ARE EMPLOYEE NONCOMPETES ASSIGNABLE? A STATE BY STATE REVIEW (July 2017 Update)
In its recent decision in Symphony Diagnostic Services No. 1, Inc. v. Greenbaum, 2016 WL 3615700 (8th Cir. July 6, 2016), the Eighth Circuit brought attention to yet another area of state noncompete law where states have adopted directly opposing positions, namely the assignability of employee noncompetes. In fact, the issue in dispute is fairly narrow. The issue is whether, in the context of an asset sale, as opposed to a stock sale or merger, an employer may assign to a purchaser noncompetition agreements it has with employees if the employees do not consent to the assignment. Typically, a provision in an employee noncompetition agreement to the effect that the agreement inures to the benefit of the employer’s successors and assigns satisfies courts the employee has consented to the assignment. In Greenbaum, the Eighth Circuit predicted the Missouri Supreme Court would “permit the assignment of covenants not to compete without contemporaneous consent.” Id. at *2. Following an earlier decision in which the Eighth Circuit predicted the Arkansas Supreme Court also would permit the assignment of employee noncompetition agreements without employee consent, Stuart C. Irby Co. v. Tipton, 796 F.3d 918 (8th Cir. 2015), the Eighth Circuit described its position in favor of the assignability of employee noncompetition agreements as the “majority rule.”
In fact, a review of published decisions (and one statute) in this area indicates the rule of assignability of employee noncompetes without consent is the position (or likely position) of sixteen (16) states, while twenty-two (22) states have not yet addressed the issue. The remaining eleven (12) states have adopted the position that employee noncompetes are not assignable without employee consent. What follows is a discussion of the leading case(s) in each state on the issue.
Alabama: No
In Sisco v. Empiregas, Inc. of Belle Mina, 237 So. 2d 463 (Ala. 1970), the plaintiff acquired all the assets of a predecessor gas company, including its employment contracts. Id. at 465. After a period of employment with the successor corporation, an employee terminated his employment and commenced employment with a competitor. Id. The successor corporation obtained a permanent injunction enforcing the noncompetition agreement the employee signed while working for the predecessor. Id. Presumably, the agreement did not contain an assignment provision. The Alabama Supreme Court reversed the permanent injunction granted by the lower court stating:
[T]he contract here at issue involved a relationship of personal confidence between the parties. No other conclusion seems logical where the contract by its language permits the employer to discharge the employee on thirty days’ notice and then to prevent him for five years from pursuing his livelihood over an area we judicially know to encompass some 7,850 square miles . . . Surely, one would not be presumed to have intended to commit himself into the hands of a stranger so empowered, and the bill shows on its face that Gas and Chemicals was no stranger to Sisco, having been his employer for some two years and eight months prior to his execution of the contract at issue. These circumstances, we feel, demonstrate that Sisco relied upon the uniqueness of his corporate employer and their relationship of mutual confidence when he entered into this contract.
Id. at 466-467.
Alaska: Undecided
Alaska courts have not yet addressed the issue of the assignability of employee noncompetes in the absence of employee consent.
Arizona: Yes
In Sogeti USA LLC v. Scariano, 606 F.Supp.2d 1080 (D.Az. 2009), the complaint alleged the defendant was originally employed by the plaintiff’s predecessor, with which he signed an employment agreement containing a covenant not to compete. The agreement did not contain an assignment provision. The complaint further alleged the defendant became an employee of the plaintiff after the plaintiff acquired the defendant’s employer, presumably through an asset purchase. Finally, the complaint alleged the defendant subsequently quit and began working for a competitor. The defendant moved to dismiss on the grounds the plaintiff lacked standing to enforce the noncompetition provision because it was not a party to the employment agreement and the assignment of the noncompetition provision to the plaintiff was void. The court denied the motion to dismiss, holding that “Arizona law is most consistent with the jurisdictions that allow successor companies to enforce restrictive covenants, even when the contract is silent regarding assignability and the employee has not consented. . . . Arizona courts treat restrictive covenants in employment agreements as assignable assets enforceable by successor companies, not as highly personalized arrangements between employee and employer.” Id. at 1085.
Arkansas: Yes
The Eighth Circuit has predicted that the Arkansas Supreme Court would adopt the position that employee noncompetition agreements are assignable even in the absence of employee consent. In Stuart C. Irby Co. v. Tipton, 796 F.3d 918 (8th Cir. 2015), the plaintiff sued three of its former employees who had signed noncompetition agreements with a company from which the successor acquired assets. The employees worked for the successor for a year before leaving to work for a competitor. The district court entered summary judgment in favor of the defendants on the claim they breached their noncompetition agreements, but the district court did not address whether the agreements were assignable absent their consent. The Eighth Circuit took up the issue and predicted “that the Arkansas Supreme Court would adopt the majority rule that a covenant not to compete can be assigned.” Id. at 924. The Court’s explanation of its prediction was brief: “While it is true that Arkansas law is generally skeptical of covenants not to compete . . . Arkansas courts also recognize the legitimate roles that non-compete agreements can play. For example, a covenant not to compete can protect a business against the appropriation of its customers . . . or against the loss of its trade secrets . . . . Permitting the assignment of non-compete agreements is in keeping with preserving these legitimate business interests.” Id. (citations omitted).
California: Undecided
Given California law essentially prohibiting the enforcement of employee noncompetition agreements, it is not surprising that California courts have not addressed the issue of the assignability of employee noncompetes in the absence of employee consent.
Colorado: Probably Yes
In Miller v. Kendall, 541 P.2d 126 (Col. Ct. App. 1975), the Colorado Court of Appeals stated that “[a]bsent a contrary provision in the contract, a noncompetition agreement may be assigned and enforced by an assignee.” The court cited a Colorado Supreme Court case, Cantrell v. Lemons, 119 Colo. 107 (1948), which held that a noncompete agreement entered into in connection with the sale of a business “is assignable, and upon sale of the business and good will, will pass to a new purchaser and the assignee may enforce it.” However, in Miller, it is not clear that assignability was at issue. After the plaintiff acquired the assets of the North American Accordion Studio, with which the defendant was employed, the defendant signed an instructor’s contract and an addendum that prohibited him for two years after termination of his employment from teaching or soliciting sales from any student enrolled at plaintiff’s accordion studio or the studio the assets of which the plaintiff acquired. After the defendant terminated employment and established his own accordion studio, approximately 50 former students of the plaintiff became students of the defendant’s studio. The trial court enjoined the defendant from teaching or soliciting the sale of accordions to students associated with the plaintiff and the Court of Appeals affirmed.
Connecticut: Probably Yes
Torrington Creamery v. Davenport, 126 Conn. 515, 12 A.2d 780 is often cited as an early statement of the position that employee noncompetes are assignable even without employee consent. SeeMadigral Audio Laboratories, Inc. v. Cello, 799 F.3d 814, 821 (2d Cir.1986). On close reading, the decision may not even address the issue because in the restrictive covenant at issue in the case, the defendant appears to have consented to assignment. The defendant signed an agreement with The Sunny Valley Corporation (“Sunny Valley”), wherein he covenanted that for two years after termination of employment he would not “solicit orders, directly or indirectly, from any customers of the Party of the First Part, or those of [its] successor if any, for such products as are sold by the Party of the First Part, or [its] successor, either for himself or as an employee of any person, firm or corporation.” After Sunny Valley sold the assets of its retail and wholesale dairy business in selected cities and towns to The Torrington Creamery, Inc. (“Torrington”), Sunny Valley terminated the defendant’s employment. Within a few months after the sale and his termination, the defendant started a business that competed with Torrington in two towns. Sunny Valley and Torrington brought suit against the defendant to enforce the terms of his nonsolicitation agreement with Sunny Valley. The case was tried, judgment entered in favor of the plaintiffs, and an injunction issued. The defendant appealed. The Connecticut Supreme Court affirmed. In its opinion, the Court addressed whether Torrington was a “proper party plaintiff.” The Court stated that “[w]here an employee enters into a restrictive covenant such as the one in this case, it becomes a valuable asset of the business and upon the sale of that business the benefits of the covenant may be assigned to the purchaser. . . . Where, as in this case, the proprietor of the business sells it in its entirety to another, in equity the seller will be deemed to have assigned so much of the benefit of the contract as is severable and necessary for the protection of the business sold to the purchaser. . . . [Torrington], as assignee, could have brought this action in its own name or in that of The Sunny Valley Corporation. Under the circumstances, either was a proper party plaintiff.” Id. at 521 (citations omitted). Notwithstanding this discussion in the case, because the language in the covenant at issue could be construed as demonstrating the employee’s consent to the assignment of the restrictive covenant to the employer’s successor, Torrington Creamery may be distinguishable from cases in which the restrictive covenant is silent as to assignability. But seeKelly Services, Inc. v. Savic, 2006 WL 3254482, *9 (D.Conn. Sept. 5, 2006), vacated on other grounds, (rejecting attempt to distinguish Torrington Creamery on grounds that restrictive covenant contained successor clause and stating, “Defendant offers no Connecticut cases, and the Court has not found any, to suggest that the holding in Torrington has been eroded or qualified by the Connecticut courts.”).
Delaware: Yes
The Delaware Chancery Court has sided with proponents of assignability. The assignability of an employee noncompete was at issue in Great American Opportunities, Inc. v. Cherrydale Fundraising, LLC, 2010 WL 338219 (Del. Ch. Jan.29, 2010), where the plaintiff alleged the defendant tortiously interfered with a noncompetition agreement between the plaintiff’s predecessor and one of its employees who terminated his employment to join the defendant, a competitor in the products and services fundraising industry. The case was tried without a jury. The court held the agreement, which did not contain an assignment provision, was assigned to the plaintiff when it acquired substantially all the assets of the employee’s former employer. The court held that “absent specific language prohibiting assignment, noncompete covenants, even though part of a personal service contract, remain enforceable by an assignee when transferred to the assignee as part of a sale or transfer of business assets regardless of whether the employment contract contains a clause expressly authorizing such assignability, so long as the assignee engages in the same business as the assignor.” Id. at *12. The court’s explanation of its rationale for the holding was brief: “Generally, contractual rights may be assigned unless that assignment is precluded by contract, is prohibited by public policy, or materially alters the duties of the obligor. While personal service contracts usually may not be assigned, noncompete agreements and other restrictive covenants exist for the benefit of the business and not the individual parties. Thus, the business, whether as assignee or assignor, should enjoy that benefit by having the power to enforce such restrictive covenants.” Id. at *11 (citations omitted).
Florida: No
Florida is the only state that has legislatively addressed the assignability issue. Florida Statute 542.335 provides as follows
(1)(f) The court shall not refuse enforcement of a restrictive covenant on the ground that the person seeking enforcement is a third-party beneficiary of such contract or is an assignee or successor to a party to such contract, provided:
(2) In the case of an assignee or successor, the restrictive covenant expressly authorized enforcement by a party’s assignee or successor.
Georgia: Undecided
Georgia courts have not addressed the issue of the assignability of employee noncompetes in the absence of employee consent.
Hawaii: Probably No
In UARCO Inc. v. Lam, 18 F.Supp.2d 1116 (D. Haw. 1998), an employer and its successor brought an action against two former employees of the predecessor and moved for a temporary restraining order and preliminary injunction prohibiting the two former employees from breaching their nonsolicitation agreements with the predecessor. Apparently, the agreements were silent as to assignability. The court denied the plaintiffs’ motion for a temporary restraining order on the grounds the nonsolicitation agreements were not assignable. Id. at 1122. However, the court later granted the plaintiffs’ motion for a preliminary injunction because subsequent to the court’s decision on the motion for a temporary restraining order, the plaintiffs merged. Thus, the transaction at issue was a merger and not an asset purchase. “Statutory and case law are clear, however, that following a merger, the successor corporation possesses all obligations and rights of the predecessor corporation.” Id. However, the court also stated “[a] covenant not to compete is not assignable because it is essentially a personal services contract,” and the court referenced its earlier unpublished decision denying the motion for a temporary restraining order where it held that a successor could not enforce a predecessor’s noncompete with its employees because “covenants not to compete are not assignable.” Id.
Idaho: Undecided
Idaho courts have not addressed the issue of the assignability of employee noncompetes in the absence of employee consent.
Illinois: Yes
In AutoMed Techs., Inc. v. Eller, 160 F. Supp. 2d 915 (N.D. Ill. 2001), the court denied the defendants’ motion to dismiss counts of a complaint asserting they breached noncompetition agreements they signed with their former employer, the assets of which were subsequently acquired by the plaintiff. The agreements did not contain assignment provisions. The defendants relied on authority to the effect that “executory contracts, with elements of personality, may not be assigned without consent of both parties.” The court held that such authority was not applicable because restrictive covenants in employment agreements are not executory or personal. “First the covenants typically take effect upon termination of employment, at which point the employer has no further obligations to the employee. Because the employer has completed its promised performance, the contract is no longer executory. Second, for the same reason, the contract loses its element of personality. An employee has a clear interest in controlling for whom he works. But the identity of the party enforcing a restrictive covenant should make little difference to a former employer.” Id. at 923-24. The court also stated that a “rule prohibiting assignment would frustrate many acquisitions,” particularly given that “the confidential information and good will protected by such agreements are typically critical components of the asset purchase.” Id. at 924.
Indiana: No
In SDL Enters., Inc. v. Dereamer, 683 N.E.2d 1347 (Ind. Ct. App. 1997), the court held that covenants not to compete, including employee noncompetes and competes executed in connection with the sale of a business, are “personal in nature,” and that because they are personal services contracts, covenants not to compete are not assignable without the consent of the party promising not to compete. Here, the plaintiff acquired the assets of a travel agency that previously acquired the assets of a travel agency founded by one of the defendants and with which the second defendant signed an employee noncompete. The first defendant signed a noncompete in connection with the sale of her travel agency. When the second defendant terminated her employment with the plaintiff and began working for a competitor at which the first defendant also worked, the plaintiff brought suit asserting the individual defendants had breached their noncompete agreements. The trial court awarded summary judgment to the defendants. The Court of Appeals affirmed.
Covenants not to compete are of ‘a personal nature.’ . . . [A] personal right cannot be assigned. . . . However, some courts have recognized an exception whereby the covenantor may acquiesce and consent to the assignment of his covenant. . . . Here, pursuant to this exception, [the] assignment of the covenants not to compete would not be valid without the consent of [the individual defendants]. . . . However, [plaintiff] does not contend, and the record does not indicate, that [the individual defendants] ever consented to . . . assignment of their covenants to [plaintiff]. As such, the assignment of the covenants is not valid.
Id. at 1349-50.
Iowa: Undecided
Iowa courts have not addressed the issue of the assignability of employee noncompetes in the absence of employee consent.
Kansas: Undecided
Kansas courts have not addressed the issue of the assignability of employee noncompetes in the absence of employee consent. However, in Safelight Glass Corp. v. Fuller, 15 Kan.App.2d 351 (1991), the court held that a covenant not to compete contained in an asset purchase agreement that included an assignment provision could be assigned by the purchaser to a related entity. The court stated:
The covenant not to compete here does not involve contract rights involving personal and confidential relations to which liabilities are attached. For examples of contracts involving such personal services, see Standard Chautauqua System, 120 Kan. 101 (contract to entertain and provide speaker services); Smith English, Partners v. Board of Education, 115 Kan. 155, 157-58, 222 P. 101 (1924) (contract for architectural services). Instead, the covenant in this case protects the good will of the business Fuller sold to LSI, and because LSI bargained and paid for the good will of Fuller's business, its successor in interest should be able to enforce the covenant against Fuller.
Id. at 359.
Kentucky: Yes
In Managed Health Care Associates, Inc. v. Rethan, 209 F.3d 923 (6th Cir. 2000), the Sixth Circuit reversed a district court decision not to preliminarily enjoin a former employee from working for a competitor of the employer. The employer relied on a noncompetition agreement the defendant signed with the company the assets of which the plaintiff acquired three weeks before defendant resigned. Evidently, the contract was silent about assignability. The Sixth Circuit predicted the Kentucky Supreme Court would conclude that employee noncompetition agreements are assignable even in the absence of an assignment provision. The Sixth Circuit rejected the argument advanced by the defendant that employee noncompete agreements are contracts wherein “one of the parties reposes a personal confidence in the other, which he would have been unwilling to repose in any other person.” Id. at 928, quoting Pulaski Stave Co. v. Miller’s Creek Lumber Co., 138 Ky. 372 (Ky. 1910). The court stated:
[Defendants] respond by arguing that a personal services contract cannot be assigned. A personal services contract, however, requires that one of the parties be bound to render personal services. [Citation omitted] In contrast, a noncompetition clause only requires that one of the parties abstain from certain activities. [Citations omitted] Here, [employee] was an at-will employee who was free to resign at any time. Consequently, the noncompetition clause does not require any affirmative action on the part of [employee], and is thus assignable.
Id. at 929-30. The court also noted that if the successor had purchased the stock of the predecessor rather than its assets, no assignment would have been necessary and enforceability of the noncompete by the purchaser would have been beyond question. “Allowing [the defendant] to avoid his obligations under the circumstances of this case simply because [the successor] decided to structure the transaction as a purchase of assets rather than stock would exalt form over substance.” Id. at 929.
Louisiana: Undecided
Louisiana courts have not addressed the issue of the assignability of employee noncompetes in the absence of employee consent.
Maine: Undecided
Maine courts have not addressed the issue of the assignability of employee noncompetes in the absence of employee consent.
Maryland: Undecided
Maryland courts have not addressed the issue of the assignability of employee noncompetes in the absence of employee consent.
Massachusetts: No
In Securitas Security Services USA, Inc. v. Jenkins, 16 Mass. L. Rept. 486, 2003 WL 21781385 (Mass. Super. July 18, 2003), a Massachusetts trial court denied a successor’s motion to preliminarily enjoin a former employee of the predecessor from working for a competitor in the security industry, which it asserted breached a noncompetition agreement between the employee and the predecessor. The agreement did not contain an assignment provision. The court stated that the relationship between the defendant and his employer involved a relationship of “personal confidence” such that the employee’s noncompetition agreement could not be assigned to Securitas without the employee’s consent. Id. at *5. The court reasoned that pursuant to his contract, the employee had explicit obligations to and benefits provided by his employer, not his employer’s successor. Id. In addition, the court reasoned, the employee agreed to the employment restrictions “knowing the character and personality of [his employer],” but may not have agreed to those same restrictions with the successor. Id. “Certainly [the employee] could not assign his contract with [his employer] to serve as its Region President for New England without [the employer’s] assent. For similar reasons Pinkerton’s could not assign [the employee’s] employment agreement to another corporate entity without [the employee’s] assent.” Id.
Michigan: Yes
In Virchow Krause & Co. v. Schmidt, 2006 Mich.App. LEXIS 2052, at *6 (Mich. Ct. App. June 27, 2006), the court reversed the trial court’s grant of summary disposition in favor of a former employee of the plaintiff’s predecessor. The court held that an accountant’s agreement not to solicit or service her former employer’s clients was assignable even without her consent. “Because complying with such an agreement requires no personal trust, special skills, or knowledge, the agreement itself is not personal contract and, therefore, is freely assignable without [the employee’s] consent.”
Minnesota: No
The defendants in GreatAmerica Leasing Corp. v. Dolan, 2011 WL 334829 (D.Minn. Jan.31, 2011) were former employees of a company that provided financing in the beauty salon equipment market. Each had signed a noncompetition agreement with the company prior to the company’s sale of its assets to the plaintiff. Presumably, the agreements did not contain assignment provisions. Each employee was terminated around the time of the asset sale and each subsequently worked for a competitor. The plaintiff brought suit and moved for a preliminary injunction. The court denied the motion. With respect to one of the employees, the court held the noncompetition agreement was no longer in effect because a settlement agreement superseded the noncompetition agreement. With respect to the second defendant, the court held the noncompetition agreement, which did not contain an assignment provision, was not assignable. The court relied on “the principle that in Minnesota, employment covenants are to be given narrow construction.” Id. at *5. “‘[W]here the contract does not provide for assignment, a Minnesota court . . . would likely construe the language of the contract against the employer and find any assignment void.’” Id., quoting Inter-Tel, Inc. v. CA Commc’ns, Inc., 2003 WL 23119384, at *4 (D.Minn. Dec.29, 2003).
Mississippi: Undecided
Mississippi courts have not addressed the issue of the assignability of employee noncompetes in the absence of employee consent.
Missouri: Yes
In Symphony Diagnostic Services No. 1, Inc. v. Greenbaum, 2016 WL 3615700 (8th Cir. July 6, 2016), after the plaintiff acquired the assets of the defendants’ employer, the two defendants, x-ray technicians, went to work for a competitor of the plaintiff. Both defendants had signed noncompetition and nondisclosure agreements with the plaintiff’s predecessor. The agreements did not contain assignment provisions. The district court entered summary judgment in favor of the defendants, holding that absent the consent of the defendants, their noncompetition and nondisclosure agreements were not assignable to the plaintiff. The Eight Circuit reversed, holding that Missouri law would “permit the assignment of covenants not to compete without contemporaneous consent.” Id. at *2. The Eight Circuit rejected the defendants’ argument that their non-compete agreements were personal services contracts and therefore not assignable without their consent. “[T]his 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.” Id. at 3. The Eight Circuit also added the following:
Refusing to enforce the non-compete and confidentiality agreements here just because they were transferred from [predecessor] to [successor] without [defendants’] consent would lead to anomalous results. If [successor] had acquired [predecessor] by way of purchasing its stock rather than its assets, there would be no bar under Missouri law to its enforcing the non-compete and confidentiality agreements. . . . We see no reason why the noncompete and confidentiality agreements here should be unenforceable simply because [successor’s] acquisition of [predecessor] was effected through an asset purchase rather than a transfer of stock.
Id.
Montana: Undecided
Montana courts have not addressed the issue of the assignability of employee noncompetes in the absence of employee consent.
Nebraska: Undecided
Nebraska courts have not addressed the issue of the assignability of employee noncompetes in the absence of employee consent.
Nevada: No
The Nevada Supreme Court has adopted the position that employee noncompetition agreements are personal in nature and not assignable without consent of the employee. In Traffic Control Services, Inc. v. United Rentals Northwest, Inc., 120 Nev. 168 (2004), the purchaser of the assets of a company sued to enforce that company’s noncompetition agreement with its employee and moved for a preliminary injunction, which the trial court granted. The agreement did not contain an assignment provision. The Court reversed on the grounds the employee’s noncompetition agreement was not assignable to the plaintiff. After reviewing the split in authority on the issue, the Supreme Court held:
We agree with those jurisdictions holding that noncompetition covenants are personal in nature and, therefore, unassignable as a matter of law, absent the employee's express consent. When an employee enters into a covenant not to compete with his employer, he may consider the character and personality of his employer to determine whether he is willing to be held to a contract that will restrain him from future competition with his employer, even after termination of employment. This does not mean, however, that the employee is willing to suffer the same restriction with a stranger to the original obligation. Certainly, the sale of a business fundamentally alters the nature of an employment relationship.
Id. at 174.
New Hampshire: Undecided
New Hampshire courts have not addressed the issue of the assignability of employee noncompetes in the absence of employee consent.
New Jersey: Yes
Perhaps the earliest statement of the position that employee noncompetes are assignable even without the consent of the employee was set out by the New Jersey Court of Chancery in 1927. A. Fink & Sons v. Goldberg, 139 A. 408 (N.J. Ch. 1927). In that case, while working as a driver for a “dealer in meat and pork products,” which was a Delaware corporation, the defendant signed a one-year noncompetition agreement prohibiting him from engaging in the manufacturing and selling of meat products in selected counties in New Jersey. Evidently, the agreement did not contain an assignment clause. The defendant’s employment was terminated after eleven weeks and he soon thereafter began working as a driver for a competitor. The defendant’s former employer then sold all its assets to a New Jersey corporation that had the same name and practically all the same stockholders as the Delaware corporation. The successor filed suit and sought to enjoin the defendant from working for the competitor in breach of the noncompete. The defendant argued the noncompete was a personal services contract and not assignable without the consent of the defendant. The court rejected that argument.
Counsel for defendant assumes that the question here involved is the assignability of a contract for personal service. It is not. The complainant is not seeking to compel the defendant to work for it. Quite the contrary. It seeks only the benefit of the restrictive covenant contained in the contract of employment. . . . ‘It should be borne in mind that a distinction must exist between compelling one to keep his contract of employment and forbidding him to work for his rival in the same line. The first would require involuntary servitude in violation of the Thirteenth Amendment to the Constitution, while the second would not be subject to that criticism.’
Id. at 410, quoting Cropper v. Davis, 243 F. 310 (8th Cir. 1917). See alsoJ.H. Renarde, Inc. v. Sims, 711 A.2d 410, 413 (N.J. Super.Ct. Ch.Div. 1998) (following Fink).
New Mexico: Undecided
New Mexico courts have not addressed the issue of the assignability of employee noncompetes in the absence of employee consent.
New York: Yes
Adopting the position that employee noncompetes are assignable even in the absence of employee consent to assignment, New York appellate courts have rejected the rationale that covenants not to compete are personal services contracts. See Eisner Computer Solutions, LLC v. Gluckstern, 741 N.Y.S.2d 511, 511 (N.Y. App. Div. 2002) (“although personal services contracts are not freely assignable, the agreement sued upon is a covenant not to compete, which is distinguishable from a personal services contract . . . and one which may have been assignable without defendant’s consent”). The appellate court cited Norman Ellis Corp. v. Lippus, 176 N.Y.S.2d 5 (N.Y. Sup.Ct.1955), a case in which the plaintiff acquired from the defendant’s former employer the right to enforce the defendant’s noncompetition agreement and filed suit against the former employee for breach of the agreement. Id. at 5. The court denied the defendant’s motion to dismiss, in which the defendant asserted the noncompetition agreement was not assignable because it was a personal services contract. Id. at 5-6. The court explained:
The authorities cited by defendants in support of this proposition are to the effect that the assignee of a contract calling for personal services may not demand the performance of those personal services by one who, while agreeing to work for the assignor, the original contracting party, is not willing to perform personal services for a stranger to the original contract. Such is not the case presented by this action. Plaintiff seeks not to compel [defendant] to work for him, but to restrain her from competing with his business, revealing a list of customers, soliciting his customers, etc., all of which she agreed to refrain from doing as a condition of her employment by plaintiff’s assignor. Such agreement, the Court holds, was just as assignable as any asset of the business.
Id.See alsoSpecial Prods. Mfg., Inc. v. Douglass, 553 N.Y.S.2d 506, 509 (N.Y. App. Div. 1990) (holding that plaintiff was entitled to enforce defendant’s noncompetition agreement which it acquired from defendant’s former employer and stating that “[b]ecause executory contracts, which do not involve exceptional personal skills on the part of the assignor and which the assignee can perform without adversely affecting the rights and interests of the adverse party, are freely assignable absent a contractual, statutory or public policy prohibition . . . a clear and unambiguous prohibition is essential to effectively prevent assignment”).
North Carolina: Yes
In Reynolds & Reynolds Co. v. Tart, 955 F. Supp. 547 (W.D.N.C. 1997), two salesmen moved for summary judgment on claims they breached restrictive covenants in agreements with their former employer, the assets of which were subsequently acquired by the plaintiff. The salesmen disputed the assignability of their restrictive covenants because they were included in contracts for personal services. The court denied the motion with respect to the breach of contract claims stating that “[l]imitations on an employer’s liberty to assign the right to enforce personal service contracts, like restrictions on an employee’s liberty to delegate her duty to perform under an employment contract, involve different issues than assignment of covenants not to compete. For while the former two primarily involve[] the relationship between the employer and employee, the latter concerns an employer’s investment being pawned off to a rival competitor. Covenants not to compete facilitate and protect capital investment. It comes as no small surprise, then, that in conjunction with the sale of a business, a covenant not to compete with a business is assignable.” Id. at 557 (quotation marks and citations omitted).
North Dakota: Undecided
North Dakota courts have not addressed the issue of the assignability of employee noncompetes in the absence of employee consent.
Ohio: Yes
Ohio case law on the assignability of employee noncompetes is unique to the extent that Ohio has permitted the enforcement of employee noncompetes in the absence of employee consent, but it has not adopted a per se rule to that effect. As summarized in Lumenate Technologies, LP v. Baker, 2014 WL 1664476 (S.D.Ohio April 25, 2014): "When a noncompete agreement is silent as to assignability, the court must ascertain the parties’ intent by determining: (1) whether the covenant employs words which indicate that assignment was contemplated; and (2) whether assignability is necessary to protect goodwill of a business being sold." Id. at *4, citing Fitness Experience v. TFC Fitness Equipment, Inc., 355 F.Supp.2d 877, 889 (N.D.Ohio 2004) and Blakeman’s Valley Office Equip., Inc. v. Bierdeman, 152 Ohio App.3d 86 (Ohio App. 2003). Factors relevant to determining whether the words of the covenant indicate assignment was contemplated include whether the covenant specifically refers to the employer and employee or refers to them only generically as “employer” and “employee,” and whether geographical restrictions are expressly defined in terms of distance from the specific employer. Fitness Experience, 355 F.Supp.2d at 889. Factors relevant to the second factor are “the nature of the business and the particular employee’s position.” Id. at 890. “At one extreme, where assignable non-compete agreements are fundamentally necessary to the continued operation of the business, are businesses which perform unique services and are highly dependent on a few key clients. At the other extreme are businesses which sell malleable goods at several fixed locations to the general public.” Id.
Ohio courts applying this analysis have held that certain employee noncompetes are assignable even in the absence of employee consent, see e.g., Artromick Int’l, Inc. v. Koch, 143 Ohio App.3d 805 (Ohio App. 2001), and still other employee noncompetes were not assignable, see, e.g., Fitness Experience, 355 F.Supp.2d at 887-890.
Oklahoma: Undecided
Oklahoma courts have not addressed the issue of the assignability of employee noncompetes in the absence of employee consent.
Oregon: No
In Mail-Well Envelope Co. v. Saley, 262 Or. 143 (1972), the Oregon Supreme Court recognized the split in authorities concerning the assignability of employee noncompetes, but took no position on the issue because the covenant at issue contained an assignment provision. However, in 1965 and 2014, the federal district court in Oregon adopted the position that employee noncompetition agreements are not assignable absent employee consent. In Perthou v. Stewart, 243 F. Supp. 655 (D. Or. 1965), several employees of a partnership operating under the name U.S Appraisal Company (“USAC”) executed noncompetition agreements with the partnership at a time when it was owned by two partners, including the plaintiff. Subsequent to the execution of those noncompetition agreements, the plaintiff acquired the second partner’s interest in the partnership and became sole owner. Subsequent to that transaction, the employees terminated employment with the plaintiff and began working for a competitor. The plaintiff sued the employees for breach of the noncompetition agreements. The court held the agreements were not assignable.
Sound authority supports the view that personal service contracts, such as those under examination, cannot be assigned. . . . This rule applies even though the assignment be to a corporation or partnership with a changed membership which carries on a business substantially in the same way in which it was previously operated. . . . The fact that a person may have confidence in the character and personality of one employer does not mean that the employee would be willing to suffer a restraint on his freedom for the benefit of a stranger to the original undertaking.
Id. at 659.
In Elwood Staffing Services, Inc. v. KGS2 Group, LLC, 2014 WL 7148278 (D.Or. Dec. 15, 2014), the court went even further and held that where the plaintiff acquired the stock of a staffing company with which the individual defendant had executed a noncompetition agreement, which apparently had no assignment provision, the plaintiff could not enforce the noncompetition because assignment of the agreement was invalid without the defendant’s consent.
Pennsylvania: No
In Hess v. Gebhard & Co., Inc., 570 Pa. 148, 166-67 (2002), the Pennsylvania Supreme Court surveyed the growing case law concerning assignability of employee noncompetes and adopted the position that they are not assignable without employee consent. In Hess, the plaintiff, an insurance agent, and his employer entered into an employment agreement containing a covenant not to compete. The agreement did not contain an assignment provision. Subsequently, the agency that employed the plaintiff sold the assets of its real estate operation to the defendant. The plaintiff terminated employment with the agency around the time the defendant took control. When the defendant learned that plaintiff was being considered for a job with a competing agency and had begun soliciting clients, including clients of the defendant, the defendant notified the competing agency, which then elected not to hire the plaintiff. The plaintiff sued and requested that the court void the employment agreement containing the covenant not to compete. Both the Court of Common Pleas and the Superior Court held that the assignment of the plaintiff’s covenant not to compete was enforceable, but the Supreme Court reversed. After reviewing the split in authority in the various states, the court concluded:
[W]e are persuaded that the better rule in deciding whether restrictive covenants are assignable is that the employment contract, of which the covenant is a part, is personal to the performance of both the employer and the employee, the touchstone of which is the trust that each has in the other. The fact that an individual may have confidence in the character and personality of one employer does not mean that the employee would be willing to suffer a restraint on his employment for the benefit of a stranger to the original undertaking. Therefore, we hold that a restrictive covenant not to compete, contained in an employment agreement, is not assignable to the purchasing business entity, in the absence of a specific assignability provision, where the covenant is included in a sale of assets. In reaching this conclusion, we find that personal characteristics of the employment contract permeate the entire transaction. Like the contract for hire, upon which the covenant was given, the employee's restrictive covenant is confined to the employer with whom the agreement was made, absent specific provisions for assignability.
Id. at 166-67.
Rhode Island: No
In Bluez4 Corp. v. Macari, No. KC 2016-1087, 2017 WL 2620125(R.I. Super. June 13, 2017) a Rhode Island trial court confronted the assignability question while considering a hair salon's motion to preliminarily enjoin a hair stylist from working for a competitor. The stylist signed a noncompetition agreement with a salon that later sold some of its assets to the plaintiff salon. The noncompete did not contain an assignment provision. The stylist worked for the plaintiff salon for approximately twenty months before she resigned. Soon thereafter, the defendant stylist began working for a competitor within the geographic scope of the noncompete she had signed. The plaintiff salon moved to enjoin the stylist from working for the competitor and to enjoin the salon from engaging her. The stylist opposed the motion, in part, on the grounds that the noncompete she signed was not assignable. The court noted that "[t]he parties have not cited, and this Court is unaware of, any case law in this state addressing whether a non-compete employment agreement is assignable without any assignment clause." Id. at * 4. The court then reviewed case law in other jurisdictions, noting the split among jurisdictions. The court was persuaded by those decisions that reasoned that employee noncompetes are "unassignable personal services contracts" or "personal in nature." The court determined that prohibiting the assignment of employee noncompetes in the absence of an assignment provision comported with the Rhode Island Supreme Court's "disfavoring of noncompetitive employment contracts and subjecting the same to strict judicial scrutiny" and the Supreme Court's position that contracts that are personal in nature are unassignable." Id. at *5. The court also found that even if the noncompete were assignable, it was not, in fact, one of the assets that the plaintiff acquired from the salon with which the stylist entered into the noncompete, and further that the term of the noncompete expired before the stylist began working for the competitor salon. Id. at *6-9. The court denied the motion for preliminary injunction.
South Carolina: Undecided
South Carolina courts have not addressed the issue of the assignability of employee noncompetes in the absence of employee consent.
South Dakota: Undecided
South Dakota courts have not addressed the issue of the assignability of employee noncompetes in the absence of employee consent.
Tennessee: Probably Yes
The key issue decided in Packers Supply Co. v. Weber, 2008 WL 1726103 (Tenn.Ct.App. Apr. 14, 2008) was whether an assignment occurred rather than whether assignment was permitted. In this case, each of the two defendants was hired by and entered into a noncompetition agreement with a sole proprietor who later incorporated his business selling equipment and parts for meat processing and packaging. Three years after the plaintiff incorporated, the employment of the two defendants terminated and they opened a competing business. The plaintiff sued for breach of the agreements and the trial court entered summary judgment in favor of the defendants. The Court of Appeals reversed. Despite the absence of any assignment provision in the noncompete agreements, the defendants conceded that the agreements were not personal services contracts and that if the sole proprietor had, in fact, assigned the agreements to the plaintiff, the plaintiff could enforce them. The court concluded that a valid assignment was made. The court relied, in part, on the Tennessee Supreme Court’s decision in Bradford & Carson v. Montgomery Furniture Co., 92 S.W. 1104 (Tenn.1906), which held that a noncompetition agreement entered into in connection with the sale of a business was assignable notwithstanding the absence of an assignment provision.
Texas: Probably
In Thames v. Rotary Engineering Co., 315 S.W.2d 589 (Tex. Civ. App. 1958), two employees of a partnership signed noncompetition agreements that apparently did not contain assignment provisions. Subsequently, at various times, new articles of partnership were created after members of the partnership withdrew and after one member died. Finally, the partnership assets were sold to a corporation, the plaintiff, the shareholders of which were the partners of the partnership as it existed at the time of the sale. One of the two employee-defendants terminated his employment prior to the sale and the other after the sale. Both went to work for competitors. The plaintiff corporation sued both defendants for breach of their noncompetition agreements. After a bench trial, the court entered permanent injunctions enforcing the agreements. The employees appealed on the grounds that the agreements were not assigned or assignable, however the appellate court affirmed. “[W]e do not find any inhibition against the assignment or transfer of this type of covenant or agreement. These are not agreements to work, but are restrictive agreements promising not to compete.” Id. at 590. However, the court also held that the employees had consented to the assignment by their continuing to work for each succeeding partnership and the corporation. Id. at 591. In fact, only one of the two employees worked for the corporation. Accordingly, it is unclear if the second argument, i.e., consent, is central to the court’s holding. However, in T.E.Moor & Co. v. Hardcastle, 421 S.W.2d 126 (Tex.Civ.App. 1967), the court, relying on Thames, held that an assignee could enforce an employee’s restrictive covenant even where the employee did not work for the successor after it acquired the assets of the predecessor.
Utah: Undecided
Utah courts have not addressed the issue of the assignability of employee noncompetes in the absence of employee consent.
Vermont: No
In Smith, Bell & Hauck, Inc. v. Cullins, 183 A.2d 528 (Vt. 1962), the successor to an insurance agency sought to enforce the noncompetition agreement between the agency and its employee, who after the sale of the agency, established his own agency. The agreement did not contain an assignment provision. The Vermont Supreme Court affirmed dismissal of the case, asserting the employee’s promise not to compete could not be assigned without his consent because the promise was personal in nature:
From its inception, the relationship between Smith, Bell & Company, Inc., and its employee Cullins was one of mutual confidence. The employer confided to the servant important customer relationships and business confidences. The employee entrusted to his employer the important privilege of discharging him at will and without cause. This eventuality would at once invoke the severe detriment of foreclosing him from employment elsewhere in that community in his chosen occupation. The restriction, in its own terms, was designed to protect a fiduciary relationship which emanated solely from the master and servant relationship.
Knowing the character and personality of his master, the employee might be ready and willing to safeguard the trust which his employer had reposed in him by granting a restrictive covenant against leaving that employment. His confidence in his employer might be such that he could scarcely anticipate any rupture between them. As to that particular employer, if a break did occur, he might be willing to pledge that his fidelity would continue after the employment had ended, even at the cost of forsaking the vocation for which he was best suited. This does not mean that he was willing to suffer this restraint for the benefit of a stranger to the original undertaking.
We conclude the personal characteristics of the employment contract permeate the entire transaction. Like the contract for hiring, upon which it was given, the employee's restrictive covenant is confined to the employer with whom the undertaking was made. Since the beneficial interest in Cullin's [sic] agreement not to engage in the insurance business was personal to Smith, Bell & Company, Inc., it was incapable of effective assignment without the employee's consent or ratification. Thus the right to enforce it expired when the corporation was dissolved.
Id. at 532.
Virginia: No
In Reynolds & Reynolds Co. v. Hardee, 932 F. Supp. 149 (E.D.Va. 1996) aff’d 133 F.3d 916 (4th Cir.1997), the plaintiff, a seller of business forms, acquired the assets of the defendant’s employer, which terminated his employment the same day it sold its assets to the plaintiff. The defendant, a salesman, then accepted employment with a competitor. The plaintiff sued defendant asserting that he breached the noncompetition provision of his employment agreement with his former employer, which plaintiff asserted it acquired. Presumably, the employment agreement did not contain an assignment provision. The defendant moved to dismiss or, in the alternative for summary judgment, partially on the grounds the covenant not to compete was not assignable. The court adopted the reasoning of Smith, Bell & Hauck, Inc. v. Cullins, 183 A.2d 528 (Vt. 1962) and held the defendant’s employment agreement was a personal services contract that could not be assigned without his consent and that the covenant not to compete could not be severed from the employee agreement and assigned:
Defendant's Employment Agreement with [his employer] is clearly a contract for personal services, based on trust and confidence. Defendant's position involved direct sales to clients; he acted as [employer’s] agent in its dealings with customers. A person in such a position must necessarily obtain the trust and confidence of his or her employer. Defendant also placed considerable trust in [employer] by even agreeing to the non-compete clause, namely trusting that [employer] would not fire him and then invoke the covenant not to compete. Because the Employment Agreement was based on mutual trust and confidence, it is not assignable under Virginia law. . . .
Without question, an employment contract of the sort involved in this case is not assignable under Virginia law. . . . Dividing defendant's contract and allowing portions of it to be assigned, while disallowing assignment of the whole is inconsistent with this Virginia precedent. This court, therefore, holds that the covenant not to compete contained in [defendant’s] employment contract is not assignable. Accordingly, this court FINDS that plaintiff is not an assignee of the contract between defendant and [his former employer] and, consequently, has no standing to sue on that contract.
Id. at 155.
Washington: Yes
In Northwest Mobile Services, L.L.C. v. Schryver Medical Sales & Marketing, Inc., 2006 WL 1799620 (W.D. Wash. June 28, 2006), the plaintiff acquired the assets of the individual defendant’s former employer, with whom the individual defendant purportedly signed a noncompetition agreement prohibiting him from providing mobile x-ray services for one year at any facility at which he provided services for his employer in the last year of his employment. Apparently, the agreement did not contain an assignment provision. After his employment terminated, the individual defendant obtained employment with a competitor of the plaintiff, which sued the individual defendant and his new employer and moved for a preliminary injunction. The court scheduled a hearing on the individual defendant’s defense that his signature on the noncompete was forged, but rejected defendant’s other arguments, including his argument the noncompete was not assignable. The court stated only: “[The plaintiff] has established that it purchased [the predecessor’s] assets and its good will, and that the better view is that that includes the right to enforce non-competition agreements in favor of its predecessor.” Id. at 3, citing H. Renarde, Inc. v. Sims, 711 A.2d 410 (N.J. Super.Ct. Ch.Div. 1998).
West Virginia: Undecided
West Virginia courts have not addressed the issue of the assignability of employee noncompetes in the absence of employee consent.
Wisconsin: Undecided
Wisconsin courts have not addressed the issue of the assignability of employee noncompetes in the absence of employee consent.
Wyoming: Undecided
Wyoming courts have not addressed the issue of the assignability of employee noncompetes in the absence of employee consent.