The problems of Successors in Enforcing Non-Competes
The recent case of Savage, Sharkey, Riser & Szulborski Eyecare Consultants, P.C. v. Tanner continues a trend by Pennsylvania courts to strictly construe and enforce – to the letter – terms of restrictive covenants, and is another Pennsylvania case where a successor company was unable to enforce a covenant not-to-compete.
In this case, Dr. Tanner worked for Pugliese Eye Specialists (Pugliese) pursuant to the terms of an employment contract. During the term of his employment contract, Savage, Sharkey, Riser & Szulborski Eyecare Consultants, P.C. (Eyecare) purchased Pugliese. After the purchase, Dr. Tanner worked for Eyecare; began receiving paychecks from Eyecare; and worked at the same office location as when he was employed by Pugliese.
At or around the time of the sale of Pugliese, Eyecare executed an “Assumption of Assignment” document where it agreed to assume Pugliese’s duties under several employment contracts Pugliese had entered into. In his employment agreement, Dr. Tanner had agreed that Pugliese could assign its rights and obligations to any legal entity or any individual that acquired the Pugliese practice. Contained within the employment agreement was the requirement that the purchaser “deliver” to employee “the written agreement of such assignee to be bound by all of the terms and obligations of the employer under his agreement.” Eyecare never formally delivered the “Assumption of Assignment” agreement to Dr. Tanner after its purchase of Pugliese. After working for Eyecare for approximately two years, Dr. Tanner began new employment with a competitor, in violation of the restrictive covenant in his employment contract with Pugliese. Eyecare, as successor, moved to prohibit such action.
The court permitted Dr. Tanner to engage in the competing operation. Determinative to the court’s decision was Eyecare’s failure to deliver the Assumption of Assignment document to Dr. Tanner. The court case does not say, and the author is reading “between the lines” here, but it is easy to imagine that for about two years when Dr. Tanner was working at Eyecare without incident, both parties (or at least Eyecare) were probably operating under the impression that the agreement was in effect. “Delivery” of the “Assumption of Assignment” document was most likely an afterthought. The issue of the enforceability of the contract probably never came up until Dr. Tanner found a better opportunity. Unfortunately for Eyecare, a minor technicality ended up costing it customers.
Implications for the Employer
First, whenever purchasing assets or stock of a company, including employment agreements, it is always important that the purchasing company closely review and follow employment agreements. Work with your attorneys and human relations staff to identify whether the agreements can be assigned and, if so, determine the proper procedures for assignment. In this case, Dr. Tanner’s agreement permitted assignment, but stated that in order for Eyecare to become Dr. Tanner’s employer, the Assumption of Assignment had to be delivered to Dr. Tanner. It appears that merely putting the Assumption of Assignment document into an envelope, delivering it, and advising Dr. Tanner that Eyecare was his employer, would have sufficed. This seemingly minor error cost Eyecare business.
Second, when it comes to covenants not-to-compete and other restrictive covenants, err on the side of caution. Work with your attorneys who are familiar with these types of provisions so that every word of the agreement is followed to the letter if you expect to have your non-compete enforced.
Implications for the Employee
This is yet another case indicative of the strict interpretation Pennsylvania courts are according covenants not-to-compete. An employer’s failure to abide by the terms of an employment contract can be fatal to an employer’s ability to enforce these documents. If you are considering a change in jobs, and have a non-compete, a thorough review of the facts and your options, with your attorney, is advisable. While covenants not-to-compete are generally enforceable in Pennsylvania, several exceptions exist which may be worth investigating.