Enforceability of Noncompetes Obtained in Conjunction with the Sale of a Business
If you're buying a business, one thing you you really don't want is for the previous owner to go out and set up a competing business. To avoid this, Purchase Agreements frequently contain a noncompetition clause or there is a separate Noncompetition Agreement to be signed by the principals or key personnel of the seller. Question is: will this work? ANSWER: Probably, based on a recent case.
I've previously made a post entitled "All About Enforceability of Noncompetes in Ohio" in which I explained how Ohio courts tend to reluctantly enforce noncompetition agreements. I've also previously posted on the answer to the question "Can a New Owner Enforce a Noncompete Made by an Employee with the Prior Owner?"' Answer: probably, but not always. And the answer revolves around whether it was contemplated that the noncompete would be assigned at some point and how big a burden does it place on the ex-employee purportedly subject to the non-compete.
So what about noncompetes signed contemporaneously with the sale of the business? A recent case involving CPAs suggests that such provisions are likely to be deemed enforceable..
In Century Business Services, Inc. v. Urban, 179 Ohio App.3d 111, 900 N.E.2d 1048, 2008-Ohio-5744 (Cuyahoga Cty 8th Dist.) the purchaser of a CPA firm had obtained a noncompete agreement from the defendant ,who was the principal of the selling CPA firm, in conjunction with the execution of an Asset Purchase Agreement. The defendant partner continued to work at the firm following the ownership change until he was eventually fired. The matter came before the trial court in the form of a declaratory judgment action. The trial court upheld the noncompete provisions, although it limited the geographis scope somewhat.
On appeal, the Court of Appeals framed the issue as follows:
At issue in this appeal is the freedom to contract and the enforceability of noncompetition and nonsolicitation agreements associated with the sale of a business. Significant to this analysis is whether these agreements when they are entered into contemporaneously with the sale of a business should be distinguished from ones that are entered into by employees as consideration for employment.
The Court of Appeals further emphasized the fact-specific nature involved in analyzing each case. It concluded that "restrictive covenants entered into ancillary to the sale of a business should be afforded less scrutiny than ones entered into by employees as consideration for employment." As long as they are "reasonable", judged by the same factors as ordinary noncompetes, but less rigidly, such noncompetes ARE ENFORCEABLE. Among other reasons supporting the enforceability of such provision in the context of a sale of the business, the Court of Appeals pointed out that
- Sellers often receive a higher purchase price for agreeing to a noncompete than they otherwise would for the sale of their business.
- generally speaking, there is much more true freedon of contract between buyer and seller than between employer and employee
To me, this conclusion makes good sense. It IS important to the buyer of a business to have the noncompete and Sellers really DO have more of an option about whether to agree to such provisions and what the geographic scope and duration should be than employees who know that the likely alternative if they don't sign is having their employment terminated..
