Traffic Control Services, Inc. v. United Rentals Northwest, Inc.
120 Nev. 168, 120 Nev. Adv. Rep. 19, 87 P.3d 1054 (2004)
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Rule of Law:
An employee's noncompetition covenant is personal in nature and may not be assigned to a successor employer without the employee's express consent, which must be supported by separate and independent consideration.
Facts:
- Philip A. Burkhardt began working for NES Trench Shoring (NES) in September 2000.
- As a condition of employment, Burkhardt signed a noncompetition covenant with NES in exchange for $10,000, allegedly after being assured NES would not be sold to its competitor, United Rentals Northwest, Inc. (United).
- The covenant prohibited Burkhardt from competing with NES for one year within a sixty-mile radius of his work location upon termination.
- On June 30, 2002, United acquired NES through an asset purchase agreement.
- The asset purchase agreement did not explicitly list Burkhardt's noncompetition covenant as one of the 'Assumed Contracts.'
- Prior to the sale's closure, United asked key NES employees, including Burkhardt, to sign new noncompetition covenants, but Burkhardt refused.
- After the acquisition, Burkhardt became dissatisfied with United's customer service and accepted a position with a direct competitor, Traffic Control Services, Inc., on August 5, 2002.
- United terminated Burkhardt's employment on August 8, 2002.
Procedural Posture:
- United Rentals Northwest, Inc. and NES Trench Shoring filed a complaint against Philip A. Burkhardt and Traffic Control Services, Inc. in the Nevada district court (trial court).
- The plaintiffs sought to enforce the noncompetition and nondisclosure covenants Burkhardt had signed with NES.
- The district court granted a preliminary injunction in favor of United and NES, enforcing the noncompetition covenant against Burkhardt.
- The district court found that the covenant was reasonable, assignable as an asset, and had been validly assigned from NES to United.
- Burkhardt and Traffic Control Services, Inc. (appellants) appealed the district court's issuance of the preliminary injunction to the Supreme Court of Nevada.
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Issue:
Is an employee's covenant not to compete assignable to a successor employer as part of a corporate asset sale without the employee's express consent and separate consideration for the assignment?
Opinions:
Majority - Per Curiam
No. An employee's covenant not to compete is not assignable without the employee's express consent, supported by separate consideration. The court reasoned that noncompetition covenants are personal contracts, and an employee's willingness to be bound by such a restriction is specific to the character and personality of their current employer. The sale of a business fundamentally alters the employment relationship, and an employee cannot be bound to a stranger to the original agreement without their consent. The burden rests on the employer, as the drafter of the agreement, to include an express assignability clause. Furthermore, for such a clause to be valid, it must be negotiated at arm's length and be supported by consideration separate from that given for the underlying covenant. In this case, Burkhardt's covenant did not contain an assignment clause, he did not consent to the assignment, and his obligation materially changed because United was a much larger business entity than NES.
Analysis:
This decision establishes a significant, employee-protective precedent in Nevada by treating noncompetition covenants as personal service contracts rather than freely transferable corporate assets. It places a heavy burden on employers to secure the right of assignment by requiring an express, separately-compensated clause in the agreement. This holding departs from jurisdictions that view such covenants as standard assets included in the sale of business goodwill. The ruling will force employers in Nevada to be more explicit and provide additional value if they wish for noncompetes to survive corporate mergers or acquisitions, thereby increasing the bargaining power of key employees.
