In the realm of non-compete agreements, the standard for the sale of business non-compete agreements are the most lenient. These restrictive covenants that coincide with a company sale agreement or asset purchase agreement are considered to be the ones that require the least protection, and as such, the courts treat them that way.
What is a Sale of Business?
A sale of business occurs when one party sells the ongoing concern of a business or portion of a business that can be free standing. The sale of business includes the accumulated goodwill that the previous business owner had generated by conducting that business. Goodwill can be associated with the name of the business, the employees, trademarks, location, phone number, or any other mechanism to identify the business compared to other similar businesses.
A sale of business does not occur when a portion of a business is sold that cannot operate as its own business. For example, the sale of just the inventory of one business would not be the ongoing concern of that business.
Sale of Business Non-Compete Standard
The standard for a sale of business non-compete is different from that found in an employment situation. The reason the standards are different is because the bargain position and the conduct of the parties varies differently. It does not make sense to allow for strict non-competes for employees who have only their labor to give; whereas, when two businessmen contract, at arms length, to include a wide non-compete as part of their agreement, presumably the seller gained something of value in this transaction, and it would not prevent the seller from earning a living otherwise.
Additionally, when someone sells a business, they sell the goodwill of that business. It is implied that the seller would not be able to immediately open a competing business across the street, as the seller would then be stealing the goodwill he or she sold to the buyer.
The standard for a sale of business non-compete is that it will be upheld (1) if it is reasonably necessary to protect the legitimate interest of the purchaser; (2) if it is reasonable with respect to both time and territory; and (3) if it does not interfere with the interest of the public.
Legitimate Interest
The legitimate Interest of the purchaser is a fairly easy standard to meet. This is also weighed against the time and territory restrictions, but generally, the legitimate interest can be met if the restriction is to protect the customers or goodwill of the company. In sale of business non-competes, this portion is less argued than in an employment situation.
Reasonable as to Both Time and Territory
The time restriction can be longer in the sale of business context than an employment context because the seller is giving up the ability to conduct business in a particular area. Lifelong non-competes have been upheld when the scope and territory restrictions are restricted.
The territory restriction is generally reasonable when it covers only the area the business’s customers are, and no further. For example, a covenant not to compete that covers North and South Carolina would not be valid for a pet store that had customers in only Chapel Hill, North Carolina.
These restrictions are weighed against each other. A longer time restriction will be allowed when a narrower territory restriction is imposed and vice versa.
Public Policy
Public policy is rarely argued successfully as a challenge to a sale of business non-compete. Though not specifically stated in most employment non-compete cases, it is more successfully used there than in the sale of business context. The public policy restriction is based on the idea that if the restriction would harm the public more than it benefits the parties to the contract, the contract should not be allowed. The classic example is a doctor in a rural area selling his practice, leaving no doctors in the area. Public policy would not allow such a contract to stand because it would harm the public.
Non-compete agreements are very complicated and always changing. If you have questions about the enforceability of your non-compete agreement or would like help crafting one for your situation, please feel free to contact us at richard@lawplusplus.com or by calling 919-912-9640.