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Employee Noncompete Agreements

By Robert A. Soriano

Often overlooked assets in bankruptcy sales are the noncompete agreements or noncompete covenants in employment contracts that debtors have with certain employees. Due to the low number of reported cases addressing the treatment of noncompete agreements in bankruptcy sales and abundance of conflicting precedents across different states, it is important for attorneys and their clients to anticipate and address these issues early in the bankruptcy sale process in order to avoid costly litigation and legal uncertainty.

Several different persons ' including the debtors, asset purchasers, stalking horse bidders, and, of course, employees ' may have an interest in how these agreements are handled in bankruptcy sales, making them increasingly relevant in bankruptcy sales considering that The New York Times recently reported they are on the rise (Steven Greenhouse, Noncompete Clauses Increasingly Pop Up in Array of Jobs, N.Y. Times, June 9, 2014, at B1).

  • A debtor who is not selling all its assets may wish to retain valued employees to operate the remaining business. Alternatively, the noncompete can be an additional asset having added value that can be realized for the debtor's estate.
  • A purchaser seeking to realize the going concern value of the debtor's assets may want to retain the key employees who operate those assets. Furthermore, a purchaser may not want to see key employees of the debtor go to a business competitor.
  • A stalking horse bidder does not always end up being the purchaser of the debtor's assets. Nevertheless, during the course of its due diligence, it may come across employees of the debtor whom it would like to hire. Whether it may hire these employees depends, among other things, on the legal status of any noncompete agreements after the assets are sold.
  • The employee who agreed to a noncompete as a condition to his employment with the debtor may not wish to work for the purchaser of the debtor's assets. Can he be forced to do so or must he find employment in another field or another place?

Following are some helpful considerations for attorneys to keep in mind when counseling clients in these matters.

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