This is Part 1 in a two-part series. Part 1 will focus on employee non-compete assignability in asset purchase transactions, and Part 2 will address stock purchase or merger transactions.

Female doctor signing paperworkHealth care employers such as medical groups or hospitals have a valuable stake in protecting their businesses interests by having covenants not to compete in place for important employees such as physicians. Whether these non-competes are assignable by a seller to a buyer can be an important consideration in structuring a business transaction involving the purchase of a health care business enterprise.

The parties to an asset purchase transaction must balance the tax and other advantages of an asset purchase with the more limited ability of the seller to assign to a buyer an employee covenant not to compete in an employment agreement without employee consent. The ability to assign such a contract is important in that it enables the buyer in a transaction the ability to enforce the non-compete against the employee in the event the employee declines employment or soon after closing leaves employment with the buyer.

Under Missouri law, if a contract is silent on the issue of assignability, it is usually assignable without consent unless it involves a personal services contract such as a physician employment agreement. A personal services contract involves a relationship of personal confidence between the employer and employee for the employee’s specialized knowledge or skills, such as those possessed by physicians. Thus, a contract for personal services in an asset purchase context requires both parties to consent to the assignment of the agreement, even if the document is silent on assignment. This can pose a potential risk to the ability to successfully close the transaction if the physician employees of a seller refuse to accept employment with the buyer or consent to an assignment of the contract and then enter into an employment relationship with a competitor.

An employee covenant not to compete, or non-compete, is generally an agreement by an employee not to compete with the business of the employer for a specified time frame within a defined geographic area. Missouri courts have narrowly construed the circumstances under which covenants not to compete are enforceable. Whether a physician or employee non-compete is otherwise enforceable, valid or has adequate consideration is outside the scope of this series of blog posts. To learn more about the enforceability of non-competes in general, please visit the Greensfelder SimplyHR blog sections on non-compete agreements and restrictive covenants.

Assuming that a particular non-compete is properly structured and validly established, the Missouri Supreme Court has not ruled on the issue of the assignability of a covenant not to compete in an asset purchase transaction. In Symphony Diagnostic Services No. 1, Inc. v. Greenbaum, 828 F.3d 643 (8th Cir. 2016), the Eighth Circuit Court of Appeals predicted that, in an asset purchase, Missouri’s high court would allow assignment of a stand-alone non-compete without employee consent if such non-compete does not otherwise address the issue of assignment. If a stand-alone employee non-compete is not an ancillary part of a larger employment agreement, it will likely not be deemed a personal services contract under Missouri law. This is because a freestanding non-compete contract merely requires the employee to refrain from competing with the employer rather than requiring an affirmative action such as providing professional services in connection with a personal services contract. The Symphony court noted that the result may have been different had the assignment resulted in a material change in the obligations of the employee or if the employee agreed to the non-compete only because of an employer’s specific qualities. By contrast, a non-compete contained in a physician employment agreement would likely be considered a personal services contract that is not freely assignable without consent.

Interestingly, the court in Symphony indicated that it saw no reason to view the assignability of a non-compete differently in an asset purchase than with a stock purchase simply because the acquisition took the form of an asset sale rather than a sale of stock. In light of this statement, it will be interesting to see how the Missouri courts address the precise issue of assignability with an asset purchase in the future. Note that Part 1 of this blog series is limited to an analysis of employee non-compete assignability in asset purchase transactions; assignability of employee non-competes under Missouri law in a stock purchase or merger transaction will be the subject of Part 2 of this two-part series.

Due diligence is particularly important to make sure the contracts the buyer wants transferred can be assigned under Missouri law and whether there are any prohibitions on assignment or change of ownership or control in the language of these contracts. To retain flexibility and make sure a contract is assignable in the event of an asset purchase, employers should consider incorporating clauses in their employment contracts that specifically permit the employer to assign the contract — especially in the event of an asset sale or change in ownership or control. In the absence of this, the parties would need to expressly consent to the assignment of an employment agreement with a non-compete to a buyer. As a practical matter, however, our experience with health care asset purchase transactions is that the acquiring hospital or medical group usually wants to use its own physician contracts with new non-competes rather than accept or obtain consent to assignment of the seller’s physician employment agreements.

Where the laws of a state other than Missouri apply, the analysis must be tailored to each state, as the laws may vary on this issue. Each situation, assignment language, transaction and employment agreement is uniquely different with facts and circumstances that should be carefully analyzed by competent counsel.