Parent Company Merger Does Not Bar Enforcement of Restrictive Covenant

A restrictive covenant is an agreement that limits an employee’s right to compete against his or her former employer. Under Florida’s non-compete statute, section 542.335, Florida Statutes, a restrictive covenant may be enforced by the employer’s successors only if the agreement expressly authorizes it. This creates a possible defense to enforcement any time there is a change to the employer’s corporate structure.

Florida’s Second District Court of Appeal tested the limits of the “successor” defense in the recent case of Collier HMA Physician Management v. Menichello. In that case, the court ruled that the merger of the employer’s parent company did not bar the enforcement of a restrictive covenant against a former employee because the merger did not change the actual employer’s corporate identity. The employer thus did not qualify as a “successor” under the statute.

The employer in Menichello is a physician group that operates hospitals and entered into an employment agreement with a physician. The agreement contained a restrictive covenant that prohibited the employee from working for certain groups or hospitals for a period of 12 months after the termination of his employment. The agreement expressly prohibited enforcement by the parties’ successors and assigns.

After terminating his employment, the physician went to work for a hospital in violation of his agreement, and the former employer sued to enforce the restrictive covenant. The physician argued that the former employer had become a “successor” after the merger of its parent company, and thus did not have the right to enforce the restrictive covenant. The trial court agreed and dismissed the former employer’s lawsuit.

The Second DCA overturned the trial court. It found that the trial court improperly focused on the substance of the merger transaction, which apparently resulted in some changes to the former employer’s operations and corporate culture, rather than the form of the merger, which did not result in any changes to the former employer’s existing corporate structure. Furthermore, there was no evidence that the former employer sold or transferred any of its assets. Because the former employer was the same company before and after the merger, the Second DCA found that it did not qualify as a “successor” employer under the non-compete statute.

The Menichello case holds that “traditional principles of corporate and business law” should determine whether a restrictive covenant may be enforced after a corporate merger or stock sale. Particularly where there are multiple levels of ownership, employers should be aware that some merger or sale transactions may open them up to a “successor” defense to the enforcement of a restrictive covenant against a former employee. Employers should carefully review the transaction documents with their counsel to determine the impact of a merger or sale on the enforceability of their (or their subsidiaries’) non-compete agreements.

About the Author:
Michael Furbush is a member of the Litigation department in Dean Mead’s Orlando office. He focuses his practice on resolving complex, commercial matters in state and federal courts throughout the country. He has represented large public corporations, small companies, and individuals from a wide range of industries, including entertainers, real estate developers, general contractors, retailers, physicians, and manufacturers.

Mr. Furbush has obtained multi-million dollar settlements on behalf of his clients and is highly experienced in arbitration, mediation and other forms of out-of-court dispute resolution. In addition, he has litigated and resolved cases involving covenants not to compete, trade secrets, trademark and copyright infringement, breach of contract, construction litigation and lien disputes, corporate dissolutions and shareholder disputes, employment discrimination, and antitrust matters. He may be reached at mfurbush@deanmead.com.

Nichole Mooney is an employment law attorney in Dean Mead’s Litigation department. She assists clients with drafting employment and severance contracts, drafting handbooks and policies, and counseling and representing employers in litigation regarding all types of employee actions, rights and obligations, including, but not limited to, wage and hour questions and disputes, FMLA issues, claims of discrimination, retaliation, theft of trade secrets, and all other manner of employment related litigation under Florida and federal law. Ms. Mooney also addresses claims regarding restrictive covenants including non-compete agreements, trade secrets litigation and protection of confidential information. She may be reached at nmooney@deanmead.com.