anti assignment provisions

Anti-Assignment Clause: Everything You Need To Know

An anti-assignment clause prevents either of the parties to a contract from assigning tasks to a third party without the consent of the non-assigning party. 3 min read updated on February 01, 2023

An anti-assignment clause prevents either of the parties to a contract from assigning tasks to a third party without the consent of the non-assigning party.

Anti-assignment clauses are of two types:

One that prohibits the assignment of work or service pursuant to the contract.

One that prohibits the assignment of payment under the contract.

The clause that prohibits the assignment of work or service is a valid clause, completely enforceable and does not bear much importance. However, the clause that prohibits the assignment of payment is a more complex clause that affects crucial buying and selling decisions.

Are Anti-Assignment Clauses That Prohibit Assigning Payments Enforceable?

As an anti-assignment clause prohibits the assignment of payment, it affects business and thus is unenforceable and ineffective under Section 9-406 of the Uniform Commercial Code. The code clearly states that clauses pertaining to "Discharge of Account Debtor, Notification of Assignment, Identification and Proof of Assignment, Restriction on Assignment of Account, Chattel Paper, Payment Intangibles and Promissory Notes" are ineffective and void.

What Should a Factor Do If a Client's Contract Contains an Anti-Assignment Clause?

Most factors prefer not to enter into an agreement with a client whose contract contains any anti-assignment clause to avoid hassle in the future. However, legal experts suggest that factors should ignore the anti-assignment clauses in the contract and proceed with business as usual along with providing a Notice of Assignment to the account debtor.

Even if the factor decides to proceed with the business decision with the said client, he should be aware that the account debtor may not want to engage in commercial activities with the factor, and may even create difficulties in dealings and collection. Though an anti-assignment clause does not deter the factor's decision to enter into a business arrangement with an account debtor or his ability to be paid given the issuance of a Notice of Assignment, it is for him to decide if the efforts are worth the business. However, to ensure a fool-proof commercial and business dealing, the factor can obtain a signed Estoppel Letter from the account debtor to avoid all future disputes.

What Are the Anti-assignment Provisions and Their Effect on Transaction Structures?

Most commercial contracts end with a clause, ”Neither this Agreement nor any of the rights, interests or obligations under the Agreement shall be assigned, in whole or in part, by operation of law or otherwise by either party without the prior written consent of the other party.” This is the anti-assignment clause that ensures the interest of both the parties and that none of the two parties transfer any rights to any other individual with our prior consent of the other main party.

Often, a contract assignment issue plays an important factor in merger and acquisition prospects as buyers want to acquire all customer and vendor contracts. However, if any of the contracts bound by the anti-assignment clause need the approval of the other party, it could lead to additional costs for the buyer, which may affect the decision. The general notion is that most contracts are assignable unless categorically included anti-assignment clauses .

What Is the Typical Anti-assignment Language to Look Out For?

There are numerous ways of including an anti-assignment provision in the contract. However, the AIA Standard Form of Agreement contains the following anti-assignment provision:

The Party 1 and Party 2, respectively, bind themselves, their partners, successors, assigns, and legal representatives to the other party to this Agreement and to the partners, successors, assigns, and legal representatives of such other party with respect to all covenants of this Agreement. Neither Party 1 nor Party 2 shall assign this Agreement without the written consent of the other.

What Are the Recommendations for Parties Entering Into Construction Contracts?

Usually, when commercial agreements are drawn, parties tend to focus on the key business aspects but pay no heed to anti-assignment provisions. It is thus the main responsibility of a corporate lawyer to study, analyze, and dissect agreements to ensure the best for their clients.

Check the miscellaneous sections of any agreement to rule out any anti-assignment clause in the contract.
Read and understand the finer points of the anti-assignment clause in the contract, if any.
Negotiate changes in the anti-assignment clause prior to signing the contract.

If you need help with an anti-assignment clause, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.

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Anti-Assignment Provisions and Assignments by ‘Operation of Law’: What Do I Have to Do? What Should I Do?

Introduction.

One of the key roles of legal due diligence in mergers and acquisitions (M&A) is to assist in the efficient and successful completion of any proposed M&A transaction. Due diligence is not merely a procedural formality but can serve as a proactive shield against unforeseen challenges and risks. One essential aspect of the legal due diligence process is reviewing third-party contracts to which the target entity is party, in order to better understand the scope of its commercial relationships and to anticipate any issues that may arise via the underlying contractual relationships as a result of completing the proposed M&A transaction.

A frequent reality in many M&A transactions is the requirement to obtain consents from third parties upon the “change of control” of the target entity and/or the transfer or assignment of a third-party contract to which the target is party. Notwithstanding the wording of such contracts, in many instances, the business team from the purchaser will often ask the question: “When is consent actually required?” While anti-assignment and change of control provisions are fairly ubiquitous in commercial contracts, the same cannot be said for when the requirement to obtain consent is actually triggered. The specifics of the proposed transaction’s structure will often dictate the purchaser’s next steps when deciding whether the sometimes-cumbersome process of obtaining consents with one or multiple third parties is actually needed.

This article examines what anti-assignment provisions are and how to approach them, depending on the situation at hand, including in the context of transactions where a change of control event may be triggered. This article also discusses how to interpret whether consent is required when faced with an anti-assignment provision which states that an assignment, including an assignment by operation of law , which requires consent from the non-assigning party.

Understanding Anti-Assignment Provisions

Generally, an anti-assignment provision prohibits the transfer or assignment of some or all of the assigning party’s rights and obligations under the contract in question to another person without the non-assigning party’s prior written consent. By way of example, a standard anti-assignment provision in a contract may read as follows:

Company ABC shall not assign or transfer this agreement, in whole or in part, without the prior written consent of Company XYZ.

In this case, Company ABC requires Company XYZ’s prior written consent to assign the contract. Seems simple enough. However, not all anti-assignment provisions are cut from the same cloth. For example, some anti-assignment provisions expand on the prohibition against general contractual assignment by including a prohibition against assignment by operation of law or otherwise . As is discussed in greater detail below, the nuanced meaning of this phrase can capture transactions that typically would not trigger a general anti-assignment provision and can also trigger the requirement to get consent from the non-assigning party for practical business reasons.

To explore this further, it is helpful to consider anti-assignment provisions in the two main structures of M&A transactions: (i) asset purchases and (ii) share purchases.

Context of M&A Transactions: Asset Purchases and Share Purchases

There are key differences between what triggers an anti-assignment provision in an asset purchase transaction versus a share purchase transaction.

i) Asset Purchases

An anti-assignment provision in a contract that forms part of the “purchased assets” in an asset deal will normally be triggered in an asset purchase transaction pursuant to which the purchaser acquires some or all of the assets of the target entity, including some or all of its contracts. Because the target entity is no longer the contracting party once the transaction ultimately closes (since it is assigning its rights and obligations under the contract to the purchaser), consent from the non-assigning party will be required to avoid any potential liability, recourse or termination of said contract as a result of the completion of the transaction.

ii) Share Purchases

Provisions which prohibit the assignment or transfer of a contract without the prior approval of the non-assigning party will not normally, under Canadian law, be captured in a share purchase transaction pursuant to which the purchaser acquires a portion or all of the shares of the target entity. In other words, no new entity is becoming party to that same contract. General anti-assignment provisions are not typically triggered by a share purchase because the contracts are not assigned or transferred to another entity and instead there is usually a “change of control” of the target entity. In such cases, the target entity remains the contracting party under the contract and the consent analysis will be premised on whether the contract requires consent of the third party for a “direct” or “indirect” change of control of the target entity and not the assignment of the contract.

Importantly, some anti-assignment provisions include prohibitions against change of control without prior written consent. For example, the provision might state the following:

Company ABC shall not assign or transfer this agreement, in whole or in part, without the prior written approval of Company XYZ. For the purposes of this agreement, any change of control of Company ABC resulting from an amalgamation, corporate reorganization, arrangement, business sale or asset shall be deemed an assignment or transfer.

In that case, a change of control as a result of a share purchase will be deemed an assignment or transfer, and prior written consent will be required.

A step in many share purchase transactions where the target is a Canadian corporation that often occurs on or soon after closing is the amalgamation of the purchasing entity and the target entity. So, what about anti-assignment provisions containing by operation of law language – do amalgamations trigger an assignment by operation of law? The short answer: It depends on the jurisdiction in which the anti-assignment provision is being scrutinized (typically, the governing law of the contract in question).

Assignments by Operation of Law

In Canada, the assignment of a contract as part of an asset sale, or the change of control of a party to a contract pursuant to a share sale – situations not normally effected via legal statute or court-ordered proceeding in M&A transactions – will not in and of itself effect an assignment of that contract by operation of law . [1]

Still, one must consider the implications of amalgamations, especially in the context of a proposed transaction when interpreting whether consent is required when an anti-assignment provision contains by operation of law language. Under Canadian law, where nuances often blur the lines within the jurisprudence, an amalgamation will not normally effect the assignment of a contract by operation of law . The same does not necessarily hold true for a Canadian amalgamation scrutinized under U.S. legal doctrines or interpreted by U.S. courts. [2]

Difference Between Mergers and Amalgamations

As noted above, after the closing of a share purchase transaction, the purchasing entity will often amalgamate with the target entity ( click here to read more about amalgamations generally). When two companies “merge” in the U.S., we understand that one corporation survives the merger and one ceases to exist which is why, under U.S. law, a merger can result in an assignment by operation of law . While the “merger” concept is commonly used in the U.S., Canadian corporations combine through a process called “amalgamation,” a situation where two corporations amalgamate and combine with neither corporation ceasing to exist. For all of our Canadian lawyer readers, you will remember the Supreme Court of Canada’s description of an amalgamation as “a river formed by the confluence of two streams, or the creation of a single rope through the intertwining of strands.” [3] Generally, each entity survives and shares the pre-existing rights and liabilities of the other, including contractual relationships, as one corporation. [4]

MTA Canada Royalty Corp. v. Compania Minera Pangea, S.A. de C.V.

As a practical note and for the reasons below, particularly in cross-border M&A transactions, it would be wise to consider seeking consent where a contract prohibits assignment by operation of law without the prior consent of the other contracting party when your proposed transaction contemplates an amalgamation.

In MTA Canada Royalty Corp. v. Compania Minera Pangea, S.A. de C.V. (a Superior Court of Delaware decision), the court interpreted a Canadian (British Columbia) amalgamation as an assignment by operation of law , irrespective of the fact that the amalgamation was effected via Canadian governing legislation. In essence, the Delaware court applied U.S. merger jurisprudence to a contract involving a Canadian amalgamation because the contract in question was governed by Delaware law. This is despite the fact that, generally, an amalgamation effected under Canadian common law jurisdictions would not constitute an assignment by operation of law if considered by a Canadian court. As previously mentioned, under Canadian law, unlike in Delaware, neither of the amalgamating entities cease to exist and, technically, there is no “surviving” entity as there would be with a U.S.-style merger. That being said, we bring this to your attention to show that it is possible that a U.S. court (if the applicable third-party contract is governed by U.S. law or other foreign laws) or other U.S. counterparties could interpret a Canadian amalgamation to effect an assignment by operation of law . In this case, as prior consent was not obtained as required by the anti-assignment provision of the contract in question, the Delaware court held that the parties to that agreement were bound by the anti-assignment provision’s express prohibition against all assignments without the other side’s consent. [5]

To avoid the same circumstances that resulted from the decision in MTA Canada Royalty Corp. , seeking consent where an anti-assignment provision includes a prohibition against assignment by operation of law without prior consent can be a practical and strategic option when considering transactions involving amalgamations. It is generally further recommended to do so in order to avoid any confusion for all contracting parties post-closing.

Practical Considerations

The consequences of violating anti-assignment provisions can vary. In some cases, the party attempting to complete the assignment is simply required to continue its obligations under the contract but, in others, assignment without prior consent constitutes default under the contract resulting in significant liability for the defaulting party, including potential termination of the contract. This is especially noteworthy for contracts with third parties that are essential to the target entity’s revenue and general business functions, as the purchaser would run the risk of losing key contractual relationships that contributed to the success of the target business. As such, identifying assignment provisions and considering whether they are triggered by a change of control and require consent is an important element when reviewing the contracts of a target entity and completing legal due diligence as part of an M&A transaction.

There can be a strategic and/or legal imperative to seek consent in many situations when confronted with contractual clauses that prohibit an assignment, either by operation of law or through other means, absent the explicit approval of the non-assigning party. However, the structure of the proposed transaction will often dictate whether consent is even required in the first place. Without considering this nuanced area of M&A transactions, purchasers not only potentially expose themselves to liability but also risk losing key contractual relationships that significantly drive the value of the transaction.

The Capital Markets Group at Aird & Berlis will continue to monitor developments in cross-border and domestic Canadian M&A transactions, including developments related to anti-assignment provisions and commercial contracts generally. Please contact a member of the group if you have questions or require assistance with any matter related to anti-assignment provisions and commercial contracts generally, or any of your cross-border or domestic M&A needs.

[1] An assignment by operation of law can be interpreted as an involuntary assignment required by legal statute or certain court-ordered proceedings. For instance, an assignment of a contract by operation of law may occur in, among other situations: (i) testamentary dispositions; (ii) court-ordered asset transfers in bankruptcy proceedings; or (iii) court-ordered asset transfers in divorce proceedings.

[2] MTA Canada Royalty Corp. v. Compania Minera Pangea, S.A. de C.V ., C. A. No. N19C-11-228 AML, 2020 WL 5554161 (Del. Super. Sept. 16, 2020) [ MTA Canada Royalty Corp. ].

[3] R. v. Black & Decker Manufacturing Co. , [1975] 1 S.C.R. 411.

[4] Certain Canadian jurisdictions, such as the Business Corporations Act (British Columbia), explicitly state that an amalgamation does not constitute an assignment by operation of law (subsection 282(2)).

[5] MTA Canada Royalty Corp .

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What is an Anti-Assignment Clause?

When business owners are negotiating contracts to gear up for the sale of their business, they are rightly concerned with key questions such as the sale price for the business including assets such as how much the sale will cost them and what happens if something goes wrong. At the end of the contracts, there are usually several pages of type that usually look like boilerplate. Inside those clauses is usually something called an assignment clause, or more accurately, an anti-assignment clause.

It’s one of those clauses that everyone glosses over – after all, it’s just standard legal text, right?

For a business owner hoping to sell their business, an anti-assignment clause can dissuade potential buyers and play a crucial role in the selling price of a business. If this sounds familiar and you’re in the process of negotiating the merger or acquisition of your business, read on – we’ve put together a practical guide to anti-assignment clauses and what to look out for.

Looking for legal help? feel free to get in touch with our commercial lawyers for matters related to contracts.

What is an assignment clause?

The anti-assignment clause states that neither party can transfer or assign the agreement without the consent of the other party. On a basic level, that makes sense – after all, if you sign a contract with a specific party, you don’t expect to be entering into an agreement with a third party you didn’t intend to be.

However, when you sell your business, you will want to transfer ownership of those contracts to the buyer. If your contracts all contain an anti-assignment clause, they effectively restrict you from transferring ownership to the interested party. Now, you’re presented with a new challenge altogether – before you can focus on the sale of your business, you must first renegotiate the terms of your contracts with each party.

Language to look out for in anti-assignment clauses

If you’re thinking about selling your business or even have potential buyers interested, it’s better to know in advance if you’ve got anti-assignment clauses in your contracts. There are generally two types of anti-assignment clause to look out for. The first relates to the complete bar on assignment of rights and responsibilities and is typically worded in this way, or similar:

“Neither Party may assign, delegate, or transfer this agreement or any of its rights or obligations under this agreement.”

The second type prevents the transfer of rights or duties without prior written consent of the other party. This will read along the lines of:

“Neither this agreement nor any right, interest, or obligation herein may be assigned, transferred, or delegated to a third party without the prior written consent of the other party, and whose consent may be withheld for any reason.”

So, where the first prohibits assignment altogether, the second prohibits assignment unless permission is sought in advance. Some clauses may even explicitly state that a change of control such as a merger or acquisition is an assignment. The last thing you want is to cause a dispute by breaching the contract, but if you’ve already agreed to these terms, you’ll have to open a fresh set of negotiations with the contracting party before you sell the company.

Assignment clauses in M&A: what’s the problem?

Due diligence is the bread and butter of any merger or acquisition. Rather than a leap of faith, due diligence ensures the purchase of a business is a calculated decision with minimal risk to the buyer. Typically carried out by specialist lawyers, the process is designed to lift the hood on the target business to determine the valuation of assets and liabilities and identify any glaring issues that could leave the buyer open to risk.

During the due diligence process, the buyer will look through all of the major contracts the business has open, and specifically keep a close eye out for assignment clauses.

Despite the virtual environment that many businesses have been forced to operate in in 2020, most companies will have commercial leases for the premises from which they typically work. Almost all leases have an anti-assignment clause, and this is a perfect example of an instance that is often overlooked by commercial tenants when selling a business which includes a leasehold property. This transfer of ownership may well be prohibited under an anti-assignment clause so that prior to the sale of the business, you would be required to ask permission from your landlord. The issue here is that the landlord may well see this as the perfect opportunity to renegotiate and secure a better deal for themselves. What’s worse, if they don’t sign off on the transfer, you’ll have an obstruction on your hands that will stand in the way of the sale.

In any case, an unexpected anti-assignment clause usually winds up being a last-minute hitch in the sale, and it never comes at a good time. Whether it delays the sale or obstructs it altogether, overlooking an anti-assignment clause can cost you considerably in an M&A transaction.

What makes anti-assignment clauses enforceable?

Generally speaking, an anti-assignment clause will be enforced by the courts if it was agreed upon by both parties to the contract. Many contracts exclude or qualify the right to assignment – according to the courts, a clause that states that a party to a contract may not assign the benefit of that contract without the consent of the other party is legally effective and will extend to all rights and benefits arising under the contract.

Courts won’t always enforce assignments to which the counterparty did not give permission, even where there is no anti-assignment clause that specifies this provision.

How to negotiate anti-assignment clauses

The best practice for business owners is to be vigilant when negotiating new contracts and ensure that any anti-assignment clauses still allow for the transfer of ownership when they decide to sell the business.

Remember, even though the buyer is purchasing the assets of the business, this usually means that all of the contracts of the business go with it because the business remains intact. Therefore, the best way forward is to negotiate these clauses upfront from the outset of the relationship, so that when you do decide to sell your business, you automatically have permission to transfer the ownership without having to delay the sale by entering into fresh negotiations.

If your agreement does not permit assignments, it’s worth seeking the advice and support of a specialist lawyer who can help protect your interests through negotiation with your counterparty on this point. You may be able to include a provision that allows for assignment of your rights and obligations upon the prior written consent of the other party. Your lawyer will likely advise you to carve out a specific provision to prohibit the counterparty from unreasonably withholding or delaying consent or making it subject to unreasonable conditions – an issue which, if not provided for within the contract, can cause serious delay and disruption to the sale of your business. Further, it may be beneficial to add an extra element to the contract that makes exceptions to the clause for assignments between affiliates. If you’re planning to sell your business, this would be the right place to carve out an exception within the clause to the change of control via a merger or acquisition.

It’s important to bear in mind that anti-assignment clauses tend to be viewed narrowly by courts, and that there have been several instances whereby anti-assignment clauses have not been enforced since the clause itself did not explicitly state that the assignment of rights, duties or payment would render the contract void or invalid. So, if you’re in the process of negotiating an agreement and wish to protect your interests through the addition of an anti-assignment clause, it’s critical that you include the consequences of assignment within the clause itself and state that assignments would invalidate or be in breach of the contract.

If you do not wish for the counterparty to be able to transfer the legal obligation to perform their duties as stated in the contract to a third party, this must be explicitly stated in one of three ways:

Specify the need for consent

There’s no need to be unreasonable – you can protect your interests while still giving the counterparty the space to re-negotiate should they wish to assign rights by including a clause that asks for consent.

Provide an exemption to consent for affiliates, successors or new owners

Ask your lawyer to draft an exception into the clause that permits assignment to affiliates or successors to the counterparty, such as:

“Neither party may assign or delegate this agreement or its rights or obligations under this agreement without the prior written consent of the other party, except that no consent is required (a) for assignment to an entity in which the transferring party will own greater than 50 per cent of the shares or other interests; or (b) in connection with any sale, transfer, or disposition of all or substantially all of its business or assets; provided that no such assignment will relieve an assigning party of its obligations under this agreement. Any assignment or delegation that violates this provision shall be void.”

Require reasonable consent

Just as you would not wish for consent to be held back from you unreasonably in the renegotiation of contract terms prior to a sale, your assignment clause should make clear that you will not unreasonably withhold or delay consent should the third party request permission to assign their legal obligations. This may read something like this:

“Neither party may assign or delegate this agreement or its rights or obligations under this agreement without the prior written consent of the other party, whose consent shall not be unreasonably withheld or delayed. Any assignment or delegation that violates this provision shall be void.”

Whatever the circumstances, we strongly recommend calling upon a contract law specialist, whether you’re undergoing due diligence in the run up to an M&A transaction, are considering selling your business or are negotiating new contracts with customers and suppliers. Our lawyers bring in-depth expertise in the area of anti-assignment clauses and will work closely with you to protect your interests and ensure no clauses in your contracts negatively impact the sale of your company.

For a free consultation, get in touch with our team through the contact form below or using our online chat service.

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Building Your Business

What Is an Anti-Assignment Clause?

Anti-Assignment Clauses Explained

Definition and Example

How Anti-Assignment Clauses Work

State Laws and Anti-Assignment Clauses

Extreme Media / Getty Images

An anti-assignment clause is a provision in an insurance policy that bars the policyholder from transferring their rights under the policy to another party. The clause prohibits the insured from authorizing someone else to file claims, make changes, or take other actions under the policy.

Many small businesses purchase insurance policies that contain an anti-assignment clause, which may affect their ability to conduct certain routine business transactions. For instance, if your property is damaged and you hire a contractor to make repairs, the clause may bar you from allowing the contractor to collect loss payments directly from your insurer. In addition, some restrictions found in anti-assignment clauses may be overridden by state laws. Below, we’ll explore further what an anti-assignment clause is and how it works.

Definition and Example of an Anti-Assignment Clause

An anti-assignment clause is language found in an insurance policy that forbids the policyholder from assigning their rights and interests under the policy to someone else without the insurer’s consent. The clause is usually found in the policy conditions section.

Alternate name : Assignment clause, Non-assignment clause

An example of an anti-assignment clause is wording contained in the standard Insurance Services Office (ISO) business owners policy (BOP) . You can find it in the Common Policy Conditions (Section III) under the heading “Transfer of Your Rights and Duties Under This Policy.” The clause states that your rights and duties under the policy may not be transferred without the insurer’s written consent. However, if you are an individual named on the policy and you die, your rights will be transferred to your legal representative.

An anti-assignment clause may not include the word “assignment” but instead refer to a transfer of rights under the policy.

Anti-assignment clauses prevent policyholders from transferring their rights under the policy to someone else without the insurer’s permission. The clauses are designed to protect insurers from unknown risks. Insurers evaluate insurance applicants carefully before they agree to provide coverage. They consider an applicant’s business experience, loss history, and other factors to gauge their susceptibility to claims. When an insurer issues a policy, the premium reflects the insurer’s assessment of the applicant’s risks. If the policyholder transfers their rights under the policy to another party, the insurer’s risk increases. This is because the insurer hasn’t had an opportunity to evaluate the new party’s risks.

The following example demonstrates how an anti-assignment clause in an insurance policy can affect a business.

Theresa is the owner of Tasty Tidbits, a pastry shop she operates out of a commercial building she owns. She has insured her business for liability and property under a business owners policy. Theresa decides to take a one-year sabbatical from her business and asks her friend Ted to manage Tasty Treats during her absence. Theresa signs a contract assigning her rights under Tasty Tidbits’ BOP to Ted.

If a loss occurs, Ted may have no right to file a claim or collect benefits under the policy on Tasty Treats’ behalf. The assignment is barred by the anti-assignment clause in the BOP.

Effect of State Laws on Anti-Assignment Clauses

Many states have enacted laws via a statute or court ruling that override anti-assignment clauses in insurance policies. These laws may invalidate all or a portion of a policy’s anti-assignment provision. While the laws vary, many bar pre-loss assignments but permit assignments made after a loss has occurred. Assignments made before any losses have occurred are prohibited because they increase the insurer’s risks. Post-loss assignments don’t increase the insurer’s risks, so they generally are permitted.

Some states prohibit any assignment of benefits made without the insurer’s consent, whether the assignment occurred before or after a loss.

Here's an example of how a state law can impact an anti-assignment clause in an insurance policy. Suppose that Theresa (in the previous scenario) has returned from her sabbatical and is again operating her business. Tasty Treats is located in a state that bars pre-loss assignments but allows assignments made after a loss has occurred.

Late one night, a fire breaks out in the pastry shop and a portion of the building is damaged. Theresa files a property damage claim under her BOP and hires Rapid Reconstruction, a construction company, to repair the building. At the contractor’s suggestion, Theresa assigns her rights to receive benefits for the claim under the BOP to Rapid Reconstruction. Because Theresa has assigned her rights after a loss has occurred, the assignment is permitted by law and should be accepted by Theresa’s insurer.

Key Takeaways

Many policies purchased by small businesses contain an anti-assignment clause.
An anti-assignment clause bars the policyholder from assigning their rights and interests under the policy to someone else without the insurer’s consent.
Many states have a statute or court ruling that overrides anti-assignment clauses in insurance policies.
State laws vary, but many prohibit pre-loss assignments yet permit assignments made after a loss has occurred.

Canopy Claims. " Business Owners Coverage Form ," Page 53.

Penn State Law Review. " If You Give a Shop a Claim: The Unsustainable Inequity of Pennsylvania’s Unbridled Post-Loss Assignments ."

Stahl, Davies, Sewell, Chavarria & Friend. " Buyers and Sellers Beware - Assignment of Hurricane Claims May Be Invalid in Texas ."

UNDERSTANDING THE ANTI-ASSIGNMENT CLAUSE IN CONTRACTS

Introduction.

Contracts, generally, are freely assignable i.e., either party can freely transfer one’s obligations or rights to a third party. This is what an assignment clause signifies. An assignment is a transfer of rights and liabilities that the third party must then discharge to the other party. But sometimes, some contracts include an Anti-assignment clause to obstruct or limit assignment. They prevent either party to contract to transfer contractual obligations and/or rights to a third party.

The early legal system was against assigning contract rights as it considered them highly personal and intelligible. Fear of litigation, fear of maintenance, and champerty are some of the other reasons that many commentators feel led to the development of a non-assignability clause. However, with the passage of time and the development of technology, the work-load increased mani-fold necessitating the assignment of some rights and liabilities to the third party; now assignment of rights has become a general trend and non-assignment has taken a backseat which especially needs to be drafted to forbid assignment.

An anti-assignment clause also referred to as a non-assignment clause is a boilerplate clause that either bar completely or partially either of the party to the contract from transferring their rights and obligations under the contract to a third party without due permission from the non-assigning party.

FORMS OF ANTI-ASSIGNMENT CLAUSE

A non-assignment clause in a contract can be presented to the oblige in varied forms depending on the nature of the contract and its terms and conditions.

It may take the following forms-

Assignments of contract rights and liabilities may be completely prohibited, or;
Assignments may be limited to entities within the same group as the assignor.
The agreement may prohibit any transfers of the obligation without the approval of the obligor, which should not be unreasonably denied.

IMPORTANCE OF ANTI-ASSIGNMENT CLAUSE

A non-assignment clause limits the obligor’s contractual obligations to the obligee. The courts construe the clause in favor of the non-assigning party i.e., the obliger. Since the oblige afterward assigns its rights, the obliger then needs to also cooperate with the assignee i.e., a third-party or a stranger to the contract for the performance of the contract; therefore, the courts assume that only the party that can complain about the assignment is the non-assigning party.

SCOPE OF ANTI-ASSIGNMENT CLAUSE

Anti-assignment clauses in contracts have become a frequent practice because, without them, contracts are freely assignable. However, there are certain contracts where the assignment is excused by the statutes itself, however, the anti-assignment clause is still drafted into the contract for efficient enforcement. For example, Section 37 of the Indian Contract Act [1] prohibits the practice of “offering to perform” where it is against the lex-terrae. Such contracts could be of IPR where the nature of the contract is personal [2] or could be an employment agreement where an assignment without permission would lead to significant and unfavorable consequences for non-assigning parties. For all other contracts, anti-assignment clauses can be used with ease.

Examples of the use of the Anti-Assignment Clause

In Franchise Agreement, this clause clearly outlines the extent of the permissibility of the assignment of the intellectual property of the franchise.
In a Purchase and Sale Agreement, the purchaser may need to assign its rights and obligations to be able to obtain financing more easily. Certainly, the seller would need to keep some control over the financing parts of the transaction through a non-assignment clause to be on the safer side and protect himself against dealing with any strange entity.
In Asset Acquisition Agreement , a purchaser only obtains those assets and liabilities of a target listed in the agreement. In the case of an asset acquisition. In the case of an asset acquisition, any agreement with an anti-assignment clause will be activated. [3]
In the Stockholders’ Agreement, this clause will kick in (if included), the moment stockholder tries to transfer, assign, hypothecate, mortgage, or alienate any or all stocks in a corporation. This is the case where there is a complete ban on assignment, however the same can be assigned if however, there are exemptions to non-assignment by operation by law. [4]
Almost in all Commercial Lease Agreements, there is an anti-assignment clause. The transfer of ownership may be forbidden by an anti-assignment clause, so before selling the business, you must seek permission from your proprietor; however, this permission should not be withheld against the interests of the lease.

However, the list is not exhaustive. There are still a lot of businesses where the anti-assignment clause is used including but not limited to joint-venture agreements, partnership agreements, limited liability company operating agreements, real estate contracts, bills of sale, Assignment, and transaction financing agreements, etc.

ENFORCEABILITY OF ANTI-ASSIGNMENT CLAUSE

This restrictive clause’s effect will be triggered the moment there is any breach of this clause. According to the traditional view, a contract is void if this restrictive clause is violated; however, the modern view holds that a breach of it will only result in a claim for damages; the contract is not ipso-facto void unless expressly stated in the contract. Along with this view, the court will consider the relevant law, the jurisdiction that governs the contract, and the language of the contract to enforce this clause.

MERITS OF ANTI-ASSIGNMENT CLAUSE

A contract with an anti-assignment clause thrives with the following advantages-

The relationship between the assignor and the obligor is preserved, while the connection between the obligor and the assignee is either limited or eliminated.
The obligor is safeguarded by this, as they may not want to be in a situation where they must mention a set-off defence against one party and a counterclaim against the other or become involved in a disagreement between the assignor and assignee under the contract of assignment. [5]

DEMERITS OF ANTI-ASSIGNMENT CLAUSE

The anti-Assignment clause also suffers from the following disadvantages-

In cases where this clause is violated, it is extremely difficult to quantify and measure the damages.
It can be a lengthy and exasperating process for businesses that are on the brink of bankruptcy, such as start-ups, to finalize the closure until they get the approval of all the commercial entities with whom they had a contract that included a non-assignment clause.
In the event of a change in ownership, such as a merger or acquisition, a business may feel uneasy about the new owner of its partner company. To have a say in the selection of the other party’s owner, the business may include a clause in the agreement that mandates their approval before the change can occur, allowing them to indirectly manage the situation.

In conclusion, an anti-assignment clause is a provision in a contract that prohibits one party from transferring or assigning their rights or obligations under the contract to a third party without the other party’s consent. This clause is commonly used in contracts to protect the interests of the parties involved and to ensure that the original parties to the contract are the ones who will perform the obligations and receive the benefits. Anti-assignment clauses can be beneficial for both parties in a contract. For the party who is providing goods or services, it ensures that they are dealing with the same party throughout the duration of the contract, which can help to maintain consistency and quality. For the party who is receiving the goods or services, it can assure that they are dealing with a party that has the necessary expertise and resources to fulfill the obligations under the contract. However, there are also potential drawbacks to anti-assignment clauses. They can limit a party’s ability to transfer their rights or obligations under the contract, which can be problematic if the party needs to assign the contract due to unforeseen circumstances. Additionally, anti-assignment clauses can make it more difficult for a party to obtain financing or sell their business, as potential buyers or lenders may be hesitant to take on a contract with such a clause. Overall, the use of anti-assignment clauses in contracts should be carefully considered and tailored to the specific needs of the parties involved. It is important to strike a balance between protecting the interests of the parties and allowing for flexibility in the event of unforeseen circumstances.

Author(s) Name: Avee Singh Dalal (Dr B.R. Ambedkar National Law University, Sonipat)

References:

[1] The Indian Contract Act, 1872, Sec. 37, No. 9, Acts of Parliament, 1872 (India)

[2] Kapilaben v. Ashok Kumar Jayantilal Sheth, (2020) 20 SCC 648

[3] Aaron R Katz, A Guide to Understanding Anti-Assignment Clauses, GT ISRAEL LAW BLOG (Feb. 18, 2023, 5:15 PM), https://www.gtlaw-israelpractice.com/2016/02/04/a-guide-to-understanding-anti-assignment-clauses/ .

[4] The Law of Offices of STIMMEL, STIMMEL & ROESER, https://www.stimmel-law.com/en/articles/assignments-basic-law (last visited Feb. 18, 2023).

[5] Michael Bridge, The nature of assignment and non-assignment clauses, LSE RESEARCH ONLINE (2015), https://eprints.lse.ac.uk/61892/1/The_Nature.pdf .

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Spotting issues with assignment clauses in M&A Due Diligence

Written by: Kira Systems

January 19, 2016

6 minute read

Although not nearly as complex as change of control provisions , assignment provisions may still present a challenge in due diligence projects. We hope this blog post will help you navigate the ambiguities of assignment clauses with greater ease by explaining some of the common variations. (And, if you like it, please check out our full guide on Reviewing Change of Control and Assignment Provisions in Due Diligence. )

What is an Assignment Clause?

First, the basics:

Anti-assignment clauses are common because without them, generally, contracts are freely assignable. (The exceptions are (i) contracts that are subject to statutes or public policies prohibiting their assignment, such as intellectual property contracts, or (ii) contracts where an assignment without consent would cause material and adverse consequences to non-assigning counterparties, such as employment agreements and consulting agreements.) For all other contracts, parties may want an anti-assignment clause that allows them the opportunity to review and understand the impact of an assignment (or change of control) before deciding whether to continue or terminate the relationship.

In the mergers and acquisitions context, an assignment of a contract from a target company entity to the relevant acquirer entity is needed whenever a contract has to be placed in the name of an entity other than the existing target company entity after consummation of a transaction. This is why reviewing contracts for assignment clauses is so critical.

A simple anti-assignment provision provides that a party may not assign the agreement without the consent of the other party. Assignment provisions may also provide specific exclusions or inclusions to a counterparty’s right to consent to the assignment of a contract. Below are five common occurrences in which assignment provisions may provide exclusions or inclusions.

Common Exclusions and Inclusions

Exclusion for change of control transactions.

In negotiating an anti-assignment clause, a company would typically seek the exclusion of assignments undertaken in connection with change of control transactions, including mergers and sales of all or substantially all of the assets of the company. This allows a company to undertake a strategic transaction without worry. If an anti-assignment clause doesn’t exclude change of control transactions, a counterparty might materially affect a strategic transaction through delay and/or refusal of consent. Because there are many types of change of control transactions, there is no standard language for these. An example might be:

In the event of the sale or transfer by [Party B] of all or substantially all of its assets related to this Agreement to an Affiliate or to a third party, whether by sale, merger, or change of control, [Party B] would have the right to assign any or all rights and obligations contained herein and the Agreement to such Affiliate or third party without the consent of [Party A] and the Agreement shall be binding upon such acquirer and would remain in full force and effect, at least until the expiration of the then current Term.

Exclusion for Affiliate Transactions

A typical exclusion is one that allows a target company to assign a contract to an affiliate without needing the consent of the contract counterparty. This is much like an exclusion with respect to change of control, since in affiliate transfers or assignments, the ultimate actors and responsible parties under the contract remain essentially the same even though the nominal parties may change. For example:

Either party may assign its rights under this Agreement, including its right to receive payments hereunder, to a subsidiary, affiliate or any financial institution, but in such case the assigning party shall remain liable to the other party for the assigning party’s obligations hereunder. All or any portion of the rights and obligations of [Party A] under this Agreement may be transferred by [Party A] to any of its Affiliates without the consent of [Party B].

Assignment by Operation of Law

Assignments by operation of law typically occur in the context of transfers of rights and obligations in accordance with merger statutes and can be specifically included in or excluded from assignment provisions. An inclusion could be negotiated by the parties to broaden the anti-assignment clause and to ensure that an assignment occurring by operation of law requires counterparty approval:

[Party A] agrees that it will not assign, sublet or otherwise transfer its rights hereunder, either voluntarily or by operations of law, without the prior written consent of [Party B].

while an exclusion could be negotiated by a target company to make it clear that it has the right to assign the contract even though it might otherwise have that right as a matter of law:

This Guaranty shall be binding upon the successors and assigns of [Party A]; provided, that no transfer, assignment or delegation by [Party A], other than a transfer, assignment or delegation by operation of law, without the consent of [Party B], shall release [Party A] from its liabilities hereunder.

This helps settle any ambiguity regarding assignments and their effects under mergers statutes (particularly in forward triangular mergers and forward mergers since the target company ceases to exist upon consummation of the merger).

Direct or Indirect Assignment

More ambiguity can arise regarding which actions or transactions require a counterparty’s consent when assignment clauses prohibit both direct and indirect assignments without the consent of a counterparty. Transaction parties will typically choose to err on the side of over-inclusiveness in determining which contracts will require consent when dealing with material contracts. An example clause prohibiting direct or indirect assignment might be:

Except as provided hereunder or under the Merger Agreement, such Shareholder shall not, directly or indirectly, (i) transfer (which term shall include any sale, assignment, gift, pledge, hypothecation or other disposition), or consent to or permit any such transfer of, any or all of its Subject Shares, or any interest therein.

“Transfer” of Agreement vs. “Assignment” of Agreement

In some instances, assignment provisions prohibit “transfers” of agreements in addition to, or instead of, explicitly prohibiting “assignments”. Often, the word “transfer” is not defined in the agreement, in which case the governing law of the contract will determine the meaning of the term and whether prohibition on transfers are meant to prohibit a broader or narrower range of transactions than prohibitions on assignments. Note that the current jurisprudence on the meaning of an assignment is broader and deeper than it is on the meaning of a transfer. In the rarer case where “transfer” is defined, it might look like this:

As used in this Agreement, the term “transfer” includes the Franchisee’s voluntary, involuntary, direct or indirect assignment, sale, gift or other disposition of any interest in…

The examples listed above are only of five common occurrences in which an assignment provision may provide exclusions or inclusions. As you continue with due diligence review, you may find that assignment provisions offer greater variety beyond the factors discussed in this blog post. However, you now have a basic understand of the possible variations of assignment clauses. For a more in-depth discussion of reviewing change of control and assignment provisions in due diligence, please download our full guide on Reviewing Change of Control and Assignment Provisions in Due Diligence.

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Near Unanimity Among the Circuits: Anti-Assignment Provisions are Enforceable

U.S. Courts of Appeals in all but four Circuits have now held that anti-assignment provisions in health insurance plans governed by ERISA are enforceable. In American Orthopaedic & Sports Medicine v. Independence Blue Cross Blue Shield , No. 17-1663, 2018 WL 2224394 (3d Cir. May 16, 2018) the Third Circuit joined the First, Second, Fifth, Ninth, Tenth, and Eleventh Circuit Courts of Appeals in holding that an anti-assignment provision effectively prevents a plan participant from assigning her right to sue for benefits under ERISA to a third party.

The provider in this case, American Orthopaedics, charged $58,400 to perform a shoulder surgery on an individual covered under an ERISA group health plan. The plan's insurers applied the plan's out-of-network limit to the provider's claim and reimbursed only $316 of the claim amount. The provider then pursued the internal administrative appeals process and simultaneously asked the participant to sign an assignment of benefits and limited power of attorney that would allow the provider to pursue a claim under Section 502(a)(1) of ERISA for payment of benefits under the plan. After the insurers denied the appeal, the provider filed suit and the insurers moved to dismiss citing an anti-assignment provision in the plan. The anti-assignment provision stated that right of the member to receive benefits under the plan was personal to the member and could not be assigned to any person, hospital or other entity.

Section 502(a) of ERISA provides that only a plan participant, beneficiary, fiduciary, or the Secretary of Labor have standing to bring a civil action under ERISA. This limitation is often referred to as a "statutory standing" requirement and the limitation seems straight forward enough. Nevertheless, several federal courts have held that a participant may assign the payment of insurance benefits and standing to sue under ERISA to a health care provider that has provided covered services to the participant. The rationale underlying these assignment decisions is that the ability to assign payment rights to a health care provider promotes access to health care by encouraging providers to treat patients without requiring payment in advance.

In recent years, health care providers - particularly out-of-network providers and collection agents purportedly acting on their behalf - have filed lawsuits pursuant to assignments from covered members that attempt to collect a larger share of their fees for service rendered to the member. In response to this increase in litigation, many plan sponsors have included the anti-assignment language in their plan documents in order to prevent participants and beneficiaries from assigning their rights under the plan to a health care provider or any other third party.

After concluding that the language of ERISA Section 502(a) did not conclusively preclude anti-assignment clauses, the Court in American Orthopaedics considered, but did not find persuasive, policy arguments advanced by both the insurers and the provider. Ultimately, the Court looked to the decisions of its sister circuits, which have held that an unambiguous provision in a private contract (in this case the plan document) must be enforced and followed suit. Accordingly, the Third Circuit joined the consensus opinion among several Circuits to hold that an anti-assignment clause in an ERISA health plan should, as a general matter, be enforceable. The Court also rejected the provider's argument that the insurers had waived their right to enforce the anti-assignment provision by failing to raise it as an affirmative defense during the administrative appeals process.

As illustrated above, following the American Orthopaedics decision, a majority of Federal Circuit Courts of Appeal have established strong authority that anti-assignment clauses in ERISA welfare benefit plans will be enforced. Even in the Fourth, Sixth, Seventh, and D.C. Circuits where there is no binding Court of Appeals decision, several District Courts have found that such provisions are enforceable. Accordingly, appropriately targeted anti-assignment provisions designed to limit provider litigation should be incorporated in most welfare benefit plans. The existence of such provisions provides the opportunity to end provider litigation at the motion to dismiss stage, often avoiding costly discovery and subsequent litigation activity.

If you would like additional information about incorporating anti-assignment language into your plan, or general protections against potentially expensive provider litigation, please contact a member of Verrill Dana's Employee Benefits and Executive Compensation group.

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An Alternative Approach to an ERISA Litigation Conundrum

Recently, a three-judge panel in the Court of Appeals for the Ninth Circuit overturned a district court dismissal of an out-of-network provider’s claims against Blue Cross and Blue Shield of Illinois (“BCBSIL”). The unanimous panel found that BCBSIL had waived its right to raise the anti-assignment clauses in the applicable plan documents as a basis for dismissal of the provider’s claims because BCBSIL did not raise the anti-assignment clauses as a defense to the provider’s claims during the administrative appeal of the claims. ( Beverly Oaks Physicians Surgical Ctr., LLC v. Blue Cross and Blue Shield of Illinois, No. 19-55820 (9 th Cir. 12/17/20) (motion for reconsideration and reconsideration en banc currently pending).)

After providing some additional background, this article considers an alternative legal theory that courts could consider in similar cases that would have affirmed the district court’s dismissal of the case, but with no harm to the plan member whose claim was being appealed. This approach may more closely align with the approach taken by most courts in other Circuits when ruling on motions to dismiss provider claims based the existence of a valid anti-assignment provision.

Background on Provider Rights under ERISA

In all Circuits a federal court may only allow a provider’s claim for benefits under an ERISA plan to proceed if the provider has a valid assignment of plan benefits from the plan member. That is because Section 502 of ERISA, which sets forth the exclusive remedies available under ERISA, expressly identifies plan participants or beneficiaries (jointly “plan members”) as the only persons authorized to bring judicial claims for plan benefits under Section 502(a)(1)(b).

In addition, while ERISA prohibits the assignment of retirement plan benefits, there is no similar restriction on the assignment of welfare plan benefits under ERISA plans to providers. As a result, the courts have generally recognized that a provider with a valid assignment of benefits “steps into the shoes” of a plan member and may seek judicial review of an adverse benefit determination under Section 502(a)(1)(b). In such a case, a federal court would have subject matter jurisdiction under ERISA to hear the provider’s claim.

Background on Anti-Assignment Provisions

The courts also generally hold that anti-assignment provisions in ERISA plans are enforceable and will invalidate a purported assignment of benefits. Where an ERISA plan has a valid anti-assignment provision a court will generally grant a motion to dismiss a provider’s claim for failure to state a claim for relief under Section 12(b)(6) of the Federal Rules of Civil Procedure based on an anti-assignment provision invalidating the assignment. In addition, case law also limits the assignment-based rights that a provider may assert to those rights that were clearly assigned by the member.

An exception may arise when, based on the specific facts in the case, a court finds that the ERISA plan, through its conduct, either waived the anti-assignment provision or should be equitably estopped from raising it under general principles of law. While there is not complete unanimity among the Circuits in how these principles apply in this context, generally the mere fact of direct communication by the ERISA plan with the provider – or even exercising a contractual right to elect to make payment directly to the provider – is not sufficient to result in a waiver of, or estoppel with respect to, the anti-assignment defense.

Background on DOL Claims Regulation

In addition to ERISA Section 502, which identifies the various judicial remedies available under ERISA, Section 503 requires administrators of ERISA plans to (i) provide plan members with adequate and timely notice of any adverse benefit determination (i.e., any determination giving rise to any financial responsibility for the plan member) and (ii) afford plan members a reasonable opportunity for a full and fair review by an appropriate fiduciary of any decision denying a claim.

The DOL in turn has promulgated detail regulations governing what constitutes a reasonable claims procedure for purposes of Section 503. DOL Reg. § 2560.503-1 et seq . One such portion of the regulation expressly provides that the plan’s claims procedure may “not preclude an authorized representative” of a plan member from acting on behalf of the plan member in pursuing an appeal of an adverse benefit determination.

Background on the Case

BCBSIL approved the provider’s claims for payment at issue in Beverly Oaks but reimbursed the provider an amount less than the provider’s billed charges.

The provider unsuccessfully appealed the amount of payments and then sued BCBSIL under Section 502(a)(1)(B) of ERISA in order to recover additional professional fees for the same surgical services.

In its original and multiple amended complaints, the provider argued that BCBSIL either had waived or was equitably estopped from asserting any anti-assignment provisions in the ERISA plans because it had failed to raise the anti-assignment provision either during the provider’s initial coverage confirmation calls or during the appeal of the claims.

After dismissing two prior versions of the complaint based on the anti-assignment provisions in the plans, the district court granted BCBSIL’s motion to dismiss with prejudice citing two recent unpublished opinions from the Ninth Circuit involving a similar pricing dispute and anti-assignment defense. ( Brand Tarzana Surg. Inst. v. Intl. Longshore and Warehouse – Union Pacific Maritime Welfare Plan, 706 F. App’s 442 (9 th Cir. 2017) and Eden Surgical Ctr. v. Cognizant Tech. Solutions Corp. 720 F. App’x 862 (9 th Cir. 2018).) The courts in both cases found that the failure of the plan to notify a provider during the ERISA appeal of the anti-assignment defense did not result in a waiver of the anti-assignment defense. Both cases distinguished their holding from that in Harlick v. Blue Shield of California, 686 F.3d 299 (9th Cir. 2012), in which the Ninth Circuit first indicated that failure to address a potential defense to a plan member’s claim during an administrative appeal could result in waiver of the defense. In distinguishing the case, both panels reasoned that the anti-assignment defense did not go to the merits of the claims being appealed, but rather only to the provider’s right to litigate the claims, which was an appropriate defense to raise for the first time during the litigation.

In Harlick, an actual plan member, not a provider, appealed a denial of her claims for coverage for benefits received while staying in a residential treatment facility. The insurer of the ERISA plan relied on the fact that such services were not covered under the plan when denying the appeal. However, the Ninth Circuit in Harlick determined that to the extent the services were medically necessary the insurer was required to cover them under the California Mental Health Parity Act. When the insurer sought to challenge that finding, the court held that the insurer could not raise a substantive defense based on the lack of medical necessity, as that defense was not raised during the administrative appeal as a defense to the claim.

The Ninth Circuit had also interpreted the scope of Harlick in the context of an anti-assignment clause in Spindex Physical Therapy USA, Inc. v. United Healthcare of Arizona, Inc., 770 F. 3d 1382 (9 th Cir. 2014). The panel in Spindex held that an insurer acting on behalf of an ERISA plan had not waived the anti-assignment provision by paying the provider directly, which it had the discretion to do, notwithstanding the anti-assignment provision. Moreover, the panel held that there was no waiver because there was nothing in the record to prove that the insurer knew that the provider was pursuing an administrative appeal based on an assignment , rather than as an authorized representative of the plan member . As noted above, a properly authorized representative must be allowed to represent the plan member (but not its own interests) under the U.S. Department of Labor’s claims regulations.

In Beverly Oaks , the panel distinguished the holding in Spindex based simply on the fact that a provider had checked the assignment box on its claim form and, therefore, the ERISA plan had notice that the provider had an assignment. However, nothing in the DOL’s claims regulations gives a provider with an assignment the right to step into the shoes of the plan member and represent its own interests, not those of the plan member, during an administrative appeal. Moreover, the DOL’s claims regulations allow a provider to act as the authorized representative of a plan member in pursuing an administrative appeal with or without an assignment.

The panel in Beverly Oaks had before it the actual assignments that in theory were signed by the plan members and the assignment forms clearly listed the provider as the plan member’s “designated authorized representative.” Nevertheless, contrary to the holding in Spindex, the panel held the mere existence of an assignment was determinative.

The Alternative

In the Ninth Circuit, a failure by an ERISA plan to raise a substantive defense during the administrative review process can result in a waiver of the defense at the litigation stage. However, nothing in Spindex or other binding Ninth Circuit authority required the panel in Beverly Oaks to find that the rule should apply to non-substantive defenses that only become relevant at the litigation stage or to apply Harlick just because the ERISA plan knows that the provider has an assignment. The holding in Spindex should be limited to situations where the ERISA plan knows the provider is appealing in its capacity as an assignee of the claim and not as an authorized representative.

From an ERISA perspective, the DOL has concluded that a full and fair review procedure requires that a plan member be able to designate a third party to represent the interests of the plan member in an appeal of a claim denial or other adverse benefit determination. The DOL has not extended that right to a third party who is only taking its own interests into account and not representing the interests of the plan member.

A better approach would be for courts either to limit the holding in Harlick to defenses that apply to the plan member or limit the holding in Spindex to situations, as was the case in Spindex , where the provider has made it clear that it is filing an appeal in its capacity as an assignee (i.e., acting at least in part in its own interest) and not as an authorized representative of the plan member.

In the latter case, the ERISA plan would be free to confirm with the plan member that the plan member is comfortable with allowing the provider to proceed in the capacity as an assignee and not as a representative of the plan member. Further, it would allow the plan member to understand the consequences of the provider’s approach. Finally, this alternative would also create a less subjective and more definitive rule that would protect ERISA plans from unknowingly waiving a non-substantive defense.

There would not appear to be any downside from the plan member’s perspective with this approach, only more knowledgeable decision-making. Even if the provider itself might be precluded from suing the ERISA plan to dispute the amount of the payment received, the plan member would remain free to seek such a remedy and the provider free to assist in the process.

Michael H. Woolever

Partner/Retired

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Pepsi-Cola Metropolitan Bottling Company, Inc. v. Employers Insurance Company of Wausau, 2023 WI 42

In Pepsi-Cola, the Wisconsin Supreme Court issued a per curiam decision on May 24, 2023, affirming a court of appeals decision dated July 8, 2022, Pepsi-Cola Metropolitan Bottling Company, Inc. v. Employers Insurance Company of Wausau, 2022 WI App 45, 404 Wis. 2d 337, 979 N.W. 2d 627, because no three Supreme Court justices could reach agreement to either affirm, reverse, or affirm in part and reverse in part the court of appeals decision. Only 5 of the Supreme Court justices participated.

Pepsi-Cola, the alleged assignee of rights under several insurance policies issued to two foundries, brought an action for determination of the insurer’s duties to defend and indemnify it against asbestos exposure claims related to a pump manufactured by the foundries. The trial court granted summary judgment to the insurer, based on anti-assignment provisions in the policies, and relying on Red Arrow Products Co., Inc. v. Employers Insurance of Wausau, 2000 WI App 36, 233 Wis. 2d 114, 607 N.W. 2d 294. On appeal, the court of appeals reversed, holding that the anti-assignment provisions in the policies were not enforceable because the assignments were “post-loss.” The policies had been issued to the foundries during the time the asbestos exposure had allegedly occurred in the 1960s. The foundries went through a series of transfers that purported to assign the right to insurance with those transfers, even though the policies contained anti-assignment clauses, which provided that “Assignment of interest under this policy shall not bind the company until its consent is endorsed hereon.”

Relying on several Wisconsin cases that were decided in the late 1800s and early 1900s, the court held that anti-assignment clauses that prohibit an assignment after a loss has occurred are generally regarded as void as against public policy. The court distinguished Red Arrow, a case decided in 2000, wherein the court stated that without the insurer’s permission, no assignee has any rights to any benefits under the subject policies. The Pepsi-Cola court indicated that in Red Arrow, it was not called upon to examine the enforceability of an anti-assignment clause, because both parties agreed that there had been no transfer of recovery rights under the policies to begin with, and therefore the court did not need to decide whether there was an assignment of the rights to recover under the policies. In fact, the court of appeals indicated that its statement in Red Arrow regarding the effect of the anti-assignment clause was dicta, and did not control the outcome of this case.

The court of appeals reaffirmed “Wisconsin’s longstanding rule” that an anti-assignment clause is unenforceable when the assignment is made post-loss, noting that the foundry had already paid the premiums for the policies to protect against the claimed loss and the assignment did not increase the insurer’s coverage risks because the alleged occurrences had already taken place. The court of appeals stated that even though the loss that took place during the policy periods may not be known for many years, it allegedly occurred during the policy periods and the right to make claims under the policies was assigned post-loss to subsequent entities.

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Anti-Assignment Clause: Everything You Need To Know
Anti-assignment clauses are of two types: One that prohibits the assignment of work or service pursuant to the contract. One that prohibits the assignment of payment under the contract. The clause that prohibits the assignment of work or service is a valid clause, completely enforceable and does not bear much importance. However, the clause ...
Anti-Assignment Provisions and Assignments by 'Operation of Law': What
Understanding Anti-Assignment Provisions. Generally, an anti-assignment provision prohibits the transfer or assignment of some or all of the assigning party's rights and obligations under the contract in question to another person without the non-assigning party's prior written consent. By way of example, a standard anti-assignment ...
Are Anti-Assignment Clauses Enforceable?
Without an anti-assignment provision, contracts are generally assignable even absent the consent of the counterparty. The Uniform Commercial Code (UCC), a group of laws governing the sale of goods, prefers the free transferability of all types of property, including contracts. Still, courts normally enforce anti-assignment clauses that are ...
Anti-Assignment Provisions and Assignments by 'Operation ...
An anti-assignment provision in a contract that forms part of the "purchased assets" in an asset deal will normally be triggered in an asset purchase transaction pursuant to which the ...
What is an Anti-Assignment Clause?
The anti-assignment clause states that neither party can transfer or assign the agreement without the consent of the other party. On a basic level, that makes sense - after all, if you sign a contract with a specific party, you don't expect to be entering into an agreement with a third party you didn't intend to be.
A Guide to Understanding Anti-Assignment Clauses
One of the commonly used anti-assignment provisions reads as follows: "No party may assign any of its rights under this Agreement, by operation of law or otherwise, to a third party without the ...
What Is an Anti-Assignment Clause?
An anti-assignment clause is a provision in an insurance policy that bars the policyholder from transferring their rights under the policy to another party. The clause prohibits the insured from authorizing someone else to file claims, make changes, or take other actions under the policy.
Mergers and Restrictions on Assignments by "Operation of Law"
Nonetheless, " [w]hen an anti-assignment clause includes language referencing an assignment 'by operation of law,' Delaware courts generally agree that the clause applies to mergers in which the contracting company is not the surviving entity.". [3] Here the anti-assignment clause in the original acquisition agreement did purport to ...
Stuff You Might Need to Know: What Assignments Do Broad Anti-Assignment
An anti-assignment clause declaring void an assignment made in violation of that clause is categorized as a clause restricting the power to assign, while those that do not are typically viewed as only limiting the right to assign. [7] Of course, if the contract permits the non-breaching party to terminate upon breach of the contract by the ...
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Anti-assignment clauses create a defined and relatively well understood set of opportunities and issues for participants, beneficiaries, health care providers, insurers, and plans. Powers of attorney offer a mechanism for healthcare providers to pursue their patients' claims for benefits even where a valid anti-assignment clause in a plan ...
Understanding the Anti-assignment Clause in Contracts
CONCLUSION. In conclusion, an anti-assignment clause is a provision in a contract that prohibits one party from transferring or assigning their rights or obligations under the contract to a third party without the other party's consent. This clause is commonly used in contracts to protect the interests of the parties involved and to ensure ...
Anti-Assignment Sample Clauses
Sample 1. Anti-Assignment. Neither this Agreement nor any of the rights, interests or obligations under this Agreement shall be assigned, in whole or in part, by operation of law or otherwise by any of the Parties without the prior written consent of the other Party. Any purported assignment without such consent shall be void.
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Anti-assignment Provisions - The Regulatory Framework. Pursuant to 42 C.F.R. § 424.73, except with respect to certain limited exceptions, "Medicare does not pay amounts that are due a provider to any other person under assignment, or power of attorney, or any other direct payment arrangement." There are several exceptions to this anti ...
Anti-assignment Clauses in Health Plans
August 16, 2022 (3 min read) Health plan sponsors and insurers have increasingly added anti-assignment clauses in their health plans in large part to help avert lawsuits by out-of-network healthcare providers who dispute a coverage decision, or the reimbursement rate offered by the plan or insurer for services rendered to a covered individual.
Anti-Assignment Provision Sample Clauses
Sample 1. Anti-Assignment Provision. Except as provided in Sections 16.2 and 21.4, no benefit under the Plan shall be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance or charge, and any attempt to do so shall be void. No benefit under the Plan shall in any manner be liable for or subject to the ...
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This is why reviewing contracts for assignment clauses is so critical. A simple anti-assignment provision provides that a party may not assign the agreement without the consent of the other party. Assignment provisions may also provide specific exclusions or inclusions to a counterparty's right to consent to the assignment of a contract ...
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In our last post we talked about anti-assignment provisions in contracts, and we mentioned "legal overrides" that might help.So, what are the legal overrides? They are found in four sections of the UCC (Sections 9-406, 9-407, 9-408 and 9-409, for the academics out there). Some overrides dispense only with limitations on the grant of a security interest, while others go further and also ...
Anti-Assignment Provisions in Leases
In Brentsun Realty Corp. v. D'Urso Supermarkets, Inc ., 182 A.D.2d 604, 582 N.Y.S.2d 216 (N.Y. App. Div. 1992), the Second Department interpreted an anti-assignment covenant in a lease that ...
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Anti-Assignment and Change-of-Control Clauses Generally Anti-assignment and change-of-control clauses come in a variety of forms. [1] Some only restrict the actual assignment of the applicable contract by a party to that contract (and some contracts that contain no anti-assignment clause at all are deemed by statute to have such a clause [2] ).
Near Unanimity Among the Circuits: Anti-Assignment Provisions are
The anti-assignment provision stated that right of the member to receive benefits under the plan was personal to the member and could not be assigned to any person, hospital or other entity. Section 502(a) of ERISA provides that only a plan participant, beneficiary, fiduciary, or the Secretary of Labor have standing to bring a civil action ...
Anti-assignment Clause Enforced by Delaware Bankruptcy Court
On June 20, the U.S. Bankruptcy Court for the District of Delaware held that anti-assignment clauses contained in certain promissory notes were enforceable under Delaware law, contract law and the Uniform Commercial Code. In In re Woodbridge Group of Companies, the court held that the assignment of certain promissory notes to a claims purchaser ...
An Alternative Approach to an ERISA Litigation Conundrum
The courts also generally hold that anti-assignment provisions in ERISA plans are enforceable and will invalidate a purported assignment of benefits. Where an ERISA plan has a valid anti-assignment provision a court will generally grant a motion to dismiss a provider's claim for failure to state a claim for relief under Section 12(b)(6) of ...
Pepsi Insurance Claim: Anti Assignment Provision and Post Loss
The trial court granted summary judgment to the insurer, based on anti-assignment provisions in the policies, and relying on Red Arrow Products Co., Inc. v. Employers Insurance of Wausau, 2000 WI ...