Where a buyer purchases a business through an asset purchase sale, any then-existing employment agreements do not apply to activities beyond the sale date. Addison Whitney, LLC v. Brannon Cashion, et al, 2019 NCBC 16 (J. Conrad). As a result, Plaintiff could not maintain claims for breach of employment agreements against certain Defendants where their purported bad acts occurred after Plaintiff purchased the assets of the former company.
In 2007, inVentive Health, Inc. acquired Addison Whitney, Inc. (“AW”) through an asset purchase sale. At the time of the sale, three of the defendants had written employment agreements (“EA””) with AW that specified ownership rights in the company related to certain work product (i.e., trademarks, new product ideas, etc.) created by them while on the job. After the sale, inVenti changed the company’s name to Addison Whitney, LLC (“Addison Whitney”), and the three defendants continued to work for Plaintiff for the next ten years. In 2016, the three defendants and other executives began to create ideas and work product that they failed to share with Plaintiff. When Defendants left Plaintiff in 2017 to start a new company that competed with Plaintiff, Defendants used the ideas and work product created in 2016 to further the new company. Plaintiffs filed suit and sought a declaration that, based on the EAs, it both owned the ideas and the work product created in 2016 and that defendants’ actions constituted a breach of the EAs.
The Business Court disagreed. In granting Defendants’ motion to dismiss any claims based upon the EAs, the Court recognized that the acquisition of a company by an asset purchase (as opposed to a stock or equity purchase) serves to terminate any existing employment relationships. If the buyer chooses to retain any employees, it can only enforce the employment rights as they existed at the time of the sale, but cannot enforce any restriction as if it had been entered into originally by the buyer. As a result, Addison Whitney only obtained AW’s rights in the EAs up to 2007 when AW’s assets were sold. However, the EAs did not apply to any actions after 2007. Because the complaint admitted that the ideas and work the defendants used was created in 2016, the EAs did not cover such activity and Plaintiff could not maintain any claim related to the 2016 activities based upon the EAs. Based upon this decision, businesses should remember that if purchasing a company via an asset purchase sale, any employment agreements (i.e., non-competes, non-solicitation, confidentiality agreements, etc.) do not apply to any employee after the sale’s close. New employment agreements should be entered into with the employees, with appropriate consideration given where applicable.