As the economy declines, increased attention may be given to whether an employer may assign its rights under a non-compete. Businesses will fail and, when they fail, they will consider whether and how they can sell their assets, including non-competes.
Until recently, it appeared clear in Colorado that an assigned covenant would be enforced. An older Colorado Supreme Court decision enforced an assigned non-compete that arose out of the sale of a business. Several more recent unpublished decisions from the Court of Appeals followed this rule as they held that assigned non-competes would be enforced. .
A 2007 Court of Appeals decision raises questions, however, about whether Colorado routinely will enforce non-competes in employment agreements which are assigned to another party. In that decision, the employee argued that an employer couldn’t assign its rights under a non-compete because personal service contracts may not be assigned. The Court of Appeals recognized this rule of law, but declined to decide whether an employment contract qualified as a personal services contract. Instead, the Court of Appeals ruled that personal services agreements could be assigned when the employee consented to the assignment. It found, in the case before it, that the employee had consented, because the employment agreement included a provision that stated that it would would be binding upon and inure to the benefit of the parties and the employer’s successors and assigns.
It is not clear how the Court of Appeals would have ruled absent the provision in which the employee consented to the assignment. It’s possible that the Court of Appeals would conclude that an employment agreement is a personal service contract and, as such, can not be assigned. On the other hand, it’s possible that Colorado courts would conclude that a non-compete in connection with the sale of a business should be enforced.
In any case, the recent Colorado Court of Appeals’ decision demonstrates why it is so important for both employers and employees to consult with counsel before a non-compete is signed. An employee might be able, for example, to negotiate the deletion of any language in the non-compete that allows for the enforcement of the non-compete by an employer’s successors or assigns.