A recent decision from an appeals court in Pennsylvania is a warning to companies that the non-compete agreement they think they have with their top executive could be unintentionally wiped out with a few words in a later agreement. In law-speak, the words are called an “integration clause” or a “merger clause.” Through them, the parties agree that their agreement is their “entire” agreement and that it wipes out any earlier agreements.
In the Pennsylvania case, Randy Baker was the President and CEO of Diskriter when Diskriter was acquired by Joansville Holdings, Inc. The terms of the acquisition were memorialized in a stock purchase agreement (“SPA”), which had non-compete and non-solicitation clauses that apparently bound Baker.
Baker later left Diskriter for Keystrokes and allegedly took one of Diskriter’s clients with him. Diskriter sued, claiming that Baker was violating the non-compete and non-solicitation clauses in the SPA and that the court should order him to stop. The trial court refused and the appeals court agreed. The problem for Diskriter is that after the SPA was inked, Diskriter and Baker entered into an employment agreement with an integration clause providing that the employment agreement was the parties’ “entire agreement” and “supercede[d] all prior agreements or understandings.” In other words, the non-compete and non-solicitation clauses that Diskriter believes should prevent its former President and CEO from stealing its clients are no more.
Integration clauses may only be a few words and look like contract boilerplate at the bottom but they can have powerful and unintended consequences. Companies and executives should consider their impact carefully before including them in agreements of any kind – including employment, severance and separation agreements.