When one business buys another business, the buyer might assume that it’s just stepping into the shoes of the purchased entity, especially as to employees that stay on. But a recent opinion from Judge Conrad reminds employers that this isn’t always the case. To play it safe, a successor business needs to have retained employees sign new employment agreements.
In Addison Whitney, LLC v. Cashion, the successor business didn’t play it safe. Employees had signed agreements making clear that trademarks, ideas, and work product that the employees created during their employment belonged to their employer. The employer was then purchased by a new business through an asset purchase, but the successor business didn’t have the retained employees sign new work-product agreements.
The consequences of that decision sat dormant for a decade. Then, a group of employees who had signed work-product agreements with the old entity departed to set up a competitor. The successor-employer then sued the departing employees, alleging that the employees were in breach of the work-product agreement because they took with them work product that they had created for the successor-employer.
The employees filed a motion to dismiss, arguing that they didn’t have any work-product agreement with the successor business. So what rights, if any, did the successor have in the old work-product agreements?
Judge Conrad emphasized that the question turned on the nature of the change in corporate form. The business had changed through an asset purchase rather than some other change in corporate form (like a merger). The asset purchase implicated two employment principles:
- The asset purchase terminated all existing employment relationships in existence at the time of the purchase.
- Any employee that was retained entered into a new employment relationship with the purchasing business.
These principles meant that the work-product agreements themselves were terminated by the asset purchase. The successor business didn’t step into the shoes of the old business. Instead, the successor business only got whatever rights the old business had in the terminated work-product agreements.
In this case, that made all the difference for the employer’s claims. The work product at issue was all generated after the asset purchase. The old work-product agreements simply had nothing to say about work product generated by the employees for the successor business. As Judge Conrad put it, the successor business “obtained the right” to enforce the work-product agreements “as to work product created while” the employees were employed by the purchased business. But the successor business “did not obtain the right to enforce” the work-product agreements for issues related to the employees’ “distinct, subsequent employment” by the new employer.
Judge Conrad’s straightforward opinion doesn’t break new ground, but it does give businesses a good reminder. When you purchase a new business, check whether you need to re-up the employment agreements for employees that stay on board.