Atronix, Inc. v. Kenneth Morris & a.

Citation: 197 A.3d 79Docket: 2017-0318

Court: Supreme Court of New Hampshire; October 23, 2018; New Hampshire; State Supreme Court

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The opinion is a legal notice indicating that it is subject to motions for rehearing and editorial revisions before publication. Readers are encouraged to report any errors to the New Hampshire Supreme Court for correction. The case involves Atronix, Inc. (plaintiff) against Kenneth Morris and Scott Electronics, Inc. (defendants), concerning allegations of breach of contract and tortious interference. The Superior Court dismissed the plaintiff's action for lack of standing, which the plaintiff is appealing. 

Key facts include that Morris worked for Atronix Sales, Inc. since 1982, signing a non-compete and non-solicitation agreement in 1997. After a merger in 2011, Atronix, Inc. sold its assets to Consolidated Cable Assembly Holdings, Inc. (CCAH) in 2014, including the tradename 'Atronix, Inc.' The plaintiff, now the subsidiary of CCAH, claims Morris breached the agreements after leaving to work for a competitor. The trial court ruled that the plaintiff lacked standing to enforce the agreements, a decision the plaintiff argues is inconsistent with the Asset Purchase Agreement (APA) and the principle that restrictive covenants transfer with the sale of a business. The plaintiff contends the court conflated the assignment of the non-compete agreement with Morris's consent to that assignment, which was not required. The appellate court will review the standing issue de novo, focusing on whether the APA allowed enforcement of the agreements.

The trial court ruled that neither the non-compete agreement nor the non-disclosure agreement was transferred under the Asset Purchase Agreement (APA), defining these collectively as "Agreements." The plaintiff only contests the ruling regarding the non-compete agreement. The central issue is whether this agreement was included in the assets conveyed to the plaintiff under the APA. The interpretation of the APA is necessary, governed by Delaware law, which aligns closely with New Hampshire's contract interpretation principles. The intent of the parties is paramount, assessed through the plain meaning of the language used in the context of the agreement. Ambiguity in language arises only when there is reasonable disagreement over its meaning, necessitating an objective understanding of the parties' intent.

The plaintiff argues that the trial court's conclusion conflicts with the APA, particularly Section 2.02, which broadly states that the plaintiff shall acquire all assets and agreements related to the business, excluding specific Excluded Assets. The trial court determined the plaintiff lacked standing to enforce the Agreements, asserting that acquisition of assets alone does not confer contracting rights without explicit transfer of the non-compete agreement. The plaintiff contends that this agreement falls under the category of "all other contracts and agreements" as per Section 2.02(a)(xii), referencing case law that supports broad interpretations of asset purchase agreements in similar contexts.

Morris’ non-compete agreement is a contract belonging to the Company, and the plaintiff claims it was conveyed to them under the Asset Purchase Agreement (APA). The defendants dispute this, arguing that the APA lacks specific references to employee contracts or Morris’s non-compete agreement, and instead merely indicates that the plaintiff would offer employment to existing employees under the same terms as before the closing. They cite a precedent, Hedgeye Risk Management, LLC v. Heldman, where the court ruled that an employee's restrictive covenants were not transferred with the company’s assets because the contract was neither scheduled nor referenced in the APA, and the APA’s language allowed employees to accept or reject employment offers.

The defendants argue that, similarly, the APA here does not support the claim that Morris’s non-compete agreement was transferred as an asset, as it explicitly addresses non-competition without mentioning Morris. However, the plaintiff distinguishes this case from Hedgeye, noting that Morris's non-compete agreement is not an employment contract but a separate non-compete and non-solicitation agreement. While Morris's employment was part of the consideration for this agreement, it was additionally supported by a nominal payment. The contract solely addresses competition and solicitation, with no other employment terms provided. The plaintiff notes that Morris was an at-will employee without a written employment contract and executed the non-compete agreement long after starting his employment. Thus, the APA’s provision about employment terms does not contradict the claim that the non-compete agreement was conveyed under the APA.

Defendants argue that the Asset Purchase Agreement (APA) implies a new employment relationship with Morris, suggesting that it does not transfer Morris's non-compete agreement. However, this interpretation overlooks that Morris could decline the new employment, thereby retaining the value of his non-compete agreement, which protects the goodwill associated with the business conveyed under the APA. The non-compete agreement is valid during employment and for three years post-termination, indicating its relevance regardless of Morris's acceptance of the offer. The term "other contracts" in section 2.02(a)(xii) should include the non-compete agreement, given the APA's intent to convey the business as a going concern and its goodwill. The court rejects the defendants' claims that the APA's structure and treatment of employment matters diminish the significance of the non-compete agreement, emphasizing that it is distinct from employment contracts. Additionally, the absence of specific reference to Morris in the non-compete clause does not alter the APA's intent. Courts recognize separate contexts for non-compete agreements arising from employment versus business sales but assert that this distinction does not impact the interpretation of the APA regarding the assignment of non-compete agreements.

Defendants argue that Morris’s non-compete agreement was not conveyed to the plaintiff due to legal restrictions on assignment without Morris's consent, conflating this issue with whether the agreement qualifies as an asset acquired by the plaintiff. The non-compete agreement is governed by Massachusetts law, which suggests that it is not assignable without explicit consent from Morris. However, the trial court did not rule on this matter, instead stating that the plaintiff lacked standing because the agreement was not assigned. The court declined to address the defendants' arguments regarding the enforceability of the agreement against Morris, including claims that the agreement only restricted competition against PSJL Corporation and that any restrictions expired in July 2017. Ultimately, the court concluded that the non-compete agreement was conveyed to the plaintiff as per the terms of the asset purchase agreement, and thus did not need to consider further arguments from either party. The decision was reversed and remanded, with concurrence from Lynn, C.J. and Hantz Marconi, J.