. the successor is a mere continuation of the predecessor; or

    4. the transaction is a fraudulent effort to avoid liabilities to the predecessor.

    In any of these circumstances, the Court would hold that a successor corporation has the right to enforce the predecessor's non-compete agreements with its employees.

    In sum, the Florida Supreme Court, applying traditional corporate law principles, has held for the very first time that "in contrast to an asset purchase, neither a 100 percent purchase of corporate stock, nor a corporate merger affects the enforceability of a non-compete agreement." Id.