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8th Circuit predicts Arkansas will allow assignment of noncompete agreement to successor employer

By Ronald Miller, J.D.

After predicting that the Arkansas Supreme Court would adopt the majority rule that a covenant not to compete can be assigned, the Eighth Circuit found that a district court erred in granting summary judgment in favor of three employees against an employer’s claim that they breached their noncompete agreements by taking positions with a competitor and calling on their former customers. Finding that the noncompete agreements were assigned to the employer after it executed an asset purchase agreement with their former employer, the appeals court held that the employer fully stepped into the shoes of its predecessor and received its rights in full force and effect. Thus, the district court’s grant of summary judgment on the employer’s claims of breach of contract, among other claims, was vacated (Stuart C. Irby Co., Inc. v. Tipton, August 6, 2015, Gruender, R.).

Non-compete agreements. While working for Treadway Electrical Company, a distributor of electrical products, three employees signed agreements containing noncompete provisions. On December 8, 2011, Stuart C. Irby Co. entered an asset purchase agreement for Treadway. The agreement stated that Treadway would assign rights to various assets. According to Irby’s chief operating officer, this included the noncompete agreements. In fact, Treadway and Irby specifically discussed the noncompete agreements. On January 1, 2012, after the asset purchase agreement took effect, the three employees became Irby employees. They retained essentially the same benefits and seniority, and Irby’s business was the same as Treadway’s had been. One employee served as a branch manager and the other two were inside salesmen.

After working for Irby for a year, the branch manager began talking with a competitor, and soon announced that he was leaving to work for the competitor. The next day, the two salesmen did the same. With respect to events leading up to his resignation, the branch manager claimed little recollection about conversations he had with the competitor about coming to work for it. When asked whether he spoke with the other two employees about going to the competitor, he allegedly did not remember speaking with them about leaving.

Breach of fiduciary duty. Irby sued the branch manager, the sales representatives, and the competitor for breach of fiduciary duty, breach of contract, civil conspiracy, and tortious interference with a contract. On cross-motions for summary judgment, the district court granted summary judgment to the defendants on all claims.

On appeal, Irby contended that the branch manager breached his fiduciary duty by recruiting the two sales representatives to join the competitor. As manager of the employer’s office in Conway, Arkansas, the branch manager owed a fiduciary duty to Irby. Before resigning, a manager has a duty of loyalty that “preclude[s] him from soliciting other employees or customers to leave [the employer] with him.” Thus, the Eighth Circuit concluded that a trial was necessary to determine whether the branch manager, while still employed by Irby, solicited the two sales representatives to leave for the competitor. In January 2013, he exchanged text messages with the competitor to arrange a meeting for “you guys” with the competitor. A reasonable jury could conclude that the “guys” for whom he was arranging a meeting included the sales representatives.

Furthermore, a reasonable jury could infer that by arranging a meeting with the competitor, the branch manager was trying to convince them to join the competitor with him. Making all reasonable inferences in favor of the employer, the appeals court concluded that a reasonable jury could find that the branch manager crossed the line between discussing his intent to leave Irby with the sales representatives and recruiting them to follow him to the competitor. Thus, the appeals court disagreed with the lower court that “nothing in the record” suggested the branch manager disregarded his duty of loyalty.

Breach of contract. The district court also granted the former employees’ motion for summary judgment against the employer’s breach of their noncompete agreements. Here, the appeals court began with the threshold question of whether Arkansas law permits the assignment of an employee’s noncompete agreement to a successor employer. The court noted that the Arkansas Supreme Court has not addressed this issue, but that the majority rule among state courts is that a covenant not to compete can be assigned to a successor employer. Thus, the appeals court predicted that the Arkansas Supreme Court would adopt the majority rule that a covenant not to compete can be assigned.

Valid assignment of noncompete agreements. This conclusion led to the question of whether the employees’ noncompete agreements were validly assigned. Here, the appeals court agreed with the district court that the noncompete agreements were “arguably assigned.” The asset purchase agreement indicated that Treadway assigned some of its contracts to Irby. Further, the record evidence showed that while discussing the assignment of contract rights, Treadway and Irby discussed the noncompete agreements, and Treadway’s president showed the branch manager’s agreement to Irby. This evidence was sufficient to create a genuine dispute of material fact about whether Treadway assigned the noncompete agreements to Irby.

The court next turned to the legal effect of this assignment of contract rights. The general rule is that “an assignment operates to place the assignee in the shoes of the assignor, and provides the assignee with the same legal rights as the assignor had before assignment.” The district court found that Irby only partially stepped into Treadway’s shoes as a result of the assignment, reasoning that Irby could enforce the noncompete agreements against the employees but only for one year after they left Treadway’s employ. It found that becoming Irby employees after the asset sale triggered the beginning of the noncompete agreements’ one-year period. However, the appeals court concluded that if the noncompete agreements were in fact assigned to Irby, it fully stepped into Treadway’s shoes and received its rights in full force and effect. Thus, Irby would have the ability to enforce the noncompete agreements for one year after the employees left its employ.

Enforcement of noncompete agreements. Alternatively, the district court concluded that the noncompete agreements were unenforceable under Arkansas law because they were overbroad, did not protect a valid interest, and lacked a reasonable geographic limitation. However, the appeals court determined that a genuine issue of material fact existed concerning whether the noncompete agreements were necessary to protect Irby from losing its customers. Before going to work for the competitor, the three employees spent several years developing customer relationships as Treadway and Irby employees. According to the branch manager, cultivating these customers was important to Irby’s business. Viewing this evidence in the light most favorable to Irby, the appeals court found that a reasonable jury could conclude that the noncompete agreements were necessary to protect Irby against a loss of customers.

The district court also concluded that the noncompete agreements lacked a reasonable geographic limitation. However, the appeals court understood that the plain language of the agreements merely limited the employees’ activities within the territory to which Irby had assigned them during their employment. With the noncompete provisions properly construed, it became apparent that there was a genuine dispute of material fact about whether the agreements had a reasonable geographic limitation. Further, although the parties had not presented any evidence about the size of Irby’s trade territory or the size of the territory that the employees were assigned, the court concluded that a reasonable factfinder could rely on the relatively limited intrusion that the agreements imposed on a former employee’s livelihood to find that the geographic limitation was reasonable. Thus, it concluded that a genuine issue of material fact existed about whether the noncompete agreements had a reasonable geographic limitation.