Massachusetts Court Holds Employee’s Non-Compete Agreement Cannot be Assigned to Successor Corporation

When acquiring a business, successor companies desire the ability to enforce their predecessors’ restrictive covenants, such as non-competition, non-solicitation, and confidentiality agreements, with present and past employees, in order to safeguard the goodwill and assets of their new acquisition. Courts in several states have considered the issue of whether employers can assign employees’ non-compete agreements to successor companies without the employees’ consent. As with much of the law regarding non-compete agreements, there is no consensus on whether such assignments are valid. Indeed, the law varies considerably among the states that have considered the issue and remains unresolved or undeveloped in many others. Recently, in Securitas Security Services USA, Inc. v. Jenkins, the Business Division of the Massachusetts Superior Court weighed in on this issue of first impression in the Commonwealth, holding that an employer could not assign an employee’s non-compete agreement to a successor company without the employee’s consent.

In Securitas, Kenneth Jenkins, the employee-defendant, had served as a high-level executive of Pinkerton’s Inc. for almost three years. Mr. Jenkins had an employment agreement with Pinkerton’s that contained a number of restrictive covenants, including provisions regarding trade secrets, confidentiality, non-competition and non-solicitation of customers and employees. The agreement apparently did not have a provision stating that it could be assigned to Pinkerton’s successors. Mr. Jenkins resigned from his employment with Pinkerton’s in June 2003 to accept a position as President and Chief Operating Officer of an alleged competitor. About one week later, Pinkerton’s filed a motion for preliminary injunctive relief against Mr. Jenkins. After undergoing corporate restructuring and being succeeded by a new company, Securitas Security Services USA, Pinkerton’s filed an Amended Complaint, replacing itself with Securitas as the plaintiff in the action.

Securitas alleged that Pinkerton’s had assigned its rights under Mr. Jenkins’ agreement as part of the transaction in which Pinkerton’s sold all of its assets and liabilities to Securitas. Because of this assignment, Securitas argued that it was entitled to enforce the non-compete provisions of Mr. Jenkins’ employment agreement. The Massachusetts Superior Court, however, disagreed, finding that such an assignment was invalid without the consent of Mr. Jenkins; therefore, Securitas did not have any rights to enforce the non-compete provisions. In support of its decision, the Court emphasized the personal nature of an employment contract, and its dependence upon mutual confidence and respect between employer and employee. Accordingly, the Court reasoned, the parties entering into such a personal relationship intend that the rights should be exercised and the duties performed solely by those parties. To illustrate its rationale, the Court stated, "Certainly Mr. Jenkins could not assign his contract with Pinkerton’s to serve as … its President … without Pinkerton’s assent. For similar reasons, Pinkerton’s could not assign Mr. Jenkins’ employment agreement to another corporate entity without Mr. Jenkins’ assent."

In light of this recent case, Massachusetts (and all) employers are advised to include assignability provisions in restrictive covenants to allow maximum flexibility in corporate restructuring. Likewise, companies in the merger and acquisition market should not automatically presume that they are able to succeed to the rights and protections of their predecessors’ restrictive covenants with employees, even where the transaction agreement provides for such succession. To understand their rights and vulnerabilities with respect to the enforceability of such covenants in the particular states at issue, employers are advised to consult with counsel.