Hd Supply Facilities Maint., Ltd v. Bymoen

• Decision Date: 11 June 2009
• Docket Number: No. 50989.,50989.
• Citation: 210 P.3d 183
• Parties: HD SUPPLY FACILITIES MAINTENANCE, LTD., Appellant, v. Leif BYMOEN, an Individual; and AZ Partsmaster, Inc., an Arizona Corporation, Respondents.
• Court: Nevada Supreme Court

210 P.3d 183

HD SUPPLY FACILITIES MAINTENANCE, LTD., Appellant, v. Leif BYMOEN, an Individual; and AZ Partsmaster, Inc., an Arizona Corporation, Respondents.

No. 50989.

Supreme Court of Nevada.

June 11, 2009.

Lewis & Roca, LLP, and Daniel F. Polsenberg, Las Vegas; Ford & Harrison, LLP, and Dinita L. James, Phoenix, AZ, for Appellant.

Fennemore Craig, P.C., and David W. Dachelet, Las Vegas; Quarles & Brady Streich Lang, LLP, and Eric B. Johnson, Phoenix, AZ, for Respondents.

Before the Court En Banc.

OPINION

By the Court, PARRAGUIRRE, J.

The United States District Court for the District of Nevada has certified, under NRAP 5, three questions concerning "[w]hether the Nevada rule stated in Traffic Control Servs. v. United Rentals, 120 Nev. 168, 172, 87 P.3d 1054, 1057 (2004), that `absent an agreement negotiated at arm's length, which explicitly permits assignment and which is supported by separate consideration, employee [noncompetition] covenants are not assignable,' applies when a successor corporation acquires a noncompetition covenant[, or a covenant of nonsolicitation or confidentiality] as a result of a merger?" We answer these questions in the negative and clarify that Traffic Control's rule of nonassignability does not apply when a successor corporation acquires restrictive employment covenants as the result of a merger.

FACTS AND PROCEDURAL HISTORY

These certified questions arise from a federal district court action brought by appellant HD Supply Facilities Maintenance, Ltd. (HDS), to enforce restrictive covenants in an employment agreement against its former employee, respondent Leif Bymoen, and respondent AZ Partsmaster, Inc. (AZP), Bymoen's current employer.

HDS is the product of two separate mergers. In the first merger, Bymoen's original employer, Century Maintenance Supply, Inc., was acquired by Hughes Supply, Inc. In the second, Hughes merged with a subsidiary of The Home Depot, Inc. The surviving corporation—renamed HDS—emerged as one of the largest maintenance, repair, and operations supplies distribution firms in the United States. As Century's successor-in-interest, HDS claims to have succeeded to the restrictive covenants of former Century employees, including Bymoen's.

While at Century, Bymoen entered into covenants of nonsolicitation and confidentiality, as well as a noncompetition covenant restricting him for six months after his termination from "engag[ing] in any business activity, directly or indirectly, whether for profit or otherwise, which is similar to or competitive with the business of Century in any market area then being served by Century." The agreement did not contain an assignment clause.

Over the course of the two mergers and eventual name change, Bymoen continued in his position as a sales representative with Century's successors. On September 22, 2006, however, Bymoen voluntarily resigned from HDS and immediately took a sales position with AZP, an HDS competitor. Within days of joining AZP, Bymoen sent solicitation letters to his former HDS clients.

Learning of Bymoen's actions, HDS alerted AZP that Bymoen was allegedly in breach of the covenants contained in his original employment agreement with Century, HDS's predecessor. Nevertheless, AZP continued to employ Bymoen, prompting HDS to bring a federal action against both AZP and Bymoen for breach of contract, misappropriation of trade secrets, tortious interference with contractual relations, and breach of fiduciary duty.

Once suit was filed, Bymoen moved to dismiss HDS's contract claims on grounds that the restrictive covenants at issue were unenforceable under Traffic Control because he did not consent to their assignment when he was employed with Century. In response, HDS distinguished Traffic Control as limited to its facts, arguing first that the nonassignability rule announced in that decision was limited to asset purchase transactions, and second, that the rule did not govern the covenants of nonsolicitation and confidentiality.

Considering these conflicting arguments, the federal court concluded that Traffic Control was not clearly controlling precedent because it "d[id] not directly answer" the basic issue before it:

whether a successor company may enforce an employee's non-compete, non-solicitation, and confidentiality covenants where the company claims the right to enforce the covenants through a ... merger rather than through an asset purchase.

As a result, this issue was certified to this court under NRAP 5, in the form of three separate questions, which can be summarized as follows: whether the Nevada rule stated in Traffic Control Services v. United Rentals, 120 Nev. 168, 172, 87 P.3d 1054, 1057 (2004), that "absent an agreement negotiated at arm's length, which explicitly permits assignment and which is supported by separate consideration, employee noncompetition covenants are not assignable," applies when a successor corporation acquires (1) a noncompetition covenant, (2) a nonsolicitation covenant, or (3) a confidentiality covenant as the result of a merger?

DISCUSSION

These three certified questions ask us to clarify whether Traffic Control's rule of nonassignability applies when a successor corporation acquires covenants of noncompetition, nonsolicitation, or confidentiality as the result of a merger. Because we conclude that Traffic Control does not apply in the context of a statutory merger, we answer these questions in the negative.

Traffic Control's rule of nonassignability

In Traffic Control, this court addressed "whether an employer in a corporate sale may assign rights under an employee's covenant not to compete without the employee's consent." 120 Nev. at 169, 87 P.3d at 1055. Confronting an apparent split of authority, the court resolved the issue in the negative and announced that "absent an agreement negotiated at arm's length, which explicitly permits assignment and which is supported by separate consideration, employee noncompetition covenants are not assignable." Id. at 172, 87 P.3d at 1057.

Notwithstanding this broad language, which in Bymoen's view suggests that Traffic Control has a wider application, HDS argues that Traffic Control is narrowly limited to its facts, and as such, its rule prohibiting assignments does not apply when a successor corporation acquires restrictive employment covenants as the result of a merger. For the following two reasons, we agree.

Traffic Control is a narrow decision based on the law of contract

HDS asserts that Traffic Control's nonassignability rule is grounded in the common law of contractual assignments and, therefore, does not control whether a restrictive covenant may be validly acquired in the context of a statutory merger. In view of Traffic Control's discrete facts and narrow reasoning, we agree.

Rather than support a comprehensive inquiry into different types of corporate transactions and their various consequences for assignments, Traffic Control's narrow set of facts—which involved the attempted assignment by a selling company of a noncompetition covenant under an asset purchase agreement—supported a much more limited inquiry, namely, whether the noncompetition covenant passed to the acquiring company under an asset purchase agreement without the employee's consent. Id. at 169-71, 87 P.3d at 1055-56.

Nevertheless, despite the narrow facts before it, the court framed its inquiry somewhat generically as whether a noncompetition covenant was assignable in a "corporate sale," id. at 169, 87 P.3d at 1055, and, even more expansively, as whether the covenant was assignable "through the medium of an asset sale (or otherwise)." Id. at 172, 87 P.3d at 1057 (emphasis added). However, by seeming to treat an asset purchase as indistinguishable from other corporate transactions, the court's inquiry in Traffic Control was framed as if its restrictive rule would apply in any transactional context, which is the principal source of confusion underlying these certified questions.

As a result, we have been asked to determine the significance of this apparent incongruity—i.e., whether, despite its broadly framed inquiry, Traffic Control is nonetheless limited to asset purchase transactions. In this regard, we agree with HDS that the limited scope of Traffic Control's rule of nonassignability is betrayed by the nature of the court's reasoning and the narrowness of its concerns.

In Traffic Control, the court reasoned that because the covenants are "personal" in nature¹ and replacing a former employer with another obligee could fundamentally change the nature of an employee's obligation, noncompetition covenants could not be assigned without employee consent. Id. at 174-75, 87 P.3d at 1058-59.

Notably, by conditioning assignability on consent, Traffic Control protects against unbargained-for changes in the scope of the restraint barring a covenanting employee from competing with his or her former employer. See id. at 174, 87 P.3d at 1058. In this way, the rule of Traffic Control echoes the basic policy in the law of contractual assignments of honoring an obligor's choice to contract with only the original obligee, thereby ensuring that the obligor is not compelled to perform more than his or her original obligation. See Munchak Corporation v. Cunningham, 457 F.2d 721, 725-26 (4th Cir. 1972); Roeder v. Ferrell-Duncan Clinic, Inc., 155 S.W.3d 76, 89 (Mo.Ct.App.2004).

Carrying this policy further, beyond requiring employee consent as a general matter, Traffic Control imposes two additional conditions to a valid assignment: an express assignability clause negotiated at arm's length and separate consideration. Id. at 175, 87 P.3d at 1059. As the court explained, the intended purpose of these conditions is to "place[] the burden on the employer to seek assignability and adequately compensate[] the party with the lesser bargaining power for the possibility that a stranger to the covenant may ultimately assume the right to its...