San Diego M&As: Assignability of Confidentiality Agreements
Under California law, most contracts and contractual rights can be freely assigned. Legally speaking, an assignment is a transfer of the rights (and obligations) of a contract held by one person/entity to another. Assignments are common when there is a business acquisition or merger. For example, where a new business entity plans to take possession of real property that is held pursuant to a commercial lease, it is necessary that there be an assignment of that lease from the previous tenant to the new tenant.
Another set of contracts that should be assigned during a merger or acquisition are confidentiality agreements. These agreements might have been signed by current and former employees, vendors, contractors, those with whom confidential information has been exchanged, those involved in litigation and more. Part of the merger and acquisition due process is to have an experienced San Diego corporate attorney review such agreements and provide for assignment to the buyer or newly-created entity. Hopefully, the confidentiality agreements are facially assignable. That is, hopefully, the agreements state within the agreements that they are freely assignable without further action by those who are bound by the confidentiality obligations.
Even if the confidentiality agreements are not facially assignable, they should still be assigned as part of the purchase or sale of the business. Many contracts do not need to explicitly specify that assignment is permitted. Indeed, as noted, most contracts are freely assignable under California law. Likely, this is true with respect to confidentiality agreements. There does not appear to be a California court case directly holding that confidentiality agreements can be assigned without prior consent, but there are a couple of cases from other jurisdictions. The most recent case is Hawg Tools, LLC v. Newsco International Energy Services, Inc., 411 P.3d 1126 (Colo. App. Div. II, 2016). Hawg Tools involved allegations of trade secret misappropriation related to something called a mud motor used in operations to drill for and extract oil and natural gas. A certain machinist created a new design with respect to a mud motor manufactured and sold by Daniel Gallagher. The machinist obtained the help of a designer — Joe Ficken — who signed an agreement with Gallagher that included this confidentiality provision:
“Confidentiality. [The designer] shall not at any time use for [his] own benefit, or disclose to any person or entity any of the Protected Materials or any information related thereto (the “Confidential Information”).”
Later, Gallagher started a new company — Hawg Tools — and transferred certain of his assets to Hawg Tools, including Ficken’s agreement containing the confidentiality provision.
Some years after that, Ficken began working for Newsco International and Hawg Tools accused him of using for his own benefit and of disclosing confidential information to his new employer. Hawg Tools brought suit claiming trade secret theft and breach of the confidentiality agreement.
Among other defenses, Ficken — and Newsco — argued that Ficken did not consent to the assignment of his agreement from Gallagher to Hawg Tools. The Colorado Court of Appeals rejected the argument. The court held that confidentiality provisions can be assigned, even if the agreement is silent with respect to assignment and even if no explicit consent is given for assignment. Under Colorado law, only contracts that involve “personal trust or confidence” cannot be freely assigned. A confidentiality agreement does not involve personal trust or confidence. As such, Hawg Tools was permitted to enforce the confidentiality agreement that Ficken had signed with Gallagher. A similar holding involving an employee confidentiality provision can be found in Symphony Diagnostic Services No. 1 v. Greenbaum, 828 F. 3d 643 (US 8th Cir. 2016). There are sound logical and practical reasons that California courts would follow the holdings of these cases.
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For more information, call attorney Michael Leonard, Esq., of San Diego Corporate Law. Call Mr. Leonard at (858) 483-9200 or contact him via email. Mr. Leonard provides legal services related to business law, private securities offerings/sales, the sale/purchase of a business, and for mergers and acquisitions. Mr. Leonard can also assist with setting up a new corporate entity, annual corporate maintenance, and can help review and draft business contracts. Mr. Leonard can be reached at (858) 483-9200 or via email. Like us on Facebook.