In-House Advisor

The Value of a Non-compete Agreement to an Acquiring Company Can Be Limited

April 10, 2017


It is standard practice in M&A transactions for the acquired business to assign all if its contractual rights to the purchaser. While that may sound good in theory, depending upon how the underlying contracts are drafted, they could have little or no value to the purchaser. Indeed, as the Massachusetts Superior Court’s decision in NetScout, Inc. v. Hohenstein confirms, this warning can be particularly important when the underlying contract involves an employee non-compete.

Carl Hohenstein was employed by a subsidiary of Danaher Corporation, and in 2011 he and Danaher entered into a contract that included a non-compete agreement. Four years later, NetScout acquired Danaher and its subsidiaries, and as part of that transaction (i) Hohenstein became a NetScout employee; and (ii) Danaher assigned its rights under the 2011 contract with Hohenstein to NetScout. Six years after that, Hohenstein left NetScout and began working for one of its competitors.

NetScout sued Hohenstein and moved for a preliminary injunction, asking the Court to bar him from competing against the company. While the Superior Court found that the non-compete agreement in the 2011 contract between Hohenstein and Danaher was enforceable, and that NetScout was entitled to enforce that contract as Danaher’s assignee, the Court refused to grant NetScout the preliminary injunction that it sought. The keys in this regard were that (i) the non-compete only precluded Hohenstein from competing against “the Company;” (ii) the non-compete only applied while Hohenstein was employed “by the Company and for 12 months thereafter;” and (iii) the term “Company” was defined as being Danaher, its affiliates and its subsidiaries – and it did not include assigns of Danaher. In light of all of this, there were two reasons why the Court refused to grant NetScout injunctive relief:

Since Hohenstein’s non-competition agreement only barred him from competing with Danaher, or with Danaher’s subsidiaries and affiliates, [there was] no contractual right to bar Hohenstein from working for a company that instead competes with NetScout. … In any case, Hohenstein’s obligations under the [contract] expired by their terms twelve months after Hohenstein stopped working for any Danaher subsidiary … on July 14, 2015, when he became an employee of NetScout. His obligations not to compete with Danaher therefor expired one year later, on July 14, 2016.

Had the term “Company” in the 2011 Contract been defined to include “assigns,” the non-compete provision may have been enforceable by NetScout until one year after Hohenstein left NetScout’s employment and with respect to NetScout’s competitors. Obviously, however, NetScout had no ability to go back in time to make that change when it was buying Danaher. What NetScout could have done, however, was to enter into a new non-compete agreement with Hohenstein at the time NetScout became his employer (and make sure that such an agreement was supported by new consideration).

So the next time your company is acquiring a business that has non-compete agreements with its employees, scrutinize those agreements to see what happens to them after the acquisition takes place and consider entering into new non-competes if you feel the current ones will not provide the necessary protections.

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