Ambiguity in Merger Clause in Release Agreement Allows Action for Breach of Restrictive Covenants in Employment Agreement to Proceed Past Pleadings Stage

Posted by Neal F. Weinrich on

Cadillac Jack, Inc. v. Eclipse Gaming Systems, LLC, No. 1-10-CV-03193-RWS, 2011 WL 2883442 (N.D. Ga. July 15, 2011), addressed whether a merger clause in a release agreement barred claims for breach of restrictive covenants in an earlier employment agreement.

Cadillac Jack supplies games and systems to the gaming industry.  When Mr. Saltiel left Cadillac Jack to join Eclipse Gaming Systems, LLC (“Eclipse”), Cadillac Jack filed suit against Mr. Saltiel and Eclipse alleging, among other things, that Mr. Saltiel was violating restrictive covenants in an employment agreement with Cadillac Jack.

Mr. Saltiel entered into the employment agreement in 2004, and it expired on its own terms in 2006.  However, the restrictive covenants in the agreement expressly survived the agreement’s expiration.

Shortly after he stopped working for Cadillac Jack, Mr. Saltiel signed a Release and Severance Agreement.  The release contained the following standard merger clause: “This agreement contains the entire agreement and understanding concerning the subject matter between the parties.  Each party acknowledges that no one has made any representations whatsoever not contained herein concerning the subject matter hereof, to induce the execution of this Agreement.”

Mr. Saltiel and Eclipse moved for judgment on the pleadings with respect to Cadillac’s Jack’s claims based on the restrictive covenants, arguing that, due to the merger clause, the covenants no longer apply because the employment agreement and the covenants therein were superseded by the release.  That is, the release alone controls Mr. Saltiel’s post-employment obligations.

The District Court noted that for the merger rule to apply, the parties must have a valid agreement which is subsequent to and inconsistent with a prior agreement, and the new agreement must completely cover the subject matter embraced by the original agreement.  The District Court found that there was overlap between the release and the employment agreement but also found that the release made no reference to certain materials in the employment agreement.  While Mr. Saltiel and Eclipse argued that the release was intended to cover all post-employment obligations of the parties and the employment agreement should therefore merge into the release, the District Court found that the parties’ intent in the release was not clear and unambiguous.

As such, the District Court could not conclude as a matter of law that the employment agreement merged into the release.  The District Court therefore denied Mr. Saltiel and Eclipse’s motion for judgment on the pleadings and allowed Cadillac Jack’s claims based on the restrictive covenants to proceed.