Covenant not to compete survived merger

August 9, 2006

By ANN W. PARKS,

Daily Record Assistant Legal Editor

A Baltimore-based company can prevent its director of manufacturing from working for a competitor in its highly specialized industry, a Baltimore City Circuit Court judge has concluded.

Judge Kaye A. Allison granted a permanent injunction against James Braithwaite, restraining him from accepting employment with Westminster-based IntelliTECH Inc., one of approximately 17 manufacturers nationwide competing with National Instrument LLC and its predecessor, National Instrument Company Inc. (NIC).

In a case of first impression in Maryland, Allison concluded that NIC’s merger into National Instrument in 2004 did not invalidate a 1992 agreement by Braithwaite that, upon his departure from NIC, he would not work for a NIC competitor for two years.

Braithwaite “contends that the Covenant he signed with NIC could not have been assigned to National Instrument, and therefore, National Instrument cannot enforce it,” Allison wrote in a 15-page opinion. “However, National Instrument actually acquired the Covenant when NIC merged into it.”

Section 3-114 of the Corporations and Associations Article provides that, in a merger, the “assets of each corporation … transfer to, vest in, and devolve on the successor without further act or deed.”

James A. Rothschild, who represented the company, said the facts were not in dispute, that the merger issue — and to a lesser extent, the reasonableness of the covenant not to compete — controlled the outcome of the case.

“Five states say specifically that if you have a statute like Maryland’s that permits merger, you don’t have to get into the issue of assignability,” Rothschild said. “Here, [the covenant] passed by operation of law. That seems to be the trend … no court has said the covenant doesn’t pass by operation of law.”

James P. Gillece, who represented Braithwaite, declined to criticize the judge’s opinion, although he felt that his client had a “pretty strong position.” Besides the merger issue, he had contended that the agreement Braithwaite signed was unreasonable.

“The covenant [not to compete] covers all of North America,” he said. “I think that’s a little broad.”

Gillece doesn’t plan to appeal, since by the time an appeal can be heard, the two-year covenant not to compete will have expired. His client, he said, will take another job in another industry.

Knowledge

National Instrument designs, markets and sells liquid filling systems — “anything taking a liquid and putting it into a bottle,” Rothschild explained — to the pharmaceutical, medical, cosmetics, food and beverage, household products and chemical industries.

Braithwaite, who began his career at NIC as a machinist in 1983, worked his way up to become director of manufacturing and, by 2005, had also become a member of National Instrument’s executive board.

“Through these various positions Mr. Braithwaite gained intimate knowledge of National Instrument’s proprietary manufacturing systems and future improvements, its quality control systems, performance data …,” Allison noted. “In other words, he had access to significant confidential and proprietary information.”

Braithwaite, who left National Instrument earlier this year in the hopes of working for IntelliTECH, contended that the covenant not to compete he signed in 1992 was a personal service contract that could not be assigned without the consent of the other contracting party.

Assuming without deciding that the covenant was in fact a personal service contract, the judge nevertheless concluded that the agreement was an asset that transferred from NIC to National Instrument upon the merger by operation of law, not by assignment.

“It prevented a valuable employee from leaving to work for a competitor where the employee could share confidential and proprietary information at the expense of the company (s)he left,” Allison wrote.

And the merger, the judge noted, was carried out for the sole purpose of creating a limited liability company; nothing in the company changed “from an operational standpoint.”

The “burden the Covenant places upon Mr. Braithwaite is small compared to the benefit it bestows upon National Instrument,” Allison wrote, in discussing the reasonableness of the agreement. “The Covenant only prohibits Mr. Braithwaite from working for a competitor of National Instrument in the liquid filling systems industry for a period of two (2) years.”

Photo by Max Franz