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• Robert M. Linn

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• Litigation

In a case of first impression, the Pennsylvania Supreme Court recently held that, absent specific provisions for assignability, a covenant not to compete is not assignable by a former employer to the purchaser of the assets of the employer's business.  Hess v. Gebhard & Co. Inc., 2002 Pa. Lexis 2181 (Oct. 16, 2002).  The Supreme Court's ruling, which reversed the decision of the Superior Court, may signal a growing reluctance on the part of the Pennsylvania judiciary to enforce noncompete provisions and should serve as an impetus for employers to include assignability provisions in their employment agreements and, to the extent that employers have existing employment agreements without assignability provisions, to draft revised employment agreements (with additional consideration) that include assignability provisions for the employees at issue.

The matter in Hess v. Gebhard & Co. Inc. arose as a result of the assignment by Eugene Hoaster Company, Inc. ("Hoaster") of the employment agreement and restrictive covenant of W. Lawrence Hess ("Hess") to Gebhard & Co. ("Gebhard") in conjunction with Hoaster's sale of the insurance portion of its business to Gebhard.  The central issue in the case was whether the assignment of the restrictive covenant was valid in the absence of an assignability provision and without the employee's consent.  In an opinion authored by Justice Sandra Schultz Newman, the Supreme Court held that the assignment of the covenant was invalid in the absence of specific provisions for assignability.

In reaching its decision, the Supreme Court made several key findings.  First, the Court held that good will, to which no apparent monetary value had been assigned, does not provide a legally protectible business interest for either the employer or the purchaser of its assets.  Second, the Court noted that nothing in the employment agreement executed by Hess and Hoaster suggests that the parties intended for the contract to be assignable.  In light of the fact that restrictive covenants are disfavored under the law and that the employment contract, of which the covenant is a part, is "personal to the performance of both the employer and the employee," the Court found that "a restrictive covenant not to compete, contained in an employment agreement, is not assignable to the purchasing business entity, in the absence of a specific assignability provision, where the covenant is included in a sale of assets."  Finally, the Court held that, contrary to Hoaster and Gebhard's argument, Hoaster did not have a protectible interest in Gebhard's retention of Hoaster's former insurance clients and, as a result, Hoaster could not enforce the covenant against Hess.

The Court's decision in Hess v. Gebhard & Co. Inc. may signal a movement by the Pennsylvania judiciary towards greater scrutiny of noncompete provisions and could evince an increasing reluctance of the Court to enforce such provisions.  Consequently, employers should be careful to include explicit assignability provisions in all of their employment agreements.   Additionally, to the extent that employers already have employment agreements without such assignability provisions, in order to ensure the assignability of such agreements, employers should draft new contracts, with additional consideration, for the employees at issue.  As stated succinctly by the Court in Hess:    

• It is a simple matter for the employer to insert an assignment clause into the agreement at the time that the agreement is drafted to cover future contingencies … The failure of an employer to include specific provisions in an employment contract will not be judicially forgiven or corrected at the expense of the employee.

For more information, please contact Robert M. Linn, Chair of Cohen & Grigsby's Litigation Group.