When one company acquires another company, a lot of times, it will take on the old company’s contracts, including employment agreements with key employees. Some of those agreements may include non-compete restraints. So, naturally, the question arises whether the buyer of the business can enforce these non-compete restraints even though the buyer’s name is not on the agreements. The answer to that question is, of course, it depends.
Generally speaking, Texas law prohibits assignments of contracts for personal services. Thus, for example, if someone hires a singer to perform at a wedding, the singer cannot assign their contract, i.e., transfer their singing duties, to another singer. However, whether an agreement containing non-compete restraints qualifies as a contract for personal services depends on the overall substance of that agreement.
Recently, a Texas court ruled in favor of a buyer who attempted to enforce two high-level executives’ non-compete restraints finding that the buyer could enforce the non-compete restraints because they were included in a contract that did not qualify as a “personal services” contract.
In that case, the buyer presented employees with new non-compete agreements after the acquisition. They refused to sign the agreements, continued to work for the buyer for some time, and then left to work for a competitor. When the buyer sent them a cease and desist letter, they responded that they had no valid non-competes with the buyer, and, therefore, were free of any restraints. The court rejected their argument and held that the agreements containing non-compete restraints did not qualify as a contract for personal services and, therefore, could be assigned by their old employer to their new employer, who could enforce it.
CONCLUSION: Employees should not assume that because their company was acquired and they never signed new non-competes with the buyer, that their non-compete restraints with their old employer went away. They should consult with an attorney to determine if the restraints remain valid before taking any action that may violate such restraints.
Employers should always (1) include an assignment clause in their agreements with employees and (2) make sure that the agreements that contains non-compete restraints are drafted in such a way as to avoid the categorization of a “personal services” contract under Texas law.
Leiza Dolghih is the founder of Dolghih Law Group PLLC. She is board certified in labor and employment law and has 16+ years of experience in commercial and employment litigation, including trade secrets and non-compete disputes. You can contact her directly at leiza@dlg-legal.com or (214) 531-2403.