February 26, 2024

Tullio Corradini

Trusted Legal Source

Missed Assignments: The Importance of Assignability Clauses in Restrictive Covenant Agreements

Missed Assignments: The Importance of Assignability Clauses in Restrictive Covenant Agreements

Consider paying thousands and thousands to acquire a corporation only to later on discover the restrictive covenants in the employment agreements of substantial-degree executives had been unenforceable. Which is exactly what happened in Intertek Asset Integrity Administration. In Intertek, Texas’s Twelfth Court docket of Appeals held a company Vice President’s non-contend was unenforceable by the purchaser-entity since the fundamental employment settlement lacked an assignment clause. Such language, if integrated, would have permitted the vendor to transfer the contract’s legal rights and obligations with no the employee’s consent. Assignability clauses are frequently buried in the “miscellaneous” part of agreements and—too often—omitted. Firms who forget these terms in Texas employment contracts do so at their peril.

Restrictive covenants can be a essential element to results in really-competitive industries of all stripes. Well-drafted noncompetes, consumer and staff non-solicits, and nondisclosure provisions in employment contracts can safeguard a company’s private and proprietary information and facts, while limiting unfair competition from personnel-raiding competition hunting to shortcut the path to income. In addition, acquiring enforceable restrictive covenants in place with critical personnel can insert price to a organization in the context of a sale. Unsurprisingly, then, a great deal time, vitality, and concentrate is put on drafting restrictive covenants in work contracts. But an significant, and related, contractual provision is typically provided quick shrift: assignability.

Texas courts have shown just how very important assignability clauses are in employment contracts—and how the absence of 1 can, and most likely will, render the enforcement of restrictive covenants by a purchaser-entity almost unachievable. Accordingly, savvy employers ought to understand the worth of guaranteeing their restrictive covenant agreements include assignability clauses or possibility possessing them declared worthless during or immediately after an acquisition occasion.

As a basic issue of Texas law, contracts are freely assignable to one more celebration unless of course the agreement is for “personal providers.” Private services contracts are all those which contemplate the overall performance of private companies involving the workout of exclusive awareness, judgment, flavor, talent, or capability, like get the job done requiring “rare genius” or “extraordinary talent.”[1] These contracts are only assignable if the assignor has the assignee’s consent—most generally completed by means of an assignability clause. And absent an assignability clause, it could be extremely hard for a third bash to enforce the underlying agreement against the assignee. Only set, a restrictive covenant arrangement with a substantial-amount personnel or govt may possibly be unassignable without that individual’s consent.

This specific issue lately came in advance of the Tyler Court of Appeals which refused to enforce a non-compete provision in an employment agreement due to the fact the settlement did not have an assignability clause and the employee did not normally consent to the assignment.

In Intertek Asset Integrity Management,[2] a Vice President effectively prevented a purchaser entity, Intertek, from enforcing the non-compete provision in his work arrangement. Notably, the employment settlement did not have an assignability clause. In an effort and hard work to defeat this omission, Intertek argued that the employment arrangement did not drop into the “personal services” contract exception and need to be enforceable. In addition, Intertek argued that the order settlement outlined the obtained “assets” to involve all the “seller’s rights, title and desire in all Contracts … and Personnel agreements of the vendor.” The court turned down Intertek’s argument and refused to enforce the non-compete provision in the employment agreement. In so performing, the Intertek court docket produced two big conclusions. 1st, the court identified that the employment settlement was a individual providers contract, due to the fact the Vice President’s placement necessary “rare genius” or “extraordinary skill” and relied on the Vice President’s particular have faith in, confidence, talent, character, or credit. 2nd, due to the fact the particular services deal (i.e., the employment settlement) did not have an assignability provision and the Vice President did not consent to assignment, the non-compete provision was unenforceable.

Due to the fact Intertek, courts have ongoing to assist this idea that, with no a valid assignability clause, restrictive covenants in an employment arrangement are unenforceable by purchaser entities.[3]

Assignability clauses are routinely relegated to the “miscellaneous” segment of work agreements, and can look inconsequential. But the failure to involve a meticulously-crafted assignability clause could be detrimental to enterprises trying to get to implement restrictive covenants immediately after an acquisition. It is vital for companies to realize the worth of like these provisions inside of their employment agreements so that they continue being enforceable adhering to an acquisition or asset transfer. And purchasers in a corporate transaction should have a crystal clear comprehending of what language is—and is not—in the seller’s contracts with essential executives.

FOOTNOTES

[1] See In re Wofford, 608 B.R. 494, 496-97 (Bankr. E.D. Tex. 2019).

[2] Intertek Asset Integrity Mgmt. v. Dirksen, No. 12-20-00060-CV, 2021 WL 1047055, 2021 Tex. App. LEXIS 2112 (Tex. App.—Tyler Mar. 18, 2021, no pet. h.).

[3] See Winsupply E. Hous. v. Blackmon, No. 4:21-CV-01387, 2021 WL 5504756, 2021 U.S. Dist. LEXIS 225067, at *17 (S.D. Tex. 2021) (declining to enforce a non-compete provision in opposition to a salesperson and sales assistant by an acquiring enterprise, because their work agreements did not include legitimate assignment clauses and the employees did not usually agree to assignment).