Every year, hundreds of U.S. companies are sold to new owners, and in many cases the seller’s contracts transfer to the buyer. Recently, this became an issue when employees allegedly violated their former employer’s noncompete and confidentiality agreements. As a result, the Eighth Circuit Court of Appeals had to decide whether the contracts were conveyable without the employees’ consent.

COMPANY CHANGES HANDS

Symphony Diagnostic Services No. 1 Inc. v. Greenbaum addressed a situation in which former employees of Ozark Mobile Imaging had signed noncompete and confidentiality agreements that listed their employers as “Mobile Medical Services Inc., Ozark Mobile Imaging, Clearview Mobile Imaging, LLC and/or its affiliates.” In signing these documents, the employees agreed that, during their employment and for two years after, they wouldn’t:

1. Directly or indirectly engage in the mobile diagnostic business,
2. Become connected in any manner with, or be employed by a person, company, firm or corporation engaged in, the mobile diagnostic business, or
3. On their own behalf or behalf of other people, partnerships or corporations, solicit business from customers of their former employers and their affiliates.

When Ozark was sold as part of an asset purchase to Mobilex, the new owner offered the employees part-time employment. The employees rejected the offer and went to work for a competitor. Mobilex brought suit against them to enforce the noncompete and confidentiality agreements the employees had signed while employed by the previous owner. The employees filed for summary judgment and the trial court granted their motion. Relying on a 2004 Missouri Court of Appeals decision, Roeder v. Ferrell-Duncan Clinic, Inc., the trial court held that personal services contracts couldn’t be assigned to a subsequent employer without the employees’ contemporaneous consent. No one disputed that, in this case, the employees hadn’t given their consent. Mobilex appealed the ruling.

APPEALS COURT DISAGREES WITH RULING

The appeals court determined that under state law the noncompete and confidentiality agreements were not in fact personal services contracts. Therefore, the agreements were assignable to the company without the employees’ consent.

According to the court, the Roeder case relied on by the trial court differed from the present situation. In Roeder, the plaintiff had agreed in an employment contract to provide medical services for his employer’s sole benefit during the term of the agreement. It was that agreement the Roeder court found to be a nonassignable personal services contract. But the agreements at issue in this case weren’t personal services contracts because they were free-standing noncompete and confidentiality agreements that weren’t part of a larger employment contract. Furthermore, they didn’t require the employees to provide personal services of any kind to their former employer.

The employees argued that the agreements were personal services contracts because the agreements they’d signed stated that they were entered into in consideration for continued employment by the former employer. The court disagreed, finding that personal services contracts require affirmative actions by the employees but noncompete agreements require only that the employees refrain from certain actions. The fact that the employees signed the agreements in exchange for continued at-will employment didn’t transform the agreements into personal services contracts. The court also found that the employees’ obligations were the same under the agreement — regardless of whether the former or new owner was enforcing it — because no additional burdens were placed on them. As such, the appeals court reversed the trial court’s judgment and remanded for further proceedings as to whether the noncompete and confidentiality agreements were too restrictive upon the employees.

ENFORCEMENT IS STATE SPECIFIC

Note that the enforceability of noncompete agreements is state specific. Each state has different factors they may consider for enforcement — such as assignability, whether the employee was terminated or voluntarily resigned, restrictiveness of the agreement, scope of the restriction, narrowness of the agreement, and the agreement’s duration. This means that the same noncompete agreement may be enforceable in one state but not another.