The Eighth Circuit Court of Appeals recently held that non-compete agreements may be transferred to a successor employer through an asset sale and enforced by that successor employer against the employees who previously signed the non-compete agreements. (Symphony Diagnostic Services No 1 Inc. d/b/a MobilexUSA v. Greenbaum).
In this case, after their prior employer Ozark Mobile Imaging was sold to Mobilex through an asset purchase sale, two former Ozark employees began working for Mobilex’s competitor, BioTech X-ray. The two employees left Mobilex after refusing its job offer for lesser pay and non-guaranteed benefits. Mobilex subsequently sued the two employees to enforce the terms of the non-compete agreement that each had previously signed and entered into with Ozark because they allegedly possessed various trade secrets, including customer lists and methods of operation. The trial court held that Ozark could not assign the employees’ non-compete agreements to Mobilex without the employees’ contemporaneous consent. On appeal, Mobilex argued that the trial court erroneously considered the non-compete agreements to be “personal service contracts,” which require the employees’ consent to assign, rather than “stand-alone agreements,” which can be transferred as part of an asset purchase sale.
The Eighth Circuit agreed and reversed the trial court’s decision. It stated that unlike a personal services contract (i.e. an employment contract), which requires an employee to perform an affirmative act (e.g. to provide professional services), the non-compete agreement that the employees entered into with Ozark required only that they refrain from certain actions (e.g. working in the mobile diagnostic business), as the non-compete agreements were not part of an employment contract. The court also rejected the employees’ argument that the fact that they signed the non-compete agreements in consideration for continued employment transformed the agreements into personal service contracts, reasoning that the agreements imposed no obligation on them to take any affirmative action. The court did note, however, that absent a specific provision permitting assignment, generally a non-compete agreement may not be assigned without the employee’s consent when: (1) there would be material change to the employee’s job duties and responsibilities with the new employer; or (2) the employee only agreed to the non-compete because of qualities specific to the prior employer. It determined that neither exception applied here because the non-compete agreement only barred the employees from working in their field of medical diagnostics or soliciting business from certain clients within a specific geographical area.
This decision highlights the need for employers to ensure that their employment agreements, particularly those that contain non-compete and/or non-solicitation agreements, contain clauses permitting assignment of those agreements. Indeed, the Eighth Circuit noted the absence of such a clause permitting the assignment of the non-compete agreements above, the inclusion of which would have been dispositive on the issue of assignment. Absent such language, employers run the risk that their contractual protections will be unenforceable in the event of a sale, acquisition, or other change in control.