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Effect of Continued Employment on Covenant

In the case of corporate mergers, courts have held that an employee’s continued employment with a successor to the employer with whom the employee executed a restrictive covenant constitutes a ratification or consent to the assignment of the covenant to the successor.  Such a non-compete covenant is assignable by the business of the employer and it is all the more true where the contract embracing such restrictive covenant states that its provisions shall extend to the successors and assigns of the employer.[i]  An employee who has signed a restrictive covenant should not be relieved of his/her contractual obligations simply because his employer’s name changed following a valid merger whereby the rights to the employment agreement are transferred, especially where the employee continues to accept the benefits of his agreement without objection to the merger.[ii]

However, some courts have taken a contrary view and have held that a covenant not to compete is not assignable without the consent of the employee.[iii] These courts reason such personal covenants are not assignable since they largely depend upon the intention of the parties.  The differing courts have held that the effect of the employee’s “consent” or “of his continuing in the employment of the assignor is to create a new contract between employee and assignee rather than merely to permit the assignment of the old contract.”[iv]

[i] Safier’s Inc. v. Bialer, 93 N.E.2d 734, 738 (Ohio C.P. 1950)

[ii] Peters v. Davidson, Inc., 172 Ind. App. 39 (Ind. Ct. App. 1977)

[iii] W. R. Grace & Co. v. Hargadine, 392 F.2d 9, 20 (6th Cir. Ohio 1968)

[iv] Sisco v. Empiregas, Inc. of Belle Mina, 286 Ala. 72, 77 (Ala. 1970)

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