While there are questions about the legal validity of non-competition agreements generally, there are no such questions concerning executive-level non-compete agreements that are signed and that are attendant to the sale of a business (whether as a stock sale or asset purchase transaction). As such, it is useful to examine some of the features that are commonly found in such agreements. Note that these non-compete agreements and/or provisions are often coupled with and found alongside nondisclosure and non-solicitation agreements. Those will be excluded from the discussion below.

The four basic parts of a non-compete agreement

Non-compete agreements can be called various things depending on the local jurisdiction, including various formulations that use the term “covenant” (such as “covenants against competition”). Whatever the phrasing used, there are four principal parts of a non-compete agreement.

First, there is the part about not competing. In these sentences or clauses, the seller agrees not to compete with the buyer. But, as with all contractual language, careful attention is needed. Consider this sample language where the seller agrees not to “… directly or indirectly engage in any business or activity which is the same or similar to the business of Buyer, or that competes in any manner with the business conducted by Buyer.”

Upon thoughtful consideration, this language seems too broad, particularly if the transaction is an asset purchase transaction and the seller is going to continue operating. Is the seller 100% that there is no part of the seller’s continuing business the competes “in any manner” with any of the “business conducted by the Buyer?” Often, the language is more tailored to require non-competition with the business of the seller that is being sold.

Second, a non-compete has a term. Two years is common, but a legally valid term can vary depending on the case circumstances.

Next, there is an “area of restriction” that is often a geographic area — such as “… within a 100-mile radius of seller’s (or buyer’s) principal business address” — but can be an intangible area such as “on the internet.”

Finally, a non-compete agreement must identify who is bound by the agreement. This is often a long provision, since there are many methods for a person to compete without it necessarily appearing that there is competition. Thus, a short example might look like this. “Seller, its officers, board of directors and/or owners, whether as partner, investor, stockholder, officer, director or as any type of principal whatever (whether an interest is active or beneficial), or as any type of employee or acting as an independent contractor or agent for or advisor or consultant to any individual or entity that exists or is about to exist, shall not …” compete.

Three more essential provisions

Aside from these basic provisions, there are three more essential provisions. The first is a provision that allows a court to impose an injunction. In the past, courts were generally rather stingy about granting injunctions. This is less true today, but it is still important that courts see explicitly that the parties have agreed that injunctive relief is allowed. This allows the court to order the seller to stop engaging in whatever activity has been determined to be in violation of the non-compete provisions.

In addition, there must be a severability clause. This means that if the court deems one part of the agreement to be void for some reason, the court is still empowered to enforce the remaining parts. Finally, there must be a provision — often called “blue-penciling” — allowing the court to modify the language of the agreement to conform to what the court deems fair and just. Thus, if a two-year term is deemed too long, the court will “blue-pencil” the contract to reduce the term to one year, for example. Without the “blue-penciling” language, the court would only have the power to strike out and nullify the term provisions entirely.

Contact the Business Attorneys at Revision Legal

For more information, contact the experienced Business Lawyers at Revision Legal. You can contact us through the form on this page or call (855) 473-8474.

Consideration and Enforceability: Why Business-Sale Non-Competes Are Different

The most significant legal difference between employment non-compete agreements and non-compete agreements signed as part of a business sale is the question of consideration. In the employment context, courts in many states require that a non-compete signed after employment has begun be supported by independent consideration beyond mere continued employment. No such problem exists in the business-sale context: the sale price itself constitutes ample consideration for the seller’s non-compete obligations. This is why courts and legislatures that have become skeptical of employment non-competes — including states that have banned them outright — have carved out explicit exceptions for non-competes entered into in connection with the sale of a business.

California is the most notable example. California Business & Professions Code § 16600 declares non-compete agreements void as against public policy, with narrow exceptions. Section 16601 creates one of those exceptions for sellers of business interests: a person who sells the goodwill of a business, or all shares or substantially all of the assets of a business, may agree not to compete with the buyer within a specified geographic area for a specified time. California courts have enforced these provisions strictly — the exception requires a sale of goodwill or substantially all assets, not merely an employment arrangement.

The Geographic Restriction Element: Getting It Right

Courts have wrestled for decades with what constitutes a reasonable geographic restriction in a business-sale non-compete. The traditional formulation — a mileage radius from the seller’s principal business address — works well for brick-and-mortar businesses with geographically concentrated customer bases. A law firm, a dental practice, or a retail store typically has a definable local market, and a 50-mile or 100-mile radius restriction maps onto that market in a way courts find reasonable.

The analysis is more complex for businesses that operate online or that serve national or international customer bases. Courts have increasingly upheld non-compete restrictions framed as “nationwide” or “throughout the United States” for businesses whose customer base and operations were genuinely national or internet-based at the time of the sale. The key question is whether the geographic restriction corresponds to the actual market in which the acquired business competes. A nationwide restriction for a business with ten customers in a single metropolitan area would be unreasonable; the same restriction for an e-commerce business with customers in all 50 states is defensible.

Enforcement Mechanisms: Injunctive Relief and Liquidated Damages

When a seller violates a non-compete agreement in a business-sale transaction, the buyer’s primary remedies are:

• Preliminary and permanent injunctions. Injunctive relief is typically the most important remedy, because by the time a money damages case is fully litigated, the seller may have redirected a substantial portion of the acquired customer base. To obtain a preliminary injunction, the buyer must show: (1) a likelihood of success on the merits, (2) a risk of irreparable harm absent an injunction, (3) that the balance of hardships tips in the buyer’s favor, and (4) that the public interest does not weigh against an injunction. Well-drafted non-compete agreements typically include recitals acknowledging that breach will cause irreparable harm, which courts give weight to in the preliminary injunction analysis.
• Liquidated damages. Where parties anticipate that actual damages from a breach will be difficult to quantify, a liquidated damages clause specifying a pre-agreed damages amount provides certainty. For enforceability, the clause must represent a reasonable estimate of anticipated harm, not a penalty. Courts in most jurisdictions will enforce a liquidated damages clause in a business-sale non-compete where the amount bears a reasonable relationship to actual or anticipated harm.
• Disgorgement of profits. Some courts have ordered sellers to disgorge profits earned in violation of a non-compete, particularly where proving actual lost profits would be unduly speculative.

Blue-Penciling: What Happens When the Non-Compete Is Too Broad

Where a non-compete agreement is broader than what a court deems reasonable — whether in duration, geographic scope, or activity restriction — courts in most jurisdictions have the option to “blue-pencil” the agreement: modifying its terms to make it enforceable rather than voiding it entirely. Some states permit courts to reform non-competes to the maximum enforceable scope; others follow the strict rule that if any portion is unreasonable, the entire clause is void. Knowing which rule applies in the governing jurisdiction is essential when drafting the agreement, as it affects how much risk there is in drafting broadly.

Best practice is to draft a non-compete that is genuinely reasonable for the transaction at hand, rather than drafting as broadly as possible and hoping the court will blue-pencil. Courts are more likely to enforce — and less likely to scrutinize — non-competes that are facially reasonable on their own terms.

Contact the Business Transaction Attorneys at Revision Legal

Whether you are buying a business and need well-drafted restrictive covenants to protect your investment, or you are a seller negotiating the scope of post-closing obligations, the Business Transaction Attorneys at Revision Legal can help. We represent buyers and sellers in business acquisitions of all sizes, from small asset purchases to multi-million-dollar transactions. Contact us through the form on this page or call (855) 473-8474.