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

Envision paying hundreds of thousands to acquire a business only to afterwards find the restrictive covenants in the employment agreements of higher-amount executives had been unenforceable. That is specifically what transpired in Intertek Asset Integrity Management. In Intertek, Texas’s Twelfth Court of Appeals held a organization Vice President’s non-contend was unenforceable by the purchaser-entity because the underlying work settlement lacked an assignment clause. Such language, if incorporated, would have permitted the seller to transfer the contract’s rights and obligations without having the employee’s consent. Assignability clauses are routinely buried in the “miscellaneous” area of agreements and—too often—omitted. Enterprises who overlook these terms in Texas employment contracts do so at their peril.

Restrictive covenants can be a essential element to achievements in really-aggressive industries of all stripes. Very well-drafted noncompetes, purchaser and employee non-solicits, and nondisclosure provisions in employment contracts can safeguard a company’s confidential and proprietary data, though limiting unfair competition from employee-raiding competitors searching to shortcut the route to income. In addition, acquiring enforceable restrictive covenants in area with vital personnel can add worth to a organization in the context of a sale. Unsurprisingly, then, a lot time, energy, and target is placed on drafting restrictive covenants in employment contracts. But an crucial, and associated, contractual provision is often supplied quick shrift: assignability.

Texas courts have demonstrated just how important assignability clauses are in employment contracts—and how the absence of one particular can, and very likely will, render the enforcement of restrictive covenants by a purchaser-entity practically difficult. Accordingly, savvy companies ought to acknowledge the relevance of ensuring their restrictive covenant agreements contain assignability clauses or possibility obtaining them declared worthless in the course of or following an acquisition celebration.

As a general matter of Texas regulation, contracts are freely assignable to an additional party unless of course the contract is for “personal solutions.” Individual company contracts are all those which contemplate the effectiveness of private expert services involving the exercise of specific information, judgment, style, talent, or potential, including perform necessitating “rare genius” or “extraordinary talent.”[1] These contracts are only assignable if the assignor has the assignee’s consent—most frequently attained via an assignability clause. And absent an assignability clause, it could be unachievable for a third bash to enforce the underlying settlement in opposition to the assignee. Basically place, a restrictive covenant settlement with a higher-level worker or government may possibly be unassignable devoid of that individual’s consent.

This precise difficulty not too long ago came ahead of the Tyler Court docket of Appeals which refused to enforce a non-contend provision in an work contract because the settlement 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 efficiently prevented a purchaser entity, Intertek, from implementing the non-compete provision in his employment arrangement. Notably, the employment agreement did not contain an assignability clause. In an effort to conquer this omission, Intertek argued that the employment agreement did not tumble into the “personal services” agreement exception and really should be enforceable. In addition, Intertek argued that the invest in arrangement outlined the acquired “assets” to incorporate all the “seller’s legal rights, title and curiosity in all Contracts … and Staff agreements of the vendor.” The court rejected Intertek’s argument and refused to enforce the non-contend provision in the employment arrangement. In so undertaking, the Intertek courtroom designed two significant conclusions. To start with, the court docket located that the work agreement was a particular products and services agreement, because the Vice President’s posture demanded “rare genius” or “extraordinary skill” and relied on the Vice President’s private belief, assurance, talent, character, or credit score. Second, because the individual services agreement (i.e., the work arrangement) did not include an assignability provision and the Vice President did not consent to assignment, the non-contend provision was unenforceable.

Considering that Intertek, courts have continued to assist this idea that, with no a valid assignability clause, restrictive covenants in an work arrangement are unenforceable by purchaser entities.[3]

Assignability clauses are routinely relegated to the “miscellaneous” part of work agreements, and can appear to be inconsequential. But the failure to involve a carefully-crafted assignability clause could be harmful to organizations searching for to implement restrictive covenants after an acquisition. It is critical for companies to realize the relevance of including these provisions within their work agreements so that they stay enforceable pursuing an acquisition or asset transfer. And potential buyers in a company transaction really should have a very 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. Application.—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 from a salesperson and profits assistant by an getting organization, mainly because their work agreements did not consist of valid assignment clauses and the workers did not if not agree to assignment).