De Facto New Employment Relationship Precludes Restrictive Covenant Enforcement By Successor Employer

Kelly Services, Inc. v. Savic, 2006 U.S. Dist. LEXIS 83930
Case Background

Ms. Anna Savic worked as a legal recruiter at The Wallace Law Registry and its successor companies from February 1989 until her resignation on June 20, 2005.  She began her employment primarily recruiting and placing paralegals in the Connecticut legal market.  Ms. Savic executed an employment agreement with Ms. Shelly Wallace, the owner and sole shareholder of the company, on October 2, 1990.

The agreement detailed the employment relationship between Ms. Savic and the company, specifically stating that employment was at will where either party could terminate the relationship at any time with or without cause (paragraph #3), that all the company’s information and records were private/privileged/confidential (paragraph #8), that she was prohibited from soliciting any applicant or client without express written consent for two years following termination (paragraph #9), and that she was prohibited from soliciting any employees to leave the employ of the company for two years following termination (paragraph #11).

Enforcing a Non-Compete Agreement

The Wallace Law Registry experienced a series of mergers and acquisitions during Ms. Savic’s employment and the company eventually became part of Kelly Services, Inc., a Delaware corporation with headquarters in Troy, Michigan.  Ms. Savic’s duties and responsibilities significantly changed around March 2000 and she received a new compensation schedule despite the fact that no new employment agreement was executed.

Kelly Services commenced an action to enforce the provisions of the 1990 Employment Agreement when Ms. Savic resigned from the company in 2005.  Ms. Savic asserted that the contractual obligations of the 1990 Employment Agreement were no longer in effect and that the agreement itself was not assignable during the series of mergers and acquisitions that occurred throughout her employment.

The central issues for the court were: (1) whether the 1990 Employment Agreement between Ms. Savic and The Wallace Law Registry was enforceable to Kelly Services because it lacked an assignment clause, and (2) if the agreement was assignable, whether it was enforceable.

While the 1990 agreement was silent on the assignability and/or successorship of the contractual provisions, Connecticut law and policy nonetheless enshrine the principle that employment contracts are assignable business assets.  Specifically, “Connecticut adheres to the view, rejected by most jurisdictions, that an employee’s covenant not to compete is an assignable asset of the employer”.  Madrigal Audio Laboratories, Inc. v. Cello, Ltd., 799 F.2d 814, 821 (2d Cir. 1986).  The court determined that the 1900 agreement was assignable but ultimately concluded that it was not enforceable by Kelly Services.

The Court’s Decision

In order to be successful in requesting enforcement of a non-compete agreement, a plaintiff must demonstrate (1) irreparable harm and (2) either (a) the likelihood of success on the merits or (b) sufficiently serious questions on the merits to make them fair ground for litigation.  The court held that that Kelly Services failed to establish a likelihood of success on the merits of the case.

The changes in employment/responsibilities in March 2000 went beyond mere modifications to the original employment agreement and the court concluded that a new employment relationship was created even though it was not formally detailed in a new employment agreement.  This, accordingly to the court, rendered the 1990 Employment Agreement between Ms. Savic and The Wallace Law Registry unenforceable and no longer in effect.

This case is one that demonstrates that there are exceptions to every rule.  Despite the general policy in Connecticut of assigning employment contracts in the event of a merger or acquisition, there are always certain circumstances where the original agreement will not be enforceable by the successor employer.  An employer is prevented from enforcing an original employment agreement when a de facto new employment relationship is created due to significant changes in responsibilities, compensation, and/or position within the company.

 

The lawyers at Maya Murphy, P.C., are experienced and knowledgeable employment and corporate law practitioners and assist clients in New York, Bridgeport, Darien, Fairfield, Greenwich, New Canaan, Norwalk, Stamford, Westport, and elsewhere in Fairfield County.  If you have any questions relating to your non-compete agreement or would like to discuss any element of your employment agreement, please contact Joseph C. Maya, Esq. by phone at (203) 221-3100 or via e-mail at JMaya@Mayalaw.com.