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CORPORATE EXPRESS OFFICE PRODUCTS, INC. v. PHILLIPS
This case involves the enforceability of noncompete agreements against former employees. Corporate Express Office Products, Inc. (Corporate Express) sought to enforce noncompete agreements against respondents Edward Goff, Doug Phillips, and Lori Farrell. The former employees raised as a defense that the noncompete agreements had been entered into with prior employers and not with Corporate Express. Because one corporate acquisition by Corporate Express was initially accomplished through a 100 percent stock purchase . . . and the other corporate acquisition occurred through a sale of assets, we explain the facts of each acquisition separately.
The first factual scenario involved employees Phillips and Farrell. In 1986, Phillips signed a noncompete agreement with his employer, Bishop Office Furniture Company (Bishop). In 1989, Farrell signed a noncompete agreement with Bishop. Neither agreement included an assignment clause. In 1997, Corporate Express of the South, Inc. (CES) purchased 100 percent of Bishop’s stock. The stock purchase agreement between Bishop and CES listed the noncompete agreements with Phillips and Farrell. CES operated the business under the Bishop name until 1998, when Bishop was merged into CES. Shortly thereafter, CES merged into Corporate Express of the East, Inc. (CEE). CEE then changed its name to Corporate Express Office Products, Inc.
The second scenario began in 1986 when Goff signed a noncompete agreement with his employer, Ciera Office Products (Ciera). In 1996, Ciera sold its assets, including the noncompete agreement with Goff, to CES. Goff executed a consent to Ciera’s assignment of his noncompete agreement to CES. Goff did not execute any additional consents to assignment after CES merged with CEE and then changed its name to Corporate Express.
Like Bishop and Ciera, Corporate Express is engaged in the business of selling office furniture and business equipment. Phillips, Farrell, and Goff remained continuously employed with CES from the time of the corporate acquisition through the merger into CEE and the renaming of CEE as Corporate Express. In 2000, the employees terminated their employment with Corporate Express and joined a different employer, allegedly in violation of their noncompete agreements.
The terms of the noncompete agreements precluded the employees from competing against their employers or soliciting the employers’customers for one year following the termination of employment. Further, the agreements covered seven Florida counties, which were the territories serviced by respondents. Corporate Express sued Goff, Phillips, and Farrell and their new employer for unlawful use of trade secrets and breach of the noncompete agreements. Corporate Express sought a preliminary injunction to enforce the agreements.
The former employees asserted that because the noncompete agreements did not contain a clause authorizing assignment and were in fact never assigned to Corporate Express, the noncompete agreements could not be enforced.
The 1986 noncompete agreements between Goff and Ciera, and Phillips and Bishop, and the 1989 noncompete agreement between Farrell and Bishop, are governed by section 542.33, Florida Statutes (1985), which states in pertinent part:
(2)(a) . . . [O]ne who is employed as an agent or employee may agree with his employer to refrain from carrying on or engaging in a similar business and from soliciting old customers of such employer within a reasonably limited time and area, . . . so long as such employer continues to carry on a like business therein. Said agreements may, in the discretion of a court of competent jurisdiction, be enforced by injunction.
The question in this case is whether the nature of the business transaction affects whether a consent to an assignment of a noncompete agreement is necessary either in the original agreement or in connection with the subsequent transactions. The types of transactions relevant to this case are an asset sale, a 100 percent stock sale, a merger, and a name change.
We begin with a discussion of the effect of a 100 percent stock purchase on a corporation’s existence. Unlike partnerships, a corporate entity is not dissolved by a change of ownership. See St. Petersburg Sheraton Corp. v. Stuart, 242 So.2d 185, 190 (Fla. 2d DCA 1970) (“Ownership by one corporation of all the stock of another corporation does not destroy the identity of the latter as a distinct legal entity….”). In fact, a foundation of corporate law is that, unlike a partnership or a sole proprietorship, the existence of a corporate entity is not affected by changes in its ownership or changes in management. See Cedric Kushner Promotions, Ltd. v. King, 533 U.S. 158, 163,121 S.Ct. 2087, 150 L.Ed.2d 198 (2001) (“The corporate owner/employee, a natural person, is distinct from the corporation itself, a legally different entity with different rights and responsibilities due to its different legal status.”); see also Am. States Inc. Co. v. Kelley, 446 So.2d 1085, 1086 (Fla. 4th DCA 1984) (“The general rule is that corporations are legal entities separate and distinct from the persons comprising them.”). Moreover, there is a “clear distinction between the transfer of an asset or a corporation, such as a franchise agreement, and a transfer of the stock in a corporation itself.” Hawkins v. Ford Motor Co., 748 So.2d 993, 1000 (Fla.1999). Cf. Cruising World, Inc. v. Westermeyer, 351 So.2d 371, 373 (Fla. 2d DCA 1977) (stating that a share of stock does not vest owner with any right or title to any of corporation’s property). With a stock purchase, the corporation whose stock is acquired continues in existence, even though there may be a change in its management. As explained in Sears Termite, the “fact that there is a change in ownership of corporate stock does not affect the corporation’s existence or its contract rights, or its liabilities.” 745 So.2d at 486. In contrast to a sale of corporate stock, in a sale of corporate assets the transaction introduces into the equation an entirely different entity, the acquiring business. The asset sale to that entity may include some or all of the corporate assets, and the transferred assets may include tangibles such as machinery and intangibles such as accounts receivable. See § 607.1202(1), Fla. Stat. (2002) (“A corporation may sell, lease, exchange, or otherwise dispose of all, or substantially all, of its property….”). A corporation that sells its assets may continue in existence, may dissolve, or may merge with the entity that purchased its assets. See Best Towing & Recovery, Inc. v. Beggs, 531 So.2d 243, 245 (Fla. 2d DCA 1988) (noting that pursuant to an agreement, a transfer of assets may immediately dissolve a corporation).
A corporation that acquires the assets of another business entity does not as a matter of law assume the liabilities of the prior business. See Bernard v. Kee Mfg. Co., 409 So.2d 1047, 1049 (Fla.1982). In Bernard, this Court declined to impose product liability on a successor corporation that purchased the assets of the manufacturer of a defective product and continued the product line under the same trade name, but discontinued the allegedly defective model. See id. at 1048. This Court set out the generally accepted rule applicable to an asset purchase:
The vast majority of jurisdictions follow the traditional corporate law rule which does not impose the liabilities of the selling predecessor upon the buying successor company unless (1) the successor expressly or impliedly assumes obligations of the predecessor, (2) the transaction is a de facto merger, (3) the successor is a mere continuation of the predecessor, or (4) the transaction is a fraudulent effort to avoid liabilities of the predecessor.
In an asset purchase, the liabilities and responsibilities of each party would be set forth in the parties’ agreement. See William Meade Fletcher et al., Fletcher Cyclopedia of the Law of Private Corporations, § 7122 (perm.ed., rev.vol.1990) (“The general rule . . . is that where one company sells or otherwise transfers all its assets to another company, the latter is not liable for the debts and liabilities of the transferor. . . . An express agreement, or one that can be implied, to assume the other company’s debts and obligations, is necessary….”). Thus, when the sale of the assets includes a personal service contract that contains a noncompete agreement, the purchaser can enforce its terms only with the employee’s consent to an assignment. See, e.g., Pino v. Spanish Broad. Sys. of Fla., Inc., 564 So.2d 186, 189 (Fla. 3d DCA 1990) (holding that because contract containing covenant not to compete included a provision permitting assignment, the covenant was assignable and enforceable by business that bought assets of employee’s former employer). We next address a corporate merger, which is also involved in this case. Under longstanding precedent, on the date of a merger the surviving corporation becomes “liable for the debts, contracts and torts” of the former corporation. Barnes v. Liebig, 146 Fla. 219, 1 So.2d 247, 253 (1941). This principle is codified in section 607.1106, Florida Statutes (2002), which provides in pertinent part:
(1) When a merger becomes effective:
(a) Every other corporation party to the merger merges into the surviving corporation and the separate existence of every corporation except the surviving corporation ceases;
(b) The title to all real estate and other property, or any interest therein, owned by each corporation party to the merger is vested in the surviving corporation without reversion or impairment;
(c) The surviving corporation shall thenceforth be responsible and liable for all the liabilities and obligations of each corporation party to the merger[.]
This provision has remained unchanged since its 1989 enactment and thus contains the statutory language applicable at the time of the mergers in this case. Prior to the enactment of section 607.1106, section 607.231(3), Florida Statutes (1987), similarly provided that the surviving corporation of a merger “shall have all the rights, privileges, immunities and powers, and shall be subject to all of the duties and liabilities” of the merged corporation. Precedent applying these provisions demonstrates the passage of the obligations and rights of a merged corporation to the survivor of the merger. In Celotex Corp. v. Pickett, 490 So.2d 35, 37 (Fla.1986), this Court construed section 607.231(3) to hold Celotex liable for punitive damages stemming from a shipyard worker’s exposure to asbestos manufactured by a corporation it had absorbed in a merger. This Court stated:
Where two corporations have truly merged, a corporate tortfeasor by any other name is still a tortfeasor, to paraphrase Shakespeare. See, e.g., Moe v. Transamerica Title Insurance Co., 21 Cal.App.3d 289, 98 Cal.Rpt[r]. 547, 556- 57 (1971) (merger “merely directs the blood of the old corporation into the veins of the new, the old living in the new”); Atlanta Newspapers, Inc. v. Doyal, 84 Ga.App. 122, 128, 65 S.E.2d 432, 437 (1951) (merger “is like the uniting of two or more rivers, neither stream is annihilated, but all continue in existence”).
Based on the language in Florida’s statute as well as the decisions in Barnes and Celotex, we conclude that the surviving corporation in a merger assumes the right to enforce a noncompete agreement entered into with an employee of the merged corporation by operation of law, and no assignment is necessary. This is because in a merger, the two corporations in essence unite into a single corporate existence. Accordingly, based on fundamental principles of commercial transactions and the applicable statutes, we hold that, in contrast to an asset purchase, neither a 100 percent purchase of corporate stock nor a corporate merger affects the enforceability of a noncompete agreement. This holding is in accord with our decisions in both Bernard and Celotex where we have followed the traditional principles of corporate law in determining the obligations and liabilities of a successor corporation. This holding also “conforms with the policy of preserving the sanctity of contract and providing uniformity and certainty in commercial transactions.” Pino, 564 So.2d at 189.
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