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Does Bankruptcy Immunize Company From Non-Compete Claims?


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3/10/2016
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A few years ago, the Wall Street Journal reported that OfficeMax had sued A & P, the well-known supermarket chain, seeking a restraining order barring them from poaching key employees. 

Apparently, OfficeMax felt compelled to take this action after 3 of their key employees left, including their former chief operating officer and two of his subordinates. As part of their claim, they also charged the former COO, Sam Martin, with violating the non-compete clause of his employment agreement, with breach of contract and breach of fiduciary duty, claiming that his employment contract with OfficeMax explicitly barred him from soliciting, or poaching, employees away OfficeMax's ranks. 

There was just one big fly in this particular ointment, however. 

The Problem with OfficeMax's Attempt to Get an Injunction to Uphold the Non-Compete

Since A & P had filed for bankruptcy protection, certain legal actions against A & P were prohibited, such as pursuing litigation against the bankruptcy debtor's property. (For additional information on this, please see Bankruptcy Code Section 362). 

The question is whether this particular claim - injunctive relief needed to enforce a non-compete provision - would also be subject to bankruptcy protection/immunity

A & P's argument that forcing it to defend this lawsuit would effectively deprive it of one of the chief benefits of bankruptcy protection - i.e., immunity from lawsuits - definitely has some merit. 

But I don't think that it is the better policy in cases of this nature. 

While I understand shielding a bankruptcy debtor from money judgments, that protection should not be without limits; it should not allow them to act deliberately and intentionally raid other companies' leadership without consequence. 

What Likely Would Have Happened - Had the Two Sides Not Settled

A few months after this story broke, the two sides settled, leaving us to wonder how the Court would have ruled on this issue.

My guess is that OfficeMax would have attacked A & P's response by arguing that a restraining order is inherently equitable in nature - it does not seek damages, and therefore is not the type of claim insulated from suit by the Bankruptcy Code. In addition, to the extent any damages are sought, it would appear that they are targeted at the individual defendant, Mr. Martin, rather than at A & P. 

The Takeaway

Here's the real kicker:

At least insofar as New York law is concerned, I haven't found any cases that directly address this issue or answer this question.



Category: Non-Compete & Employment Agreements


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