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Labor & Employment – Covenant Not to Compete – Asset Sale – Assignment – Pennsylvania Law

TSG Finishing LLC v. Bollinger (Lawyers Weekly No. 020-061-16, 14 pp.) (Michael Robinson, J.) 2016 NCBC 65

Holding: Even though defendant’s employment contract didn’t include an assignment clause and the assets of defendant’s employer were transferred to plaintiff, since the asset transfer left both the employer’s ownership and defendant’s job unchanged, there is at least a genuine issue of material fact as to whether the covenant not to compete in defendant’s employment contract remains enforceable under governing Pennsylvania law.

The court denies defendant’s motion for summary judgment.

According to one line of Pennsylvania cases, if a company’s assets are sold, the purchaser may not enforce an employee’s non-compete covenant unless the employment contract had an explicit assignability clause. Under another line of cases, if a company’s stock is sold to another entity, an employee’s non-compete covenant is enforceable by the purchaser.

Here, during employer TSG Inc.’s bankruptcy, its assets were transferred to plaintiff. Defendant therefore argues that, because there is no express assignability clause in his employment agreement with TSG Inc., the employment agreement was not validly assigned, and plaintiff may not enforce the restrictive covenants therein.

Defendant raised the same argument in plaintiff’s appeal of an order denying its motion for a preliminary injunction, and the Court of Appeals rejected it, concluding: “The situation in this case is not one where plaintiff was a ‘stranger to the original undertaking’…. Plaintiff is a wholly-owned subsidiary of TSG, Inc., with whom defendant entered into the non-compete…. According to defendant, every aspect of his job remained unchanged after the assignment. We reject the trial court’s conclusion that the non-compete is unenforceable because it did not contain a specific assignability provision.” TSG Finishing, LLC v. Bollinger, 767 S.E.2d 870 (N.C. Ct. App. 2014).

Even though the Court of Appeals’ conclusion was made at the preliminary injunction stage, this court concludes that, since plaintiff is essentially the same entity as the original party to the employment agreement, no assignability provision is required to allow plaintiff to enforce the agreement.

The court also notes that the order approving TSG Inc.’s bankruptcy plan specifically approved assumption by plaintiff of all of TSG Inc.’s executory contracts. Moreover, plaintiff’s CEO testified that the employment agreement was assigned by TSG Inc. to plaintiff. There is at least a genuine issue of fact as to assignment that the court cannot resolve at the summary judgment stage.

Motion denied.

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