Missed Assignments: The Importance Of Assignability Clauses In Restrictive Covenant Agreements

• Jurisdiction: Texas,United States
• Law Firm: Sheppard Mullin Richter & Hampton
• Subject Matter: Employment and HR, Contract of Employment
• Author: Mr Jonathan E Clark and Alexandria Amerine
• Published date: 23 February 2023

Imagine paying millions to acquire a company only to later discover the restrictive covenants in the employment agreements of high-level executives were unenforceable. That's precisely what happened in Intertek Asset Integrity Management. In Intertek, Texas's Twelfth Court of Appeals held a company Vice President's non-compete was unenforceable by the purchaser-entity because the underlying employment agreement lacked an assignment clause. Such language, if included, would have permitted the seller to transfer the contract's rights and obligations without the employee's consent. Assignability clauses are frequently buried in the "miscellaneous" section of agreements and'too often'omitted. Businesses who overlook these terms in Texas employment contracts do so at their peril.

Restrictive covenants can be a key component to success in highly-competitive industries of all stripes. Well-drafted noncompetes, customer and employee non-solicits, and nondisclosure provisions in employment contracts can safeguard a company's confidential and proprietary information, while limiting unfair competition from employee-raiding competitors looking to shortcut the path to profits. In addition, having enforceable restrictive covenants in place with key personnel can add value to a business in the context of a sale. Unsurprisingly, then, much time, energy, and focus is placed on drafting restrictive covenants in employment contracts. But an important, and related, contractual provision is often given short shrift: assignability.

Texas courts have demonstrated just how crucial assignability clauses are in employment contracts'and how the absence of one can, and likely will, render the enforcement of restrictive covenants by a purchaser-entity nearly impossible. Accordingly, savvy employers must recognize the importance of ensuring their restrictive covenant agreements contain assignability clauses; or risk having them declared worthless during or after an acquisition event.

As a general matter of Texas law, contracts are freely assignable to another party unless the contract is for "personal services." Personal service contracts are those which contemplate the performance of personal services involving the exercise of special knowledge, judgment, taste, skill, or ability, including work requiring "rare genius" or "extraordinary skill."¹ These contracts are only assignable if the assignor has the assignee's consent'most often accomplished via an assignability clause. And...