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Company A obtains an injunction against Company B, which sells its assets to Company C. Is Company C bound by the injunction?
The simple answer is "no" because Company C was not in privity with the parties to the A-B injunction. That's the basic rule of ADT v. NorthStar Alarm Systems.
The U.S. Eleventh Circuit Court of Appeals said that NorthStar Alarm Services was not bound by an injunction because it was not in privity with the parties to the injunction. Also, the appeals court said, the company had no notice that there was an injunction against Vision Security when it purchased the company.
"In the absence of a finding that NorthStar knew about the injunction against Vision Security, the district court erred when it ruled that NorthStar was bound by the injunction under a theory of de facto merger," the appellate panel said. "A court cannot bind a party whose 'rights have not been adjudged according to law.'"
ADT sued Vision Security in 2012 for unfair business practices, alleging that Vision sales agents sold a competitor's monitoring services to homeowners in a type of "bait-and-swtich." The agents "pretended" to do business with ADT, but then convinced homeowners to switch out ADT's service with the competitor's. Before trial, the parties agreed to a permanent injunction against Vision's sales tactics.
In 2015, Vision solds its assets to NorthStar Alarm. The sale added 8,000 accounts to the company's 35,000 accounts, and expanded its customer base to Maryland, Virgnia, Pennsylvania and Minnesota. The sales agreement did not mention the ADT injunction.
About a year after the injunction, ADT learned that NorthStar was violating its terms and sued. A trial judge concluded that even though NorthStar and Vision Security were not in privity with the ADT-Vision Security deal, NorthStar was bound by de facto merger under state law.
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On appeal, the Eleventh Circuit agreed with the trial judge on privity but not on state-law merger. The appeals court said federal injunctions are governed by Federal Rule of Civil Procedure 65(d).
"Rule 65 requires that a party have notice of an injunction before that party may be bound by the injunction," the judges said.
The court said the record did not show NorthStar knew about the injunction, and vacated the order binding the company to it.