Defendant had entered into a covenant not to compete with his employer, BBF. The assets of BBF, including its contract rights, were acquired by GDX. GDX then terminated defendant’s employment per the agreement, and hired him directly. There was no new non-compete agreement entered into directly between GDX and defendant. Years later, GDX filed for bankruptcy, and its assets were purchased by the plaintiff.
The Court held that a covenant not to compete can be assigned as the part of the sale of a business. Therefore, GDX would have been entitled to enforce the covenant against defendant if defendant had left GDX at the time of the sale and begun to compete. The Court further held, however, that GDX was obligated to negotiate a new non-compete if it wished to continue the covenant in place. (The Court held that the answer would have been different if GDX had acquired the stock of BBF, as opposed to its assets). It stated "when an employer sells its assets, including its right to enforce a restrictive covenant in an employment contract, the period of the restrictive covenant begins to run because the employment relationship has been terminated. The former employee and the new employer have the choice of either not entering into a new agreement and having the old covenant enforceable or entering into a new agreement with a new restrictive covenant."
On the issue of the entitlement of a purchaser of assets at a bankrupty sale to enforce a covenant not to compete, the Court held "this Court is doubtful that the appellate courts of this state will sanction the purchase and enforcement of restrictive covenants by bidders for assets of the bankrupt employer."