NON-COMPETE AGREEMENTS: BUSINESSES SHOULD INCLUDE THIRD-PARTY ENFORCEMENT PROVISIONS IN THEIR NON-COMPETE AGREEMENTS

All businesses, especially those that may become the target of a merger or acquisition, that want their successor entities or assignees to have the right to enforce non-compete agreements against their former employees should include a provision that allows third-parties to enforce the non-compete agreements. Unless a non-compete agreement expressly authorizes enforcement of the non-compete by an employer’s assignees or successors, employers that did not include an assignment provision in their non-compete agreements could find their non-competes to be unenforceable if they are found to be “successor” entities. See Fla. Stat. § 542.335(1)(f); see also Collier HMA Physician Mgmt., LLC v. Menichello, 42 Fla. L. Weekly D1228 (Fla. 2d DCA May 31, 2017) (citing Corneal v. CF Hosting, Inc., 187 F.Supp.2d 1372, 1375 (S.D. Fla. 2001) (“[t]he term successor ‘is generally applicable to corporations wherein one corporation by a process of amalgamation, consolidation or duly authorized legal succession becomes vested in the rights and assumes the burdens of its predecessor corporation”). Employers that include third-party enforcement provisions ensure that the employer’s interest in the agreement will survive in the event that the employer undergoes a corporate transformation and is found to be a successor in interest to the original employer. Thus, during the applicable restructuring event (merger, acquisition, spinoff, etc.), the controlling entity of an employer with executed non-compete agreements should balance the necessity of the maintenance of the employer’s non-compete agreements with the necessity of the employer becoming a different “successor” entity within the “traditional principles of corporate and business law.” Menichello, 42 Fla. L. Weekly D1228 at *7. The Mavrick Law Firm regularly handles non-compete law in Broward, Miami-Dade, and Palm Beach Counties and has specifically handled matters concerning enforcement of non-compete agreements where there has been corporate assignees and successors.

In Menichello, the 2^nd DCA recently held that the “successor defense” is ineffective against a valid non-compete agreement when the corporate identity of an employer – whose parent organizations underwent a series of mergers and acquisitions – is unchanged. See generally 42 Fla. L. Weekly D1228. In Menichello, the employer Collier HMA entered into a non-compete agreement (the Agreement) with the employee Dr. Menichello. After the parties entered into the Agreement, the ultimate parent of Collier HMA, Health Management Associates, Inc. was acquired and became a subsidiary of Community Health Systems, Inc. (CHS). After the merger, Dr. Menichello terminated his employment with Collier HMA and started working for Collier HMA’s direct competitor, in violation of his covenant not to compete. Collier HMA sought an injunction against Dr. Menichello that prohibited his employment with its competitor.

Reversing the lower-court’s refusal to enter an injunction against Dr. Menichello, the 2^nd DCA clarified that “traditional principles of corporate law” determine “the obligations and liabilities of a successor corporation,” 42 Fla. L. Weekly D1228 at *7. The court then found that Collier HMA was not a “successor” within the meaning of the statute because Collier HMA “had not been consolidated with or amalgamated into another company after the merger.” It also noted that “Collier HMA had not acquired the rights of or assumed the burdens of any other entity” and that “nothing about the corporate structure or ownership of Collier HMA was different after the merger.” Id. Thus, in this case the court found that a third-party enforcement provision was not needed. See id. (“Collier HMA had not assigned the Agreement to another entity because no such assignment was required.”) Nevertheless, employers should include third-party enforcement provisions in their non-compete agreements so that they can engage in restructuring without the looming threat of a successor defense in a non-compete dispute.

Peter T. Mavrick has successfully represented many businesses in non-competition covenant litigation. This article is not a substitute for legal advice tailored to a particular situation. Peter T. Mavrick can be reached at: Website:www.mavricklaw.com; Telephone: 954-564-2246; Address: 1620 West Oakland Park Boulevard, Suite 300, Fort Lauderdale, Florida 33311.