Eighth Circuit Finds Non-Compete May be Assignable Under Arkansas Law; Reverses Dismissal of Breach of Fiduciary Duty and Conspiracy Claims Where Manager took Subordinates with Him
The Eight Circuit has concluded that the Arkansas Supreme Court would likely adopt the majority rule that a covenant not to compete can be assigned to the purchaser of a business. Stuart C. Irby Company, Inc. v. Tipton, No. 14-1970 and 14-2682 (8th Cir. Aug. 6, 2015) The appellate court reversed an across-the board win for defendants in this Arkansas non-compete dispute, disagreeing with the district court on almost every point.
The case concerned Tipton, a former branch manager for Treadway Electric Company, Inc., and Gilbert and Padgett, two employees who had reported to Tipton. All three signed one year non-competes with Treadway. Treadway then sold its assets to the Stuart C. Irby Company. Tipton, Gilbert and Padgett became employees for Irby and worked for another year or so. Tipton then resigned to work for a competitor, Wholesale Electric. Gilbert and Pagett quit the next day and also joined Wholesale Electric. Irby filed suit, alleging breach of fiduciary duty against Tipton for soliciting its employees to leave while still employed by Irby; civil conspiracy; breach of contract; and tortious interference. The district court granted summary judgment on all claims and awarded defendants in excess of $200,000 in attorneys’ fees.
The Court of Appeals held that Arkansas law would allow an assignment of a non-compete, and that the non-competes could have been assigned by Treadway to Irby, but remanded the matter for further review of the facts. The appellate court also rejected the conclusion of the trial court that the one year restricted period would have been triggered when the three individual defendants stopped being employees of Treadway and began working for Irby. The Court of Appeals found this conclusion “peculiar.” (The 8th Circuit’s rejection of this analysis is itself somewhat unusual as courts in other states have reached a similar conclusion under similar facts, where there is a sale of assets, not stock.)
The Eighth Circuit also concluded that there were issues of disputed fact as to whether Tipton breached his fiduciary duty under Arkansas law by soliciting employees before he quit. Because it reversed dismissal of fiduciary duty claim, it also reversed dismissal of a civil conspiracy claim. Because it reversed dismissal of the breach of contract claim, it also reversed dismissal of a tortious interference with contract claim against Wholesale Electric. Finally, because defendants were no longer the prevailing party, it reversed the award of attorneys’ fees.
The text of the non-compete agreements was not made part of the decision, so it is not clear if the contracts addressed the topic of assignability. In some states, non-competes are not assignable without the consent of the employee. In Treadway, the court seemed to focus only on whether the seller, Treadway, had actually assigned the contracts to the buyer, Irby. It was also not clear if the award of attorneys’ fees was based on the contract.
The decision offers several takeaways. First, assignability of restrictive covenants is often a source of confusion, and best addressed explicitly at the drafting stage, even if no merger or acquisition is on the horizon. Second, litigators in this area should not overlook potential common law claims for breach of duty of loyalty or fiduciary duty. Usually such claims involve pre-resignation solicitation of customers, but at least under Arkansas law, solicitation of subordinate employees may also trigger liability. Third, how a particular judge or appellate panel will rule on unfair competition claims is very unpredictable. In this case, defendants went from a run-the-table victory, and $200,000 in fees, to a seat either at the negotiating table or in the courtroom.