Tuesday, October 19, 2010

PA Superior Court: Restrictive Covenants Survive Purchase of Membership Equity Interests of LLC

In Missett v. HUB International Pennsylvania, Inc., 2010 PA Super 178 (9/23/2010), the Pennsylvania Superior Court held that when a Limited Liability Company (LLC) sells all of its membership equity interests to another business entity, a restrictive covenant (or covenant not to compete) that was previously entered into by an employee of the LLC, will survive without the need for specific assignment language in the restrictive covenant.

In HUB International, Christopher Missett became employed by Clair Odell Insurance Agency, LLC ("Clair Odell") as a salesperson in the company's benefits department. In this capacity, Missett originated business for Clair Odell, negotiated with potential clients and worked with existing clients to meet their coverage and services needs. In 2000, Missett entered into an agreement with Clair Odell that contained a non-solicitation clause, which prevented Missett from soliciting Clair Odell's clients or prospective clients for two years following the date of his termination.

In 2001, Citizens Financial Group ("Citizens") purchased the membership interests of Clair Odell, and changed the name of the company to Citizens Clair Insurance Company, LLC ("Citizens Clair"). In December of 2002, Missett entered into a second Agreement that amended and restated the original 2000 Agreement, and which contained the same confidentiality and non-solicitation provisions as the 2000 Agreement.

In 2006, HUB U.S. Holdings, Inc. ("HUB U.S.") entered into a Purchase and Sale Agreement with Citizens, in which it acquired all of the issued and outstanding membership equity interests of Citizens Clair. The name of the company was then changed to Hub International Pennsylvania, LLC ("HUB Pa"). The Purchase and Sale Agreement required the companies to abide by the terms of any existing employment agreements that were attached as exhibits. Missett's 2002 Agreement was specifically included as an exhibit to the Purchase and Sale Agreement.

Missett was terminated on April 29, 2008. The stated reason for his termination was that HUB Pa did not want to pay his high commission schedule.

Missett subsequently initiated litigation seeking to enjoin HUB Pa from enforcing the non-solicitation agreement and requesting a declaration from the court that his 2002 Agreement was unenforceable. Missett argued that pursuant to the Pennsylvania Supreme Court's decision in Hess v. Gebhard & Co., Inc., 808 A.2d 912 (Pa. 2002), a restrictive covenant not to compete that is contained in an employment agreement is not assignable to a purchasing business entity in the absence of a specific assignability provision, where the covenant is included in the sale of assets. While Missett's Agreement in this case did contain an assignment provision, it limited such an assignment only to "affiliates" of the company, of which HUB Pa was not. As such, (according to both Missett and the trial court below), the non-solicitation provision of the 2002 Agreement was unenforceable by HUB Pa.

The Superior Court disagreed, reversed the trial court's decision in favor of Missett, and remanded the case for further proceedings. The Court held that the Supreme Court's decision in Hess was distinguishable and not controlling, because the reasoning in Hess was clearly premised upon a "sale of assets" of a corporation, as opposed to the sale of stock. The Superior Court noted that other decisions from the Superior Court and from the federal bench, namely J.C. Ehrlich Co., Inc. v. Martin, 979 A.2d 862 (Pa. Super. 2009), Siemens Medical Solutions Health Services Corp. v. Carmelengo, 167 F.Supp.2d 752 (E.D. Pa. 2001) and Zambelli Fireworks Manufacturing Co., Inc. v. Woods, 592 F.3d 412 (3d. Cir. 2010), all recognized that under Pennsylvania law, a transfer of a corporation's stock does not destroy the corporate entity, because "a corporation is an entity irrespective of, and entirely distinct from, the persons who own its stock." In other words, even when a corporation's stock is purchased by an outside entity and the name of the corporation is changed, the corporate entity nevertheless remains the same. The Superior Court held that "the structure of a sale of equity membership interests," of an LLC is "akin to a sale of stock rather than an asset sale," and therefore, the reasoning of Ehrlich, Carmelengo and Zambelli were applicable and controlling.

As such, the Superior Court concluded that because HUB Pa had acquired Citizens Clair via the purchase of Citizen Clair's membership equity interests, and not by purchasing its assets, no assignment provision was required in order for HUB Pa to enforce the terms and provisions of Missett's 2002 non-solicitation Agreement.

You can read the Superior Court's full opinion in HUB International here: http://www.superior.court.state.pa.us/opinions/a16035_10.pdf