«However, where non-compete obligations are prohibited, companies must rely on complex trade secret misappropriation laws to protect their confidential information. Lawsuits under trade secret misappropriation laws can become very costly, and while Apple, Amazon, and other large companies may bear the cost of such litigation, many small businesses simply won`t be able to afford it,» she said. The Eighth Circuit predicted that the Arkansas Supreme Court would take the position that non-compete obligations are transferable to employees even without employee consent. In Stuart V. Irby Co.c. Tipton, 796 F.3d 918 (8th Cir. 2015), the plaintiff sued three of its former employees who had signed non-compete agreements with a company from which the successor had acquired assets. Employees worked for the successor for a year before switching to a competitor. The District Court gave a summary judgment in favour of the defendant on the allegation that he had violated his non-compete agreements, but the District Court did not specify whether the agreements were transferable without their consent. The Eighth Circuit considered the issue, predicting «that the Arkansas Supreme Court would adopt majority rule that a non-compete agreement can be awarded.» Id.
at p. 924. The court`s explanation for his prediction was brief: «While it is true that Arkansas law is generally skeptical of non-compete agreements.. Arkansas courts also recognize the legitimate roles that non-compete obligations can play. For example, an obligation not to compete may prevent a company from appropriating its customers. or against the loss of its trade secrets. The admissibility of non-compete obligations is compatible with the protection of those legitimate commercial interests. Id. (quotation marks omitted). President Joe Biden today signed an executive order that, in addition to promoting competition in the U.S.
economy, also aims to prohibit or restrict non-compete obligations for workers that companies rely on to protect their legitimate business interests. The ban could trigger a crisis for many executives. The Eighth Circuit overturned the court`s decision and ruled in Mobilex`s favor. The court noted that there was no previous final court decision under Missouri law on whether non-compete obligations can be assigned in connection with an asset sale, but refused to use a lower court decision regarding personal services contracts. A personal service contract typically involves a person with special skills or knowledge, or a person in a position that involves confidential matters that cannot be assigned to a new owner without the employee`s consent. The agreement signed by Greenbaum and Tabanag did not require both to provide what would be considered «personal services,» so they were not under contract for personal services. The previous decision concluded that non-compete obligations are not personal service contracts, as non-compete obligations require employees not to provide certain services, while personal service contracts require employees to provide certain services. In fact, a review of published decisions (and a law) in this area shows that the rule of transferability of non-compete obligations of employees without consent is the position (or probable position) of sixteen (16) states, while twenty-two (22) states have not yet addressed the issue.
The other eleven (12) states have taken the position that employee bans cannot be granted without employee consent. The following is a discussion of the main cases in each state on the subject. In der Rechtssache Managed Health Care Associates, Inc. v Rethan, 209 F.3d 923 (Cir. 6, 2000), the Sixth Circuit overturned a District Court decision not to temporarily prohibit a former employee from working for a competitor of the employer. The employer relied on a non-compete obligation which the defendant had entered into with the undertaking whose assets the plaintiff had acquired three weeks before the defendant`s resignation. Apparently, the contract on transferability was silent. The Sixth Circuit predicted that the Kentucky Supreme Court would find that non-compete obligations are transferable to employees even in the absence of an assignment provision. The Sixth Circuit rejected the defendant`s argument that employee prohibition agreements are contracts in which «one of the parties has personal confidence in the other that it could not have left to another person.» Id., p. 928, cites Pulaski Stave Co.c. Miller`s Creek Lumber Co., 138 Ky.
372 (Ky. 1910). The court noted: Torrington Creamery v. Davenport, 126 Conn. 515, 12 A.2d 780 is often cited as an early explanation of the position that the employee`s non-compete obligations can be assigned even without the employee`s consent. See Madigral Audio Laboratories, Inc.c. Cello, 799 F.3d 814, 821 (2d Cir.1986). On closer reading, the decision may not even answer the question, since in the restrictive agreement at issue in the case, the defendant appears to have consented to the assignment. The defendant signed an agreement with Sunny Valley Corporation («Sunny Valley») in which it agreed that, two years after the end of the employment relationship, it «will not directly or indirectly request orders from customers of the party to the first party or, as the case may be, from [their] successor for the products sold by the party to the first party. or [his] successor, either for himself or as an employee of a person, company or corporation.
After Sunny Valley sold the assets of its retail and wholesale dairy businesses in certain towns and villages to The Torrington Creamery, Inc. («Torrington»), Sunny Valley terminated the defendant`s employment relationship. In the months following the sale and termination, the defendant formed a company that competed with Torrington in two cities. Sunny Valley and Torrington filed an action against the defendant to enforce the terms of its non-solicitation agreement with Sunny Valley. The case was heard, a judgment was rendered in favour of the plaintiffs and an injunction was issued. The respondent appealed. The Connecticut Supreme Court upheld this. In its opinion, the court considered whether Torrington was a «true plaintiff.» The court noted: «When an employee enters into a restrictive agreement such as the one in this case, it becomes a valuable asset of the business, and upon the sale of that business, the benefits of the agreement can be attributed to the buyer. If, as in the present case, the owner of the company sells it in its entirety to another, it is assumed that the seller has assigned in equity as many benefits of the contract as it is divisible and necessary to protect the company sold to the buyer… [Torrington] as an assignee could have brought this action on its own behalf or on behalf of Sunny Valley Corporation.
In the circumstances, one of the two was a real plaintiff. Id. at 521 (quotation marks omitted). Notwithstanding this discussion in this case, given that the wording of the agreement at issue could be interpreted as demonstrating the employee`s consent to the assignment of the restrictive agreement to the employer`s successor, Torrington Creamery can be distinguished from cases where the restrictive agreement is silent on portability. But seeKelly Services, Inc.c. Savic, 2006 WL 3254482, *9 (D.Conn. September 5, 2006), for other reasons (the attempt to distinguish Torrington Creamery was rejected on the grounds that the restrictive covenant contained a succession clause, and it states: «The defendant does not propose a case in Connecticut, and the court did not find any, suggesting that the involvement in Torrington was undermined or qualified by the Connecticut courts.»). A company`s investment in its employees, customer relationships and confidential information is too valuable to be exposed to unfair competition. MacElree Harvey`s lawyers can help you review your non-compete obligation and develop agreements tailored to your individual business needs.
To schedule a consultation, contact Harry J. DiDonato at 610.840.0237, Robert A. Burke at 610.840.0211 or a member of our business law team. «For companies whose success relies on trade secrets such as customer lists, secret recipes or other proprietary methods and processes, a ban on non-competition will significantly affect their ability to protect this information from use by former employees and competitors,» she said. Christopher Ghazarian, general counsel for web hosting company DreamHost, said: «The most important question a business owner can ask is: Why do we need a non-compete clause in the first place?» Perhaps the first explanation for the position that employee bans can be granted even without the employee`s consent was established by the New Jersey Court of Chancery in 1927. A. Fink & Söhne v. Goldberg, 139 a. 408 (N.J. Chap. 1927). In this case, while working as a driver for a «meat and pork distributor» that was a Delaware corporation, the defendant signed a one-year non-compete agreement prohibiting him from participating in the production and sale of meat products in certain New Jersey counties.
Clearly, the agreement did not contain an assignment clause. The defendant`s employment relationship ended after eleven weeks and he soon began working as a driver for a competitor. The defendant`s former employer then sold all of its assets to a New Jersey corporation that had the same name and virtually all of the same shareholders as Delaware Corporation. The successor brought an action and attempted to prohibit the defendant from working for the competitor in breach of the non-compete obligation. The defendant argued that the non-compete obligation was a personal services contract and could not be assigned without the defendant`s consent. The court rejected this argument. .