Non-compete agreements are regulated by state laws, which can vary from jurisdiction to jurisdiction. Whether a particular contract is enforceable also depends on the language of the agreement and the facts surrounding how the parties reached that agreement. In many business sales and mergers, the assets of the company, including employees and their contracts, are part of the deal.
Missouri Case Decided in Favor of New Employer
The U.S. Court of Appeals for the Eighth Circuit issued a decision in July 2016 stating that a non-compete agreement could be enforced by a company that bought all the assets of the employer. The defendants in that case, Kimberly Greenbaum and Josephine Tabanag, were mobile X-ray technicians for Ozark Mobile Imaging in Missouri. They both signed non-compete agreements with Ozark as a requirement of their jobs. The agreement stated that for two years after leaving their employment with Ozark, they couldn’t work for a competitor within a set geographic area.
Mobilex bought Ozark in an asset purchase sale in 2012. Greenbaum and Tabanag decided not to work for Mobilex because, while they had been working full time, Mobilex offered them only part-time hours and no benefits. The two started working for a competitor, Biotech X-Ray. Mobilex sued both former employees for breach of contract. The district court decided in favor of Greenbaum and Tabanag, reasoning that they didn’t agree to the assignment of their contracts when Ozark sold its assets. Mobilex appealed.
The Eighth Circuit reversed the trial court decision, finding in favor of Mobilex. The court noted that there was no definitive prior court decision using Missouri law on the issue of whether non-compete agreements can be assigned as part of an asset sale, but it rejected the lower court’s use of a decision involving personal services contracts. A personal services contract normally involves someone with specialized skill or knowledge or someone in a position involving confidential matters that can’t be assigned to a new owner without the consent of the employee. The agreement that Greenbaum and Tabanag signed didn’t require the two to perform what would be considered “personal services,” so they weren’t under personal services contracts. The prior decision held that non-compete agreements are not personal services contracts, because non-compete agreements mandate that employees do not perform certain services, while personal services contracts mandate that employees do perform certain services.
The court stated that although Mobilex was offering pay and conditions that were much worse than what the two employees had received from Ozark, there was no guarantee that their prior employment conditions would have continued if Ozark hadn’t been sold. Ozark could have cut their hours and benefits at any time. The court further stated that if Ozark had merged with Mobilex, or if Mobilex had bought Ozark in a stock sale, Mobilex would be within its rights to enforce the contracts under Missouri law. Therefore, there was no logical reason why the outcome should be different when Mobilex just bought all of Ozark’s assets. The appellate court sent the case back to the trial court so that Greenbaum and Tabanag could, if they chose, argue other reasons why their contracts shouldn’t be enforced.
Virginia Law Is More Employee-Friendly
If you’re an employee in Virginia, it’s good news. This is an example of different states having different laws covering the same issue. Virginia courts have taken the opposite approach from Missouri, ruling that Virginia non-compete agreements are not assignable, at least when there has been a merger. Virginia courts view non-compete agreements as personal services contracts. Contracts for personal services, as mentioned above, are not assignable to an employer’s new owner unless both parties agree. Under this view, Virginia law would not allow a non-compete agreement to be assigned to, nor be enforced by, a third party without the employee’s consent.
Summing It Up
A non-compete agreement could be challenged in court for many different reasons, depending on the facts of the situation and the applicable laws.
- One of those arguments is that in the case of a merger, purchase, or asset purchase, the agreement cannot be enforced because the employee didn’t agree to extend that agreement to the new owner.
- The success of this argument can vary depending on whether the agreement is considered a personal services contract. If it is, then agreement by the employee is necessary for the non-compete to continue in effect under the new owner.
If you have been given a non-compete agreement and you have questions about it, or if you’ve been asked to sign a contract with a non-compete provision, contact our office. We can help you understand what the contract says, how it could affect you, and whether it might be considered valid by a court. These types of agreements can have a major, negative impact on your career, so get information and advice before you decide what to do.
