Noncompetition Agreements
Noncompetition Agreements
One of the most important pieces of any business transfer is the seller’s agreement not to compete with the new management. If the seller opens up shop across the street, the buyer has lost much of the benefit of the bargain. How can the buyer protect the investment and treat the seller fairly?
There are three important elements in any noncompetition agreement. The agreement must be reasonable in the nature of its restrictions, in the geographic scope of the limitation, and in the time period of the prohibition.
Nature of the Restrictions
The agreement should specify clearly the things that the seller is forbidden to do. It is rarely enough to say that the seller cannot compete with the buyer’s business. The buyer may also want the seller to keep confidential the trade secrets and operating methods of the business, to refrain from beneficial ownership of a competing company, and to refuse any employment or advisory role with a competing company.
Yet the restrictions must be reasonable. The restrictions cannot force retirement, but they can impose a change of direction. For example, the purchaser of a retail home appliance store probably cannot ask the former owner to give up all sales businesses. However, that same buyer can reasonably require the seller to stay away from retail home appliance sales.
Geographic Scope of the Limitation
The noncompetition agreement should define the territory which the buyer wishes to protect from competition. The restriction must have some rational relationship to the buyer’s existing business. If the business is a retail sporting goods store with three locations in Charleston County, a statewide prohibition on the seller’s establishment of a new company would probably be unreasonable.
Sometimes a buyer will use a series of ever widening circles to describe the restricted territory. For example, in the recent Poynter Investments case the “Restricted Territory” was described as follows:
(i) An area encompassing seventy-five (75) miles in any direction from the Premises.
(ii) In the event the preceding subparagraph (i) shall be determined by judicial action to be unenforceable, the "Restricted Territory" shall be Greenville County, South Carolina and any county that borders Greenville County, South Carolina.
(iii) In the event the preceding subparagraph (ii) shall be determined by judicial action to be unenforceable, the "Restricted Territory" shall be Greenville County, South Carolina.
The South Carolina Supreme Court did not exactly say that this restriction would be enforceable, but the Court did say that South Carolina courts would not attempt to edit an unreasonable restriction to make it acceptable. The courts of this state will not “blue pencil” the parties’ agreement.
Time Period of the Prohibition
The noncompetition agreement should last only for the minimum amount of time to make its prohibitions effective. The time restriction should bear a rational relationship to the restricted behavior and the purpose of the contract. The idea is not to destroy the seller, but to preserve the benefit of the bargain to the buyer.
For example, it may be enough to keep a former sales associate out of the market for a year or two. The relatively short break would likely be sufficient to sever the associate’s ties to the active customer base. On the other hand, a longer restriction might be in order for the former business owner. In Poynter Investments, the parties did not appeal a four year restriction on the business seller.
What About Your Case?
How much is too much? How far is too far? How long is too long? I hate to give you a lawyer answer, but it all depends on your particular business. If you have serious questions about your agreement, please give us a call, and we will help you work through the details.
J. Kevin Crain
CRAIN LAW FIRM, LLC
636 Long Point Road #G95
Mt. Pleasant, SC 29464
Phone (843) 735-7602
Fax (843) 735-7002
Mobile (843) 327-7744
Email kevin@kevincrain.com
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