Non-Competes May Be Assigned to Successor Employers

Non-Competes May Be Assigned to Successor Employers

It is a situation that arises often. Company A sells its assets to Company B. After the sale, some employees stay with Company B, and others leave. What happens to the agreements the departing employees signed with Company A? Does Company B get to enforce them? In Symphony Diagnostic Services No 1 Inc. d/b/a MobilexUSA v. Greenbaum, the Eighth Circuit Court of Appeals determined that non-compete agreements may be assigned to the successor company where: (1) the agreement expressly permits assignment; and (2) the agreement is not a contract for personal services.

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Kimberly Greenbaum and Josephine Tabanag were mobile x-ray technicians for Ozark Mobile Imaging (“Ozark”). At some point during their employment, both Ms. Greenbaum and Ms. Tabanag signed nearly identical non-compete agreements with Ozark. Stating that “[i]n consideration of his/her employment by Mobile Medical Services Inc., Ozark Mobile Imaging, Clearview Mobile Imaging, LLC and/or its affiliates . . . ,” the agreements held that during his or her term of employment and for two years afterwards, the employee agreed within a specified geographical area not to:

  1. Directly or indirectly engage in the mobile diagnostic business.
  1. In any manner be connected with or employed by a person, company, firm, or corporation engaged in the mobile diagnostic business.
  1. For himself/herself or on behalf of any other person, partnership, or corporation call on any customer or customers of Mobile Medical Services, Ozark Mobile Imaging, Clearview Mobile Imaging, LLC, and/or its affiliates, for the purpose of soliciting their business for others.

Separate confidentiality agreements were also entered into, with both Ms. Greenbaum and Ms. Tabanag acknowledging that they understood that failure to maintain confidentiality of Ozark materials was just cause for dismissal.

In or about December 2012, Mobilex USA (“Mobilex”) bought Ozark as part of an asset purchase. At that time, Ms. Greenbaum was a full-time employee and District Manager, earning $21.50 an hour, while Ms. Tabanag was a full-time employee earning $17.50 an hour. Upon Mobilex’s purchase of Ozark, it offered Ms. Greenbaum a part time position, with a 90-day probationary period, no guaranteed number of hours, and no guaranteed benefits. Ms. Tabanag was similarly offered a part-time position without guaranteed benefits. Both individuals refused Mobilex’s offers of employment.

In January, 2013, Ms. Greenbaum was hired as a mobile x-ray technician at Mobilex’s competitor, Biotech X-ray (“Biotech”). The next month, Ms. Tabanag was hired by Biotech. Mobilex filed a civil complaint against both Ms. Greenbaum and Ms. Tabanag, seeking to enforce the terms of the non-compete agreements they signed, and alleging that both individuals held Mobilex’s confidential trade secrets.

Ms. Greenbaum and Ms. Tabanag moved for summary judgment, arguing that because the individuals had not consented to the assignment of the non-compete agreements entered into with Ozark, they could not be held to the terms of the agreements. The district court agreed, asserting the individuals consent was necessary in order for Ozark to assign the contracts to Mobilex.

The Eighth Circuit’s Decision:

The Eighth Circuit reversed the trial court’s ruling. In doing so, the Court was not swayed by Ms. Greenbaum and Ms. Tabanag’s arguments that the non-compete and confidentiality agreements they signed were actually personal services contracts. The Court determined that such an argument “misapprehends the crucial difference between a personal services contract and a non-compete agreement: the former requires affirmative actions by the employee, whereas the latter requires only that they refrain from certain actions.” It further reasoned that the mere fact that individuals “signed the non-compete and confidentiality agreements in consideration for continued employment did not transform those agreements into personal services contracts, because the agreements imposed no obligation on them to take any affirmative action.”

It is important to note that in making its decision, the Court noted that there may be circumstances where the assignment of a non-compete may require the employees consent. Specifically, the Court found that assignment may be precluded where: (1) it would materially change the obligations of the employee; or (2) the employee only agreed to the non-compete because of qualities specific to the employer. As the Court explained:

For example, if a non-compete agreement forbade “engaging in the same business ventures as the employer,” and the employer was acquired by a company that engaged in a broader set of ventures, the obligations imposed on the employee by the agreement would be expanded by the acquisition. Similarly, if someone agreed to work as a personal assistant to Meryl Streep subject to a non-compete because of his admiration for Streep’s character and work, allowing the non-compete to be assigned to a less accomplished actor without his consent could fairly be viewed as changing the terms of the deal.

Finally, while sympathetic that the Mobilex offers were less attractive than the employment Ms. Greenbaum and Ms. Tabanag enjoyed with Ozark, the Court reasoned that Ozark could have changed the terms of their employment agreement at any time. As such, the Court declined to impose a rule broadly forbidding the assignment of non-compete agreements.

Key Takeaway:

Overall, this is a good decision for employers, especially those within the Eighth Circuit. It permits the assignment of non-compete and non-solicitation clauses, to the extent the agreements expressly permit assignability. All employers living in states that permit non-compete clauses, should review their agreements containing non-compete and non-solicitation clauses to ensure that those agreements expressly permit assignment.

Contributor:  Meagan D. Bainbridge, Attorney at Law  |  Weintraub Tobin