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Despite frequent pronouncements by
This article evaluates the state of Minnesota law regarding the assignability of non-compete agreements and suggests practical tips for the employment lawyer when drafting such agreements or litigating the assignability question.
Stock Purchase or Merger vs. Asset
When analyzing whether a non-compete agreement has been properly conveyed to the buyer as part of a corporate acquisition, the nature of the underlying transaction matters. The impact of a stock sale or merger on underlying contractual rights and obligations will depend on the provisions of the applicable state corporate law statute.
Assuming that Minnesota law will apply because the entity is a Minnesota corporation, where an employee becomes subject to a new ownership group on account of sale of the company’s stock to a new controlling shareholder or shareholders, the assignment analysis is not triggered as there has been no conveyance of the non-compete contract. Under corporate law principles, the new owner steps into the shoes of the old owner and takes all assets and liabilities of the entity.1 Likewise, in a merger situation where a
While there are no published decisions in
For these reasons, the assignment question typically arises only in the context of an asset sale, where the seller will often convey to the buyer its goodwill, customer list, and certain contracts, including non-compete agreements. Although both the buyer and seller may assume that the non-compete agreements are freely assignable, they might be in for a surprise.
In an early case, Haugen v. Sundseth,4 the partnership of Haugen & Meier purchased a furniture and undertaking business from Sundseth. As part of the sale, Sundseth agreed not to enter into the retail furniture or undertaking and embalming business in
Thirty years later, the Minnesota Supreme Court concluded in Peterson v. Johnson Nut Co.5 that a covenant not to compete executed by a business owner in conjunction with the sale of his ownership interest remained enforceable in connection with the subsequent assignment, on two occasions, of the business’ goodwill, notwithstanding the absence of an express assignment of the contractual right by the seller to the purchaser. Relying, in part, on its 1908 decision in Haugen, the Court held that “a covenant of this nature adds to the goodwill of the business and is transferred with and as a part thereof.”
Saliterman v. Finney (1985)
The seminal modern case addressing the assignability of non-compete agreements, decided by the Minnesota Court of Appeals, is Saliterman v. Finney.6 In that case, Dr. L. M. Saliterman & Associates, P.A., purchased a dental practice from Rother in April 1984. In connection with the purchase, Rother assigned to Saliterman all his rights and obligations under an independent contractor agreement with Finney, a dentist working in the practice. Finney’s agreement contained a restrictive covenant prohibiting him from practicing dentistry within three miles of Rother’s office for three years after termination or expiration of the agreement. The agreement also provided that “this agreement shall bind the successors if any in interest to the parties.” In June 1984, only a few months after Saliterman bought the practice from Rother, Finney terminated his employment with Saliterman, established a dental office within three miles of Saliterman’s facility, and actively began soliciting Saliterman’s dental patients using patient lists from his former office.
Saliterman brought suit for injunctive relief and to enforce the restrictive covenant contained in the original independent contractor agreement.7 The district court denied Saliterman’s motion for a temporary injunction to restrain Finney from practicing dentistry within the three-mile radius because the restrictive covenant was not assignable. Citing Egner v. States Realty Co., a case involving a personal services agreement,8 the district court concluded that public policy precluded assignment of rights set forth in the agreement between Rother and Finney because the agreement was based on “personal confidence or trust between the parties.”
The court of appeals rejected the district court’s finding that the restrictive covenant could not be assigned.9 First, the court distinguished a restrictive covenant from other types of agreements that impose personal services obligations. Second, the court emphasized the importance of non-compete agreements in protecting the good will of a business. Third, the court cited cases from other jurisdictions for the proposition that non-compete covenants are assignable as part of business assets. The court concluded that “a covenant not to compete in an employment agreement is assignable ancillary to the sale of a business to protect the goodwill of that business.”
The Saliterman court went on to address whether the dentist had consented to the assignment of his restrictive covenant. The court rejected Finney’s assertion that he had not assented to the assignment of the agreement, pointing to the contract language which stated that the agreement will “bind the successors if any in interest of the parties.” The court found the “successors in interest” language to manifest the parties’ contemplation of and assent to the future assignment of their contractual interests, unconditionally.
Since the Saliterman decision in 1985, both the courts and commentators seem uncertain whether the case stands for the proposition that a non-compete agreement may be assigned in connection with the sale of a business, unconditionally, or whether the agreement must contain an express assignment clause before it can be assigned.
In BFI-Portable Services, Inc. v. Kemple,10 decided four years after Saliterman, a different panel of the Minnesota Court of Appeals touched on whether non-compete agreements can be assigned. Citing Saliterman, the court stated that “[n]oncompete agreements are assignable upon the sale of a business to protect the goodwill of the business.” It is unclear from the court’s decision whether the non-compete agreement in question contained an express assignment clause or any provision stating that the agreement inured to the benefit of its successors and assigns.
In Cardiac Pacemakers, Inc. v. St. Jude Medical S.C., Inc.,11 decided 13 years after Saliterman, the Ramsey County District Court addressed whether non-compete agreements entered into with a corporation were properly assigned to a wholly owned subsidiary created at a later time, for whom the employees then began working. The defendant employees argued, first, that the parent corporation had failed to assign the non-compete agreements to the subsidiary when their employment was transferred to the newly created subsidiary. Second, the employees argued that the non-compete agreements did not include an assignment clause. Third, the employees argued that the restrictions contained in the non-compete agreements had expired, by their own terms, one year following the termination of their employment by the parent corporation and commencement of employment with the subsidiary. Without citing any authority or providing much analysis, the district court characterized the defendants’ arguments as “rather strained” and “simply untenable.” The court further reasoned that accepting the defendants’ position “would require [the employer] to execute new agreements with every employee anytime it elected to expand its operations.”
In Guidant Sales Corp. & Cardiac Pacemakers, Inc. v. George,12 the
Perhaps the most interesting, and controversial, progeny of the Saliterman decision is Inter-Tel, Inc. v. CA Communs., Inc.,13 decided by the
In Metro Networks Communs., Ltd. P’ship v. Zavodnick,15 the
One of the most recent, and fascinating, cases to address the assignability question is Guy Carpenter & Co. v. John B. Collins & Assocs.,18 decided by the
Successors. This Agreement shall be binding upon and shall inure to the benefit of the heirs, successors and assigns of the parties; provided, however, that neither party may assign its duties and obligations hereunder without the consent of the other, which consent shall not be unreasonably withheld.19
In 1998, Sedgwick merged with another company, plaintiff Guy Carpenter & Company (Carpenter), and the defendant employees became Carpenter employees. Carpenter never asked the employees to consent to the assignment of the non-compete agreement from Sedgwick to Carpenter. In 2005, the employees resigned and began working for a competitor. On cross-motions for summary judgment, the court analyzed whether Carpenter could enforce the non-compete agreements. The court first cited Saliterman for the proposition that “[i]n
In the most recent decision addressing the assignability question, Valspar Corp. and H.B. Fuller Co. v. Henderson,22 the Hennepin County District Court held that a corporation was likely to succeed on its claim that a non-compete agreement was assignable in connection with the sale of a business and its goodwill. The employee in Valspar signed a non-compete agreement with his employer, H.B. Fuller Company, in 2001. In 2006, the employee resigned and joined a competitor. Ten days later, H.B. Fuller (Fuller) and Valspar entered into an Asset and Share Purchase Agreement. It appears from the facts of the case and the name of the agreement that the transaction included the sale of stock and assets from Fuller to Valspar, although the exact details are unclear. As part of the transaction, Valspar acquired Fuller’s powder coating business. “The purchase included the assignment to Valspar of all contracts involving the powder coating business to which Fuller was a party. As to any contract which was not assigned, Fuller agreed to give the full benefit of such contracts to Valspar including the enforcement of such contract.”23 The employee argued that the non-compete agreement was not enforceable by Valspar because the agreement defined the employer as “H.B. Fuller Company and any of its existing or future subsidiaries and affiliates,” Valspar was neither a “subsidiary” nor an “affiliate” of Fuller, and “no provision of the agreement states that it extends to successors of Fuller.” The court rejected these arguments. First, the court found that the agreement “was transferred to Valspar as part of the sale and purchase of the Fuller powder coating business and valued as part of the goodwill of that business.” Second, the court concluded that the plaintiffs were likely to prevail, citing the oft-quoted phrase from Saliterman that “a covenant not to compete in an employment agreement is assignable ancillary to the sale of a business to protect the goodwill of that business.”
Making Sense of the Cases
The state of the law in
The seminal modern case addressing the assignability of non-compete agreements in this context, Saliterman, has spawned confusion among subsequent courts and commentators. While many courts have cited Saliterman for the proposition that non-compete agreements are assignable in connection with the sale of a business, more recent federal decisions such as Inter-Tel and Guy Carpenter have interpreted Saliterman as requiring an express assignment clause before the non-compete agreement can be assigned. Some commentators likewise have interpreted Saliterman in the same fashion.25
A Judicial or Legislative Solution?
Until the Minnesota Supreme Court clears the confusion, lower state courts and the federal courts will continue to grapple over the question of whether a non-compete agreement can be assigned under Minnesota law.
The authors advocate for the “personal confidence” view of non-compete covenants, which effectively would follow the holding of Inter-Tel and require the non-compete agreement to include an express assignment clause before it can be assigned. Under this view, a contract that places reliance for its performance in a party’s integrity, credit, or responsibility, or reposes personal confidence or trust, is generally not assignable absent consent of the parties.26 This view is similar to the view taken by some courts that have refused to enforce non-compete covenants contained in employment contracts that have been assigned based on the theory that employment agreements are contracts for personal services that cannot be assigned.
Unfortunately, in Saliterman, the Minnesota Court of Appeals seemed to reject both the “personal confidence” and “personal services” views of non-compete covenants. First, the court rejected the district court’s finding that the non-compete agreement was based on “personal confidence or trust between the parties.”27 Second, the court found the district court’s reliance on Egner v. States Realty Co., a case involving the assignability of a personal services contract, misplaced.
While the authors agree that a restrictive covenant does not literally require the provision of personal services (to the contrary, it requires the employee to refrain from providing personal services), such an agreement generally does require the employee to place a high degree of personal confidence and trust in the employer. This is particularly true in today’s labor market, where jobs are in high demand, layoffs are commonplace, and many employers do not provide the employee with anything other than at-will employment for an indefinite duration in consideration of a non-compete agreement entered into at the commencement of employment. Even non-compete agreements entered into after the commencement of employment, which generally must be supported by consideration beyond mere continuation of employment, often do not guarantee the employee job security or any other substantial benefits or compensation.
Under these circumstances, the authors recommend that the Minnesota Supreme Court adopt the “personal confidence” view of non-compete covenants, under which an employer cannot assign a non-compete agreement unless the agreement itself expressly provides for such assignment, or the employee later consents to the assignment in the absence of such language. For employers, it would be easy to comply with this approach by simply including assignment language in the body of the non-compete agreement. For employees, this approach would provide a modicum of protection and forewarn the employee that the non-compete covenant can be enforced at a later time by an entirely different business entity that may acquire rights under the contract.
Alternatively, the Minnesota Legislature should pass legislation clarifying the circumstances under which non-compete agreements can be assigned or enforced by a parent, subsidiary, affiliate, successor, or assign of the original employer. Already, at least two states have adopted legislation addressing the assignability of non-compete agreements.28 Regardless of the approach adopted by the Legislature, both employees and employers alike would benefit from the certainty that would flow from such legislation.
Tips for Practitioners
Until the Minnesota Supreme Court clarifies the state of the law, or the Legislature passes legislation that explicitly addresses when a restrictive covenant can be assigned, the lawyer drafting, interpreting, or litigating a non-compete covenant should consider the following tips:
When drafting the non-compete agreement on behalf of the employer:
· Include a “choice of law” clause and, if possible, select a state whose laws allow the assignment of non-compete agreements.
· Include an express assignment clause that permits the employer to assign all or any portion of the agreement, or any rights or obligations under the agreement, to any present or future parent, subsidiary, or affiliate, or in connection with the sale of some or all of the assets or business of the company, or in connection with any merger, consolidation, reorganization, or stock purchase involving the company. Also state expressly that the employee consents to such assignment.
· Include “successors and assigns” language stating that the agreement “inures to the benefit of and binds the parties and their respective permitted successors and assigns.”
· Draft the substantive restrictions and definitions so as to benefit related corporate parties as well as the “successors and assigns.” For example, make sure that all references and definitions in the agreement applicable to the employer’s customers, vendors, suppliers, and competitors also reference those of the company’s “present and future parent, subsidiaries, affiliates, successors, and assigns.”
· Include “third-party beneficiary” language stating that each present and future parent, subsidiary, affiliate, successor, and assign of the employer is an intended third-party beneficiary of the agreement with the legal right to enforce the agreement.
When representing the buyer in a corporate acquisition:
· Ensure that the asset purchase agreement and other closing documents clearly assign and convey to the buyer all contracts used or useful in the business, including an explicit reference to applicable non-compete agreements.
· As in the Valspar case, the asset purchase agreement should include a provision stating that “as to any contract which is not assigned, seller agrees to give the full benefit of such contract to buyer including the enforcement of such contract.”
· List the non-compete agreements in any bill of sale entered into by the parties.
· Ensure that the seller conveys all “goodwill” of the business (or the division, facility, or product line being purchased).
· Allocate a portion of the purchase price to the value of the non-compete covenants.
· Consider whether to enter into fresh non-compete agreements with key employees at the time of the corporate acquisition, especially if the existing non-compete agreements do not contain an express assignment clause.
When drafting the non-compete agreement on behalf of the employee:
· If possible, include language that prohibits assignment of the agreement altogether without the employee’s consent.
· If the employee is unable to obtain a broad prohibition against assignment of the agreement, include language that prohibits assignment without the employee’s consent, “which consent shall not be unreasonably withheld,” and perhaps even outline when it would be reasonable to withhold such consent (e.g., if the employee has been terminated prior to the date of the assignment, or if the employee is not offered similar employment by the successor or assign at the time of assignment, or if the employee will be required to relocate a significant distance to remain employed by the assignee, etc.).
· If the employee is a key executive or salesperson with significant negotiating leverage, seek a guaranteed bonus payment or salary continuation if the agreement is assigned or if the employee is terminated by the new employer within 12 months following the closing.
· Include language stating that, as a condition of assignment, the employer must ensure that the assignee unconditionally agrees to perform all of the employer’s obligations under the agreement (which may include obligations to provide a guaranteed salary or employee benefits). This will avoid a situation where the employer attempts to convey only a portion of an employment agreement (e.g., the restrictive covenants) without requiring the assignee to perform other obligations under the agreement.
· Include language stating that, notwithstanding any assignment or conveyance of the agreement for any reason, including by operation of law, the signatory employer remains obligated to perform all of its duties and obligations under the agreement.
· At a minimum, insist that the employer provide written notice to the employee of any assignment of the agreement.
The increased reliance on non-compete agreements by employers of all sizes and in all industries, coupled with economic forces that will result in continued business acquisitions, mergers, and restructurings, guarantees that the assignability of restrictive covenants will continue to be litigated in the courts. Unfortunately, the state of
3 See, e.g., Zambelli Fireworks Mfg. Co. v. Wood, 2009 U.S. Dist. LEXIS 3974 (W.D.
4 Haugen v. Sundseth, 118 N.W. 666, 666 (
5 Peterson v. Johnson Nut Co., 283 N.W. 561, 569 (
6 Saliterman v. Finney, 361 N.W.2d 175 (Minn. Ct. App. 1985).
8 Citing Egner v. States Realty Co., 26 N.W.2d 464 (
9 Saliterman at 178.
10 BFI-Portable Services, Inc. v. Kemple, 1989 Minn. App. LEXIS 1232 (Minn. Ct. App. Nov. 21, 1989) (unpublished).
11 Cardiac Pacemakers, Inc. v.
12 Guidant Sales Corp. & Cardiac Pacemakers, Inc. v. George, File No. 01-1638 (MJD/JGL), 2001 U.S. Dist. LEXIS 25538 (D. Minn. Nov. 19, 2001) (unpublished).
13 Inter-Tel, Inc. v. CA Communs., Inc., No. 02-1864, 2003 U.S. Dist. LEXIS 23467 (Minn. Dist. Ct. Dec. 29, 2003) (unpublished).
15 Metro Networks Communs., Ltd. P’ship v. Zavodnick, No. 03-6198 (RHK/AJB), 2004 U.S. Dist. LEXIS 442 (D. Minn. Jan. 15, 2004) (unpublished).
16 The court’s decision in Metro Networks is somewhat puzzling, insofar as Metro Networks was described as a limited partnership, whereas Metro Traffic was presumably a corporation using the designation “Inc.” Thus, it seems unlikely to the authors that the two entities were truly the same legal entity having merely changed its name.
18 Guy Carpenter & Co. v. John B. Collins & Assocs., Civ. No. 05-1623 (JRT/FLN), 2006 U.S. Dist. LEXIS 61765 (D. Minn. Aug. 29, 2006) (unpublished).
22 Valspar Corp. and H.B. Fuller Co. v.
24 Saliterman at 177.
25 See, e.g., Christopher J. Soller and Benjamin J. Sweet, Assignability of Non-Compete Covenants, Pennsylvania Bar Association Quarterly, at 64, n.5 (April 2003) (citing Saliterman for the proposition that “[o]ther courts require the employee to consent to the assignment before an assignee may legally enforce a non-compete covenant”).
27 Saliterman at 177.