Imagine paying millions to acquire a company only to later discover the restrictive covenants in the employment agreements of high-level executives were unenforceable. That’s precisely what happened in Intertek Asset Integrity Management. In Intertek, Texas’s Twelfth Court of Appeals held a company Vice President’s non-compete was unenforceable by the purchaser-entity because the underlying employment agreement lacked an assignment clause. Such language, if included, would have permitted the seller to transfer the contract’s rights and obligations without the employee’s consent. Assignability clauses are frequently buried in the “miscellaneous” section of agreements and—too often—omitted. Businesses who overlook these terms in Texas employment contracts do so at their peril.
Restrictive covenants can be a key component to success in highly-competitive industries of all stripes. Well-drafted noncompetes, customer and employee non-solicits, and nondisclosure provisions in employment contracts can safeguard a company’s confidential and proprietary information, while limiting unfair competition from employee-raiding competitors looking to shortcut the path to profits. In addition, having enforceable restrictive covenants in place with key personnel can add value to a business in the context of a sale. Unsurprisingly, then, much time, energy, and focus is placed on drafting restrictive covenants in employment contracts. But an important, and related, contractual provision is often given short shrift: assignability.
Texas courts have demonstrated just how crucial assignability clauses are in employment contracts—and how the absence of one can, and likely will, render the enforcement of restrictive covenants by a purchaser-entity nearly impossible. Accordingly, savvy employers must recognize the importance of ensuring their restrictive covenant agreements contain assignability clauses; or risk having them declared worthless during or after an acquisition event.
As a general matter of Texas law, contracts are freely assignable to another party unless the contract is for “personal services.” Personal service contracts are those which contemplate the performance of personal services involving the exercise of special knowledge, judgment, taste, skill, or ability, including work requiring “rare genius” or “extraordinary skill.”[1] These contracts are only assignable if the assignor has the assignee’s consent—most often accomplished via an assignability clause. And absent an assignability clause, it could be impossible for a third party to enforce the underlying agreement against the assignee. Simply put, a restrictive covenant agreement with a high-level employee or executive may be unassignable without that individual’s consent.
This precise issue recently came before the Tyler Court of Appeals; which refused to enforce a non-compete provision in an employment contract because the agreement did not have an assignability clause and the employee did not otherwise consent to the assignment.
In Intertek Asset Integrity Management,[2] a Vice President successfully prevented a purchaser entity, Intertek, from enforcing the non-compete provision in his employment agreement. Notably, the employment agreement did not contain an assignability clause. In an effort to overcome this omission, Intertek argued that the employment agreement did not fall into the “personal services” contract exception and should be enforceable. In addition, Intertek argued that the purchase agreement defined the acquired “assets” to include all the “seller’s rights, title and interest in all Contracts … and Employee agreements of the seller.” The court rejected Intertek’s argument and refused to enforce the non-compete provision in the employment agreement. In so doing, the Intertek court made two major findings. First, the court found that the employment agreement was a personal services contract, because the Vice President’s position required “rare genius” or “extraordinary skill” and relied on the Vice President’s personal trust, confidence, skill, character, or credit. Second, because the personal services contract (i.e., the employment agreement) did not contain an assignability provision and the Vice President did not consent to assignment, the non-compete provision was unenforceable.
Since Intertek, courts have continued to support this concept that, without a valid assignability clause, restrictive covenants in an employment agreement are unenforceable by purchaser entities.[3]
Assignability clauses are frequently relegated to the “miscellaneous” section of employment agreements, and can seem inconsequential. But the failure to include a carefully-crafted assignability clause could be detrimental to businesses seeking to enforce restrictive covenants after an acquisition. It is important for employers to recognize the importance of including these provisions within their employment agreements so that they remain enforceable following an acquisition or asset transfer. And buyers in a corporate transaction should have a clear understanding of what language is—and is not—in the seller’s contracts with key 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 against a salesperson and sales assistant by an acquiring company, because their employment agreements did not contain valid assignment clauses and the employees did not otherwise agree to assignment).