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Contract Between Employer and Employee

Many courts have held that an employee’s covenant not to compete is assignable during the sale of a business.  In Sky Capital Group, LLC v. Rojas, 2009 U.S. Dist. LEXIS 40970 (D. Idaho May 14, 2009), the court stated that generally a non-compete covenant ancillary to the sale of a business is assignable.  An express assignment of the covenant to the subsequent purchaser is unnecessary as the covenant is treated as part of the goodwill of the business sold.

Further, in Sky Capital Group, LLC, in the context of employment contracts, the Idaho Supreme Court has stated that “covenants not to compete in employment contracts are disfavored and strictly construed against the employer.”  Non-compete provisions should be reasonable and should not be more restrictive than necessary to protect a legitimate business interest.  Further, such provisions should not be unduly harsh and oppressive to the employee, and must not be injurious to the public.

In Philips Elecs. N. Am. Corp. v. Hope, 631 F. Supp. 2d 705 (M.D.N.C. 2009), the court stated that North Carolina courts have long stated that covenants not to compete between an employer and an employee are not viewed favorably. Under North Carolina law, a covenant not to compete is valid provided such covenant is:

  • In writing,
  • A part of the employment contract,
  • Based on valuable consideration,
  • Reasonable as to time and place, and
  • Designed to protect a reasonable and legitimate business interest of the employer.

In Michael’s Finer Meats, LLC v. Alfery, 649 F. Supp. 2d 748 (S.D. Ohio 2009), the court stated that in the absence of express consent by the parties, an assignment of a covenant not to compete may be valid.  In Ohio, not every agreement is automatically assignable and no per se proscription against assignment of covenants not to compete exists. The assignment of a non-compete agreement is neither presumed nor categorically precluded, regardless of a particular agreement being silent as to its assignability.

Under a statute providing that the surviving entity in a merger receives all the business assets of the merging entities, a successor entity’s rights include the right to constrain an employees’ covenant not to compete.  In Sogeti USA LLC v. Scariano, 606 F. Supp. 2d 1080 (D. Ariz. 2009), a successor company’s right to enforce a validly assigned restrictive covenant was properly recognized.  The Arizona court held that other jurisdictions support the enforcement of restrictive covenants in employment contracts by successor companies even when the contract is silent as to assignability.  In these jurisdictions, contractual rights are generally assignable, the personal nature of an employment contract ends following termination, and restrictive covenants are scrutinized to ensure reasonableness of scope and duration.

In Sogeti USA LLC, it was found that Arizona law is most consistent with other jurisdictions which allow successor companies to constrain restrictive covenants, even when the contract is silent about assignability and where 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.

Covenants that are part of a personal services contract cannot be assigned.  However, under certain circumstances, such non-competent covenants are not personal services contract and therefore enforceable by the assignee.  In Liberty Dialysis – Hawaii, LLC v. Fresenius Med. Care Holdings, Inc., 2009 U.S. Dist. LEXIS 51906 (D. Haw. June 19, 2009), the court stated that covenants which are essentially personal services contracts are not assignable. However, when a company becomes a successor company, possessing all of the rights and obligations of the predecessor company, covenants not to compete are not really being assigned. Instead, the covenants are transferred along with all of the other rights and obligations of the predecessor company.

Inside Contract Between Employer and Employee