Non Compete Agreements in a Sale of Business

hwbAnybody who is buying a business – no matter how large or small – should consider including a non compete agreement or clause in the sale documents. For a buyer, such clause ensures that the seller does not take the proceeds from the sale and open a competing business around the corner using his or her know how and vendor or customer connections.  For a seller, a non compete clause can provide a great bargaining chip during the sale process since the length and scope of the restrictions can factor into the price of the business.

The following list identifies the common sticky points for buyers and sellers during both the negotiation of a non compete agreement as part of the sale of a business and litigation that may arise out of a non compete agreement after the sale.

1. How is the “competitive activity” defined in the non compete agreement? The buyer will want the competitive activity defines as broadly as possible, while the seller will want to make sure that it does not encompass activities that the company has not been engaged in prior to the sale.  Having a defined universe of activities that are tied to the company’s assets, operations and business conducted by the seller will help both parties understand what they can and cannot do after the sale and will minimize the chances of litigation.

2. Is the length of the non compete agreement reasonable?  Business non compete agreements (between two companies) are governed by the Texas Covenants not to Compete Act, which also governs employment non compete agreements (between companies and employees).

Under Section 15.50 of the Texas Covenants not to Compete Act, “a covenant not to compete is enforceable if it is ancillary to or part of an otherwise enforceable agreement at the time the agreement is made to the extent that it contains limitations as to time, geographical area, and scope of activity to be restrained that are reasonable and do not impose a greater restraint than is necessary to protect the goodwill or other business interest of the promisee.”

Pursuant to Section 15.50, any restriction in a business-related non compete agreement must be reasonable. However, Texas courts have interpreted business non competes more broadly than employment or personal services non compete agreements. Thus, a five-year non compete, for example, that would never be enforceable in an employment context, could be found reasonable and enforceable in a sale of business situation.

3. Is the geographic area of the non compete agreement reasonable? The geographic restrictions in a business non compete agreement must be tied to a legitimate business interest and must reasonable. Thus, for example, including a nationwide non compete agreement in a sale of a local moving company that only does business in Dallas, Texas, is not likely to hold water in court as a reasonable geographic restriction.

4. Is the non solicitation clause reasonable and does it include employees, vendors, and customers? Non solicitation agreements or clauses are subject to the same reasonableness requirements as non  compete agreements and must be driven by a legitimate business interest of the company.

5. Does the confidentiality clause impose additional anti-competitive restrictions? If the sale documents do not include a specific non compete or non solicitation agreement, the seller and the buyer should consider whether a confidentiality or non disclosure clause might, nevertheless, result in a anti-competitive restrictions by imposing limitations on what information the seller may or may not use after the sale.  The buyer will want to make sure that the company’s competitive advantage is protected via the confidentiality provision and the seller will want to make that the sale price factors in the additional protections afforded by the confidentiality clause.

Leiza litigates non-compete and trade secrets lawsuits on behalf of EMPLOYERS and EMPLOYEES in a variety of industries, and knows how such disputes typically play out for both parties. If you need advice regarding your non-compete agreement, contact Ms. Dolghih for a confidential consultation at Leiza.Dolghih@GodwinLewis.com or (214) 939-4458.

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