Rhode Island Court Gives Assignability of Employee Non-Competes a Haircut
Published Date: July 11, 2017
Last month, a Rhode Island trial court held that a hairdresser’s noncompetition agreement with the salon for which she had been working, which sold its assets to a successor salon, was not transferable to the successor business because the noncompetition agreement lacked an assignability clause. The decision, BlueZ4 Corp. D/B/A Blue Sky Spaworks v. Rebecca Macari et al., No. KC 2016-1087 (June 13, 2017), is the first in Rhode Island to examine the assignability of employee restrictive covenants in the context of the sale and purchase of a business, and it provides an important checklist for employers selling or buying businesses where the seller’s employees’ restrictive covenants are a material asset. The checklist can help ensure that such covenants remain enforceable by the buyer after the sale.
Rebecca Macari had been employed as a hairdresser by Blue Sky Spaworks since 1997. In 2004, she signed a non-compete agreement with Blue Sky, which prohibited her from competing with Blue Sky for one year after the termination of her employment within three miles of Blue Sky’s Warwick, Rhode Island, location. On September 26, 2014, Blue Sky entered into an asset purchase agreement with the owners of BlueZ4, which was to operate as a salon out of Blue Sky’s facility in Warwick. Pursuant to the purchase-and-sale agreement between the two entities, BlueZ4 purchased certain enumerated assets of Blue Sky’s salon and spa business. Notably, the purchase-and-sale agreement did not specifically refer to employees’ noncompetition agreements with Blue Sky or Blue Sky’s customer goodwill.
On October 24, 2014, in accordance with the purchase-and sale-agreement with BlueZ4, Blue Sky closed its business and notified its employees, including Macari, that their employment was terminated. Macari was informed that she would need to reapply for a hairdresser position with BlueZ4, which was opening shortly at Blue Sky’s location. Macari applied and BlueZ4 hired her. Notably, BlueZ4 did not require Macari to agree to any restrictive covenants. Macari stayed at BlueZ4 for just over a year before taking a position in June of 2016 with Astra, a salon located within a three-mile radius of BlueZ4’s location. Shortly thereafter, BlueZ4, citing Macari’s non-compete with Blue Sky, demanded that Macari discontinue her employment with Astra and that Astra terminate Macari’s employment. When both refused, BlueZ4 initiated suit against both Macari and Astra in state court for an injunction barring Macari from remaining in Astra’s employ.
The Court’s Decision
After oral argument and consideration of post-hearing briefs, the court noted that the issue of assignability of an employee’s non-compete agreement in the context of a business sale was one of first impression in Rhode Island. After considering the approaches of other jurisdictions that had looked at the issue, the court noted that Rhode Island’s precedent placed non-compete agreements in the employment context on par with personal services contracts (i.e., agreements for services such as repairs to real estate or personal property in exchange for remuneration).
Other jurisdictions holding this same view (that non-compete agreements in the employment context are comparable to personal services contracts) had concluded that employee non-compete agreements—as opposed to non-compete provisions to be enforced against the actual seller of a business—were non-transferable between the seller and buyer of the business absent assignability clauses in the non-compete agreements evidencing consent by the employees to such a transfer. The court then recognized that under Rhode Island’s common law, personal services contracts were also not assignable to third parties absent an assignability clause in the agreement. Since employee non-compete agreements were akin to personal services contracts, the court reasoned that for a Rhode Island employee’s noncompetition agreement to transfer from seller to buyer in a business sale, the noncompetition agreement had to include an assignability clause evidencing the employee’s consent to such a transfer.
Key to the court’s holding was the idea that employees must give express consent before their restrictive covenants can transfer from their current employer, whom they know and are familiar with, to a successor employer who, at the time the restrictive covenants were entered into, was a total stranger to the employees. Absent an assignability clause which gives the employer permission to transfer employees’ restrictive covenants to any third party, known or unknown to the employees at the time they entered into the restrictive covenants, the covenants do not transfer in the course of the sale of the seller-employer’s business. Looking at Macari’s non-compete, which did not contain any assignability provision, the court concluded that Macari’s non-compete was exclusively between Macari and Blue Sky and did not transfer to BlueZ4—and that BlueZ4, therefore, could not enforce it against Macari or Astra.
Notably, the court also found that, because there was no assignability clause in Macari’s noncompetition agreement with Blue Sky, it would have made no difference whether the purchase-and-sale agreement between Blue Sky and BlueZ4 specifically listed employee noncompetition agreements as part of the transaction. In any event, the court concluded that the purchase-and-sale agreement at issue did not include Blue Sky’s employees’ non-compete agreements where the assets of the sale were divided into four categories in the agreement: equipment, office equipment, inventory, and leasehold improvements. None of these, the court found, could reasonably be understood to include the employees’ non-competes. Thus, even if Macari’s non-compete with Blue Sky had included an assignability clause, the noncompetition agreement was not part of the transaction between Blue Sky and BlueZ4.
In light of the court’s ruling, employers contemplating the purchase or sale of a business in Rhode Island, where the seller’s employees’ restrictive covenants are material to the sale, may want to review the employees’ restrictive covenants to ensure they include assignability clauses and also make sure that any purchase-and-sale agreement specifically refers to such restrictive covenants as material assets in the transaction.
Todd M. Torres is an associate in the Boston office of Ogletree Deakins.
Julius Halstead is a law student participating in the summer associate program in the Boston office of Ogletree Deakins.