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“If my former employer closes, and opens a new company, is my non-compete (or other contracts) valid?”

Question: I signed a contract with my former employer that contained a non-compete agreement.

My employer went insolvent, and then the very next day started up business again under a new name. I never signed a new contract or non-compete agreement with the “new name” company.

I have left and started up my own business of the same nature, but my former employer claims the non-compete agreement I signed is a “rolling” one, and prohibits me from competing with the “new name” company. Are they right?

Heather R.
Gateshead
Tyne and Wear, United Kingdom

[Note to Readers: Tyne and Wear is a metropolitan county in the North East region of England, around the mouths of two rivers, the Tyne and the Wear, bounded on the east by the North Sea.]

Answer: Dear Heather: From the facts you have shared with me, and the general rules of interpretation of agreements in most countries, it seems to me that this “new name” company probably has no right at all to enforce the non-compete agreement you signed with your “old name” employer. However, there are two possible exceptions that could change my conclusion. Let me explain:

1. As with an agreement of any kind, a proper analysis requires that you read and understand each and every word and punctuation mark. This is a “rule of prudence” for every person who is interested in understanding the legal rights and responsibilities that arise from an agreement. Can you imagine asking your doctor to give you a diagnosis of your medical problem without letting him or her give you a medical checkup? That would be as foolish for the doctor to do as it would be for a lawyer to give you a legal opinion about a document without having read it. As I have not had a chance to review your non-compete agreement, I cannot give you a clear opinion regarding your non-compete agreement.

Even for experienced attorneys like myself, it is often the case that I truly understand an agreement only after the third or fourth time I have read it carefully, and thought about, word for word.

That said, I can share with you my views from the facts you do provide, from my many experiences with non-compete agreements, and the application of general rules of agreement interpretation common to most countries.

Our 185-Point Master Guide & Checklist to Non-Competition Agreements is a perennial favorite. It takes you step-by-step through everything you need to know. To obtain your copy, just [click here] Delivered by Email – Instantly! 

2. Here’s the first general rule you should follow: “Unless an agreement says otherwise, it is binding only on the two parties who have agreed to it.” If you and your former employer entered into an agreement, only you and your former employer are bound by it, and can claim its potential benefits. It is not binding on your cousin, or beneficial to her. And, it is not binding on a different company or new company owned by the same owners as you last company, or beneficial to that “third party.” So, your cousin could not claim your former employer owes her any money, and a different or new company owned by your former employer cannot claim you owe it a duty not to compete with it.

3. This is an exception to that first general rule: some agreements say that they are also for the benefit of “others,” or those “others” can enforce them. So, for example, if your non-compete agreement said, “This non-compete agreement is also for the benefit of, and can be enforceable by, any other company owned by the same owner as this company,” and you agreed to that, then the “new name” company can probably enforce it. (That would be called a “related beneficiary” or “successor” clause.)

As another example, if an agreement says “You agree that you are employed by ‘old name’ company, but because “old name” company paid you a bonus, you agree that in the future you will not compete with ‘new name’ company.” That would be called a “third party beneficiary” clause.)

So, both “successor clauses” and “named beneficiary” clauses can give “third parties” rights and benefits they can enforce.

If you feel that your non-compete agreement is being enforced (a) without legal basis, or (b) in an improper, illegal or discriminatory basis, you may want to proactively seek a resolution of your non-compete dilemma with your former employer before a legal dispute arises. We offer a “Model Letter: Proactive Attempt to Prevent a Potential Non-Compete Dispute” that shows you “What to Say, and How to Say It.” To get your copy, just [click here.] Delivered by Email – Instantly!

4. Your first task: Carefully read your non-compete agreement to see if there are any (a) “successor clauses” or (b) “third party beneficiaries in it. such as these anywhere in your agreement? If there are not, then you are not obligated to avoid non-competition, but then must review the second “general rule,” below, and how it might apply to you. If there are such clauses in your non-compete agreement, then this would make your non-compete agreement what you employer refers to as “rolling.”

5. Here’s the second general rule you should follow: if you only changed your name, you – with the old name or the new name – could enforce the agreement. The same goes for your former employer. Said with greater simplicity: name changes do not change legal obligations. So, for example, if you were married, and you changed your name from Heather to Matilda, you would still be married to your husband, and you would remain entitled to the benefits and be responsible for the burdens of your marriage – even if your name was now Matilda. The same rule applies to employment relations – and for both employees and employers – changing a name does not change legal rights or responsibilities.

6. Your use of the word “insolvent” about your former employer suggests to me that, in effect, it actually legally “died” and with its “death” your relation to it “died,” as well. When people say a company becomes “insolvent,” it usually means it closed down and, in the law, it “died.” Sometimes, though, company owners, after making a mistake, or in trying to avoid taxes or other debts, then immediately open up a brand new company, making the two companies just like two different people, one dead and one alive, not one person with a changed name. I have seen this happen many times. It is a kind of “business redemption” the law permits, assuming it is done honestly.

So, imagine that you are married, and your husband passes to the other side. The next day his brother says to you “I am now your husband, and you are now my wife, because your dead husband and I had the same parents.” I don’t think you would say “Yes, I now owe you loyalty and devotion of a wife.” The same is effective here: if the “old name” company legally “died,” you do not owe the “new name” company any obligations, including the non-compete obligation.

7. Your second task: In a written letter sent by email or courier, ask if your former employer’s company is either (a) “just renamed” or (b) legally “dead.” If you think about the analogy I have made to marriage, you need to ask if the man claiming to be your husband is (a) your husband with a new name, or (b) a different man. By sending a letter to your former employer, and asking him or her to tell you what has happened to the “old name” company, and sending it by email or courier, you will likely find out the answer to the second question that will determine whether you need to honor the non-compete agreement you signed.

Heather – or I will call you Matilda, if you prefer – I have a strong feeling that you have no non-compete problem. I say this because I have seen a good number of “new companies” claim that they have the benefits – although none of the burdens – of “old companies” former employment relations. That is, they want to take the “good” but do not want to take the “bad.” They cannot do this; they can only wish they can – or frighten you into believing they can.

Don’t let them frighten you. Go forward without fear, ask for information, and even if you are told they are simply “renamed,” you should ask for written proof of that. Employers are no more and no less honest than employees, and that means not all of them are honest. There is no reason at all to give up your freedom without first fighting for it; it is just too precious.

“I have a Non-Compete Agreement, but I’d like to go to work for a Competing Employer. What should I do?” The answer is almost always to proactively seek a resolution of your non-compete dilemma with your former employer before a legal dispute arises. We offer a “Model Letter: Proactive Attempt to Prevent a Potential Non-Compete Dispute” that shows you “What to Say, and How to Say It.” To get your copy, just [click here.] Delivered by Email – Instantly!

Always remember to keep copies of letters you send, and always send them in a way you can later prove was sent and delivered. The truth is the truth, and I think the truth will set you free.

I hope this has been helpful to you. And, whether or not you are married, I hope you will not take offense to my use of marriage as an analogy. I use analogies to explain concepts, and it often works very well.

I applaud you for seeking information and insight from our blog to use in standing up for yourself. We all need to do that a bit more. The more we all do just that the less employers will seek to frighten anyone.

I hope this is helpful to you. If it is, please consider telling a friend or two of our blog, and how it might help them. And – I almost forgot – Good Luck in your new business!

My Best to You,
Al Sklover

P.S.: One of our most popular “Ultimate Packages” of forms, letters and checklists is entitled “Ultimate Non-Compete Package” consisting of six Model Letters/Memos for non-compete navigation and negotiation, as well as our 185-Point Non-Compete Guide and Checklist.” To obtain a complete set, just [click here.]

© 2013 Alan L. Sklover, All Rights Reserved.