Assignment of Noncompetition Agreements in an Asset Purchase

U.S. 8th Circuit Contract Cases
Personal Services

The 8th Circuit held, in Symphony Diagnostic Services No. 1 Inc. v. Greenbaum, that certain noncompetition and confidentiality agreements were assignable without consent in the context of a business acquisition.

In Greenbaum a business was sold via an asset purchase. The buyer attempted to enforce noncompetition and confidentiality agreements the seller had with two of its employees and which were transferred in the transaction via assignment. The two employees had been offered employment by the seller at the time of the acquisition, but they refused the offers because the employment terms were less favorable than their current positions. Both employees subsequently went to work for competitors of the buyer.

The United States District Court for the Western District of Missouri granted summary judgment in favor of the two employees, who were mobile x-ray technicians, on the basis that a personal services contract cannot be assigned to a subsequent employer under Missouri law without the employee’s consent. The 8th Circuit reversed the lower court’s decision.

The question at issue in Greenbaum was whether a noncompetition and confidentiality agreement signed by an employee is assignable without the employee’s consent.

Personal services contracts aren’t assignable (as a general rule)

The 8th Circuit first considered whether the noncompetition and confidentiality agreements were personal services contracts. In Missouri, contracts are generally assignable without consent unless the contract contains an anti-assignment clause. However, contracts for personal services–that is, services that involve special knowledge, skill, or a relation of personal confidence–are not assignable without the consent of both parties.

In an opinion cited in Greenbaum, the Missouri Court of Appeals provides a good explanation of why personal services contracts generally aren’t assignable:

One of the fundamental purposes of this state’s public policy prohibiting the assignment of personal services contracts is to protect an employee’s right to choose the person or entity for whom such services will be performed. Except in those limited circumstances already discussed and distinguished, an employee cannot be forced, via an assignment of the contract, to provide personal services to a new employer unless the employee consents to do so. This right to choose, which is an inherent right granted to a person providing personal services pursuant to a contract, does involve a matter that goes to the very essence of the employment relationship. Roeder v. Ferrell-Duncan Clinic, Inc., 155 S.W.3d 76, 89 (Mo. Ct. App. 2004)

In Greenbaum the 8th Circuit distinguished personal services contracts from noncompetition and confidentiality agreements. Personal services contracts require employees to do something–that is, to perform services. In contrast, noncompetition and confidentiality agreements require the employees to refrain from the prohibited activities, so they don’t implicate the same issues as personal services contracts.

The noncompetition and confidentiality agreements at issue in Greenbaum were freestanding contracts–that is, they weren’t embedded in employment agreements. The 8th Circuit held that freestanding noncompetition and confidentiality agreements are not personal services contracts, even if they are signed in the context of an at-will employee’s continuing employment, because they do not require the employees to perform services. As such, they are assignable without the consent of the employees.

Even personal services contracts might be assignable

The 8th Circuit went on to discuss assignability of personal services contracts in the context of business acquisitions. The court seems to hold that even personal services contracts may be assigned without the employees’ consent as long as there’s no real change in the business being sold. Here’s what the court said:

Refusing to enforce the non-compete and confidentiality agreements here just because they were transferred from Ozark to Mobilex without Greenbaum’s and Tabanag’s consent would lead to anomalous results. If Mobilex had acquired Ozark 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. See Alexander & Alexander, Inc. v. Koelz, 722 S.W.2d 311, 312 (Mo. Ct. App. 1986). The court in Alexander held that after an employer merges with its parent, the merged entity is entitled to enforce employment contracts that were entered into pre-merger. Id. at 313. And it suggested that the same rule should apply not just to mergers, but also “the initial acquisition of one company by another by the purchase of stock.” Id. We see no reason why the non-compete and confidentiality agreements here should be unenforceable simply because Mobilex’s acquisition of Ozark was effected through an asset purchase rather than a transfer of stock. See Managed Health Care, 209 F.3d at 929; 9 John E. Murray, Jr., Corbin on Contracts § 49.5, at 204–05 (rev. ed. 2007) (“The underlying issue of whether an employee should be subject to a noncompetition covenant should not depend on matters of form.”).

This paragraph seems to say that whether the buyer of a business can enforce the seller’s contracts for personal services shouldn’t be determined by how a deal is structured.

I think the court is saying that if the effect of a particular acquisition on an employee’s situation is the same under an asset purchase as it would have been under a merger or stock purchase, then the considerations that make personal services contracts unassignable without the employee’s consent aren’t in play, so even personal services contracts would be assignable.

Although other courts have rendered opinions with similar reasoning, this thought is novel to me because, deal structure does matter when it comes to the contracts of the business being acquired because contracts are assigned in an asset purchase, but not in a statutory merger or a stock purchase. It’ll be interesting to see how the caselaw develops in the future.

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