Are non-competes assignable?

Posted on December 2, 2008 by Dan Warden

As the economy declines, increased attention may be given to whether an employer may assign its rights under a non-compete.  Businesses will fail and, when they fail, they will consider whether and how they can sell their assets, including non-competes. 

Until recently, it appeared clear in Colorado that an assigned covenant would be enforced. An older Colorado Supreme Court decision enforced an assigned non-compete that arose out of the sale of a business. Several more recent unpublished decisions from the Court of Appeals followed this rule as they held that assigned non-competes would be enforced. . 

A 2007 Court of Appeals decision raises questions, however, about whether Colorado routinely will enforce non-competes in employment agreements which are assigned to another party. In that decision, the employee argued that an employer couldn't assign its rights under a non-compete because personal service contracts may not be assigned. The Court of Appeals recognized this rule of law, but declined to decide whether an employment contract qualified as a personal services contract.  Instead, the Court of Appeals ruled that personal services agreements could be assigned when the employee consented to the assignment. It found, in the case before it, that the employee had consented, because the employment agreement included a provision that stated that it would would be binding upon and inure to the benefit of the parties and the employer's successors and assigns. 

It is not clear how the Court of Appeals would have ruled absent the provision in which the employee consented to the assignment.  It's possible that the Court of Appeals would conclude that  an employment agreement is a personal service contract and, as such, can not be assigned. On the other hand, it's possible that Colorado courts would conclude that a non-compete in connection with the sale of a business should be enforced.

In any case, the recent Colorado Court of Appeals' decision demonstrates why it is so important for both employers and employees to consult with counsel before a non-compete is signed.  An employee might be able, for example,  to negotiate the deletion of any language in the non-compete that allows for the enforcement of the non-compete by an employer's successors or assigns.  

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Void means void; the validity of a non-compete is determined at the time of execution

Posted on September 10, 2008 by Dan Warden

In many non-compete cases, an issue arises about when the validity of a non-compete should be determined. Under Colorado's non-compete statute, a non-compete won't be enforce unless it falls within one of the four exceptions set forth in the statute. One  of those exceptions is for 'executive and management personnel". 

Many employees sign non-competes, however, when they are first hired by a company, or before they become an executive or manager with the company. Later, they are promoted and become executives and managers. When they leave the company, employers argue that the exception for executives and managers applies and that the non-compete is enforceable, even if the employee was not an executive or manager when they were hired. And when they signed the non-compete

In Phoenix Capital,  the Court of Appeals rejected this argument when it ruled that the applicability of the exceptions set forth in the non-compete statute should be determined at the time the non-compete is signed, rather than the time when the employee terminates his employment. The Court of Appeals rejected the employer's argument that this ruling would leave employers unprotected from employees who weren't executives or managers when they joined a company but who later were promoted to executive or management positions. As the Court of Appeals noted, an employer may always enter into new agreements with employees as they take on additional responsibilities. 

Ample precedent exists for the Court of Appeals' ruling. In Management Recruiters v. Miller, a decision from 1988, the employee signed a non-compete when he was hired as an "account executive" or "information gatherer". Later, the employee was promoted to office manager, but a new agreement was not executed when he was promoted. Based on these facts, the Court of Appeal declined to enforce the non-compete. 

An interesting factual wrinkle was presented by another case that was decided prior to Phoenix Capital.  In Doubleclick  v. Paiken, a federal district court decision issued in 2005, the employee entered into a separation agreement with her employer when she left the company. The separation agreement included a non-compete. Several months later, the employer learned that the employee was working for a direct competitor and filed suit against the employee. 

Employee argued, however, that the non-compete was not enforceable because she had signed it after she had resigned and "was not, ipso facto, management personnel". In effect, employee had anticipated the rule announced in Phoenix Capital that the enforceability of a non-compete should be determined at the time the agreement is signed. If she wasn't a manager when she signed the non-compete, employee argued, then the non-compete couldn't be enforced even if the non-compete was part of her separation agreement. 

Judge Miller, on the federal bench, was not swayed, however, by this argument as he ruled against the employee. Miller seemed to be convinced that the non-compete was enforceable because it was predicated on the position that the employee had held immediately prior to the execution of the separation agreement. Notably, Judge Miller states in his opinion  "The timing of the agreement does not preclude its enforceability". Following Phoenix Capital, that statement is subject to question because a non-compete may be deemed unenforceable if it is signed prior to an employee's promotion to an executive or management position. 

The ruling in Phoenix Capital is a lesson for both employers and employees. Each time an employee is promoted to an executive or manager position, employees must consider whether to require the employee to sign a new employment agreement with a non-compete. Employees asked to sign a non-compete in connection with a promotion, on the other hand, must recognize that their promotion comes at a cost. The promotion may mean that future employment prospects will be limited by a non-compete.  

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