A well drafted noncompetition agreement should contain an assignment clause allowing a company to assign its rights to a successor. But what happens if this provision is left out and the company is sold? In most states, the successor is out of luck.
The majority of states follow the rule that a restrictive covenant not to compete is not assignable to a purchasing business entity in the absence of a specific assignability provision. The courts in these states rely on the theory that such covenants are personal in nature and, as a result, cannot be assigned without the employee’s permission.
Delaware, however, appears to follow the minority rule. The Delaware Court of Chancery recently ruled that even without an specific provision noncompete agreements are generally assignable from one employer to another as long as both employers are engaged in the same industry. The court acknowledged that while personal service contracts usually may not be assigned, noncompete agreements and other restrictive covenants exist for the benefit of the business — not the individual parties. The court explained that the business, whether as assignee or assignor, should enjoy that benefit by having the power to enforce such restrictive covenants.
This decision should benefit successor businesses who inherit employees with noncompetes that contain no specific assignment clause.
Great American Opportunities, Inc. v. Cherrydale Fundraising, LLC, C.A. No. 3718-VCP (Del. Ch. Ct. Jan. 29, 2010)