Paying It Forward: Eighth Circuit Holds Non-Compete Can Be Assigned to Purchaser Without Employee’s Consent

 See Symphony Diagnostic Servs. No. 1 Inc. v. Greenbaum (8th Cir., No. 15-2294, 7/6/16).

Background

Kimberly Greenbaum and Josephine Tabanag worked as mobile x-ray technicians for Ozark Mobile Imaging (Ozark) prior to its acquisition by Mobilex. Greenbaum started as a part-time employee, but was eventually given a full-time position and promoted to district manager. Tabanag too described her position at Ozark as full-time, working 40-plus hours a week with full benefits. Neither, according to Mobilex, had a written employment contract.

In September 2007, Greenbaum signed a non-compete agreement and a confidentiality agreement with Ozark. Tabanag signed essentially identical agreements in October 2010. Both non-competes began by stating that the employee was entering into the agreement “[i]n consideration of his/her employment … .” They went on to state 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.
2. In any manner be connected with or employed by a person, company, firm, or corporation engaged in the mobile diagnostic business.
3. 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.

The separate confidentiality agreements Greenbaum and Tabanag signed consisted of an acknowledgment that they had been instructed on their employer’s confidentiality policy, and that they understood that failure to maintain confidentiality was just cause for dismissal.

Mobilex acquired Ozark through an Asset Purchase Agreement in December 2012. Around this same time, it made Greenbaum an offer of employment. Unlike her previous position, the job Mobilex offered Greenbaum was part time, with a 90-day probationary period, no guaranteed number of hours, and no guaranteed benefits.  Greenbaum refused Mobilex’s offer.

Tabanag was likewise made an offer by Mobilex. Although Mobilex offered her the same wage she had been earning at Ozark, the position she was offered was part time and without guaranteed benefits. Tabanag also refused Mobilex’s offer.

Greenbaum took on a new position as a mobile x-ray technician at Mobilex’s competitor, Biotech X-ray, in January 2013, and Tabanag followed suit in February. In September 2013, Mobilex filed a complaint in federal court against Greenbaum and Tabanag, alleging state law claims for breach of contract, breach of fiduciary duty, and tortious interference with a business relationship. After Greenbaum and Tabanag moved for summary judgment, the district court concluded that the success of each of the claims depended on whether the non-compete and confidentiality agreements were assignable from Ozark to Mobilex without Greenbaum’s and Tabanag’s contemporaneous consent. The district court found that Greenbaum’s and Tabanag’s consent was necessary in order for the agreements to be assignable. Since it was undisputed that neither had provided consent, the district court entered judgment in their favor on all counts. The case was appealed to the Eighth Circuit. 

The Eighth Circuit’s Opinion

The central question presented on appeal was whether non-compete and confidentiality agreements signed by an employee can be assigned without the employee’s consent. Because this case was brought under Missouri state law, the Court was bound by any relevant decisions of the Missouri Supreme Court. If no such decisions exist, the Court must rely “on the decisions of intermediate state courts, unless we are convinced by persuasive data that the highest state court would decide the issue differently.”

No decision from the Missouri Supreme Court or Missouri’s intermediate courts squarely addressed the question. Noting that it previously predicted that the Arkansas Supreme Court would adopt the majority rule that covenants not to compete can be assigned to a successor employer, the Court predicted that the Missouri Supreme Court would permit assignment of covenants not to compete without contemporaneous consent.

Although there is case law to the effect that personal services contracts cannot be assigned without the consent of both parties, the Court noted that this case did not involve a personal services contract: it involved free-standing non-compete and confidentiality agreements. “Neither agreement formed part of a larger employment agreement that required Greenbaum and Tabanag to provide personal services of any kind to Ozark.”

Greenbaum and Tabanag argued that the non-compete and confidentiality agreements they signed were personal services contracts because the non-compete agreements stated that they were entered into in consideration for continued (albeit at-will) employment by Ozark. According to the Court, “this 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.”  The Court further reasoned that “the fact that Greenbaum and Tabanag 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.”

According to the Court, 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. “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.”

The Court noted that it may make sense to preclude assignment of a non-compete agreement without consent, at least in the absence of an explicit provision permitting assignment, when the assignment would materially change the obligations of the employee, or the employee only agreed to the non-compete because of qualities specific to the employer. 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.

The Court therefore reversed the judgment of the district court and remanded the case to the district court for further proceedings. It noted that, to the the extent that Greenbaum and Tabanag believe that the specific terms of the non-compete agreements restricted too heavily their ability to gain future employment, they remain free on remand to challenge the agreements on that basis.

Takeaways

This case was decided under Missouri law and is limited to its particular facts and circumstances. However, it does give asset purchasers an argument that a non-compete agreement can be assigned to them in certain circumstances even without the employee’s consent. It also underscores the importance of addressing these issues in transactions so a purchaser knows exactly what it is buying.