Eighth Circuit Interprets Missouri Law: Non-Compete Agreements May Be Transferred to Subsequent Employer

In Symphony Diagnostic No. 1, Inc. d/b/a/ MobilexUSA v. Greenbaum, the Eighth Circuit Court of Appeals recently addressed the question of whether a successor company in Missouri may enforce a predecessor company’s non-compete agreements in situations where the successor company purchases the predecessor company’s assets. Missouri law already provides that assignment is allowed in situations where there is an acquisition of stock.  Alexander & Alexander, Inc. v. Koelz, 722 S.W. 2d 311, 312 (Mo. Ct. App. 1986).

In MobilexUSA v. Greenbaum, Kimberly Greenbaum and Josephine Tabanag worked for Ozark Mobile Imaging as X-ray technicians.  Both employees signed non-compete agreements.  The non-compete agreement prohibited the employees from “directly or indirectly engaging in the mobile diagnostic business in any manner” for two years after their employment terminated and within a specified 100-mile radius geographical area.

In December 2012, Mobilex acquired Ozark Mobile Imaging through an Asset Purchase Agreement.  Mobilex offered Greenbaum and Tabanag employment, but they both refused.  In January 2013, they each accepted new positions as mobile X-ray technicians at Biotech X-ray, Mobilex’s competitor.

In September 2013, Mobilex filed a complaint in the United States District Court for the Western District of Missouri against Greenbaum and Tabanag, alleging state law claims for breach of contract, breach of fiduciary duty, and tortious interference with a business relationship.  After Greenbaum and Tabanag moved for summary judgment, the district court determined the central issue was whether the non-compete agreements were assignable from Ozark to Mobilex without Greenbaum’s and Tabanag’s consent.

The district court relied on Roeder v. Ferrell-Duncan Clinic, Inc. [See article written by Jeffrey R. Schmitt on the Roeder decision here.]  In Roeder, the Missouri Court of Appeals for the Southern District ruled that a physician in a group practice was no longer bound by his “personal services contract” that contained a non-compete agreement after the practice assigned his personal services contract to a hospital. 155 S.W.3d 76 (Mo. App. S.D. 2004).  The court held that “in a contract for personal services, which involves special knowledge, skill or a relation of personal confidence, the duty to perform is not assignable without the consent of both parties.”  Id. at 84. It is also notable that unlike Mobilex where the successor purchased assets, there was no sale in Roeder.  Instead, the assignment was based on strategic purposes related to insurance benefits.  On appeal, Mobilex argued that the district court wrongly deemed the free –standing non-compete and confidentiality agreement to be personal service contract.

The Eighth Circuit Court of Appeals noted that no decision from the Missouri Supreme Court or Missouri’s intermediate courts have squarely addressed the issue.  When the court was faced with the same issue under Arkansas law, they predicted that the Arkansas Supreme Court would adopt the majority rule that a covenant not to compete can be assigned.  Stuart C. Irby Co. v. Tipton, 796 F.3d 918, 924 (8th Cir. 2015).  In fact, the court reached this conclusion despite the Arkansas courts’ general skepticism of covenants not to compete.  The court mentioned that Missouri courts have not shared in this skepticism and, therefore predicted that the Missouri Supreme Court would permit assignment of covenants not to compete without contemporaneous consent.  See Whelan Sec. Co. v. Kennebrew, 379 S.W.3d 835, 841-42 (Mo. 2012) (en banc) (holding that “Missouri courts generally enforce a non-compete agreement if it is demonstratively reasonable”).

Ultimately, the court reversed the district court’s decision, finding that unlike a personal services contract in Roeder, which requires an employee to perform an affirmative act, the non-compete and confidentiality agreement that the employees entered into only required abstention from certain actions.

The court did note, however, that when the non-compete agreement lacks a specific provision allowing assignment, the non-compete agreement generally may not be assigned without the consent from the employee when: (1) the assignment would materially change the obligations of the employee; or (2) the employee only agreed to the non-compete because of qualities specific to the employer.  The court gave two examples to illustrate these exceptions.  First, if an employee agreed to work as Meryl Streep’s personal assistant subject to a non-compete because of his admiration for her work, allowing the assignment of the non-compete would materially change the obligations of the employee.  Second, if a non-compete agreement prohibited “engaging in the same business ventures as the employer,” and the employer was acquired by a company that engaged in a broader set of ventures, the obligations imposed on the employee by the agreement would be expanded by the acquisition.

The court determined that neither exception applied here because the non-compete agreement only precluded working in the field of medical diagnostics or soliciting business from certain clients within a specified geographical area.

The lesson learned for Missouri employers is to ensure, at the very least, that their non-compete and non-confidentiality agreements contain an assignment clause.  Absent this measure, an employer runs the risk that their non-compete and confidentiality agreements will not be enforceable in the event of a sale or acquisition of their business.

To read the MobilexUSA v. Greenbaum opinion, visit:

http://media.ca8.uscourts.gov/opndir/16/07/152294P.pdf

Posted by Attorney Katherine Flett. Flett is a member of the litigation team whose primary focus is on assisting clients in insurance defense, business litigation, employment law, and bankruptcy matters.