Executive Summary: The United States Court of Appeals for the Eighth Circuit recently held that a successor employer, who was assigned non-competition agreements as part of an asset purchase, could seek to enforce the non-competition agreements under Missouri law against two former employees of the predecessor who went to work for a competitor. Reversing the district court's order granting summary judgment to the former employees on the basis that the non-competition agreements were "personal service contracts" and could not be assigned without the employees' consent, the Court of Appeals in Symphony Diagnostic Services No. 1 Inc. v. Greenbaum found that that the non-competition agreements were not personal service contracts and, therefore, could be assigned without the employees' consent.
Background of the Case
Defendants Kimberly Greenbaum and Josephine Tabanag worked as mobile x-ray technicians for Ozark Mobile Imaging (Ozark). Both employees signed a non-competition agreement and a confidentiality agreement with Ozark. Both non-competition agreements stated that the employee was entering into the agreement "[i]n consideration of his/her employment by… Ozark…." and imposed, among other things, a two-year restriction within a specified geographic area on the employee "engag[ing] in the mobile diagnostic business."
Ozark was later acquired by MobilexUSA (Mobilex) through an asset purchase agreement. At the time of the acquisition, Greenbaum and Tabanag were both full-time employees of Ozark. MobilexUSA offered them both part-time positions with no guaranteed hours or benefits, which both declined. Both Greenbaum and Tabanag subsequently accepted employment with one of Mobilex's competitors, Biotech X-ray.
Mobilex then sued Greenbaum and Tabanag in federal court, alleging claims under Missouri state law, including breach of contract. The federal district court held that the non-competition agreements could not be assigned without the former employees' consent. Because the court found they had not consented to the assignment, it granted summary judgment in favor of Greenbaum and Tabanag.
The Eighth Circuit's Decision
The Eighth Circuit began its analysis by framing the central issue as "whether non-compete and confidentiality agreements signed by an employee can be assigned without the employee's consent." Finding no state court precedent on this issue, the Eighth Circuit reviewed one of its earlier decisions, Stuart C. Irby Co. v. Tipton, which addressed the same issue under Arkansas law where there was no controlling authority from the Arkansas appellate courts. In Stuart C. Irby, the Court of Appeals "predicted" that the Arkansas Supreme Court would adopt the majority rule "that covenants not to compete" can be assigned to a successor employer." [emphasis in original]. Finding that Missouri courts viewed covenants not to compete more favorably than Arkansas courts, the Eighth Circuit predicted that "the Missouri Supreme Court would permit assignment of covenants not to compete without contemporaneous consent."
The Court of Appeals then noted its disagreement with the district court that the agreements signed by the defendants were "personal services contracts" and distinguished the Missouri Court of Appeals decision relied on by the district court. The Eighth Circuit held that the agreements signed by both defendants were "free-standing" agreements and that "[n]either agreement formed part of a larger employment agreement that required Greenbaum and Tabang to provide personal services of any kind to Ozark."
The Eighth Circuit rejected the former employees' argument that the agreements at issue were personal service contracts based on language in the non-competition agreements. The Court noted that a personal service agreement "requires affirmative actions by the employee" while a non-compete agreement "requires only that they refrainfrom certain actions." [emphasis in original]. The Court further stated that under Missouri law a non-competition agreement can be enforced by a successor employer who is assigned the agreement as part of a stock purchase. The Eighth Circuit reasoned that requiring consent as a condition for a valid assignment as part of an asset purchase "would lead to anomalous results."
Although it found the agreements in this case were assignable without consent, the Court reasoned that under certain circumstances an assignment without employee consent might be improper where the agreement did not contain an explicit provision permitting assignment. The Court noted that such circumstances could be present "when the assignment would materially change the obligations of the employee, or the employee only agreed to the non-compete because of qualities specific to the employer." However, the Eighth Circuit concluded that the record did not reflect circumstances indicating that an assignment without consent would be improper in this case.
The Court of Appeals concluded its review by stating that Greenbaum and Tabanag were free on remand to argue that the specific restrictions imposed by the non-competition agreements amounted to an unreasonable burden on their ability to secure future employment.
Employers' Bottom Line: The Eighth Circuit's decision in Mobilex is a good one for successor employers who are assigned non-competition agreements as part of an asset purchase and later seek to enforce those agreements. While the trend in the law appears to favor the enforceability of assigned non-competes where the terms of the agreement permit assignment, state laws vary in this area. Some states still maintain a distinction between acquisitions by asset purchase and those accomplished through a stock purchase. In North Carolina, for example, an asset purchaser is considered to be a new employer and must either act to enforce the original non-compete or enter into a new non-compete agreement with the employees. By contrast, some courts have concluded that non-compete agreements are assets that pass to a purchaser by operation of law under state corporation statutes and therefore can be enforced. While the law will continue to evolve in this area, employers should always include an assignment clause in non-competition agreements and should document the assignment.