This post discusses enforcing sale of a business non-compete claims. I have discussed sale of a business non-competes in several blog posts and videos. For instance, this video touches upon the general landscape re sale of a business non-compete agreements and walks through certain defenses.
But today, I’m going to address enforcement.
The Sale Agreement
- The Sale Agreement: The single most important part of enforcing a sale of a business non-compete is the actual sale agreement itself. If you are buying a business, then you need to invest appropriate resources in having a proper asset purchase agreement prepared. From my experience, if you want to do things by the book, then you need three skill sets involved in preparing the asset purchase agreement: You need (1) a transactional skill set, especially if it is a complex transaction (2) you need a tax skill set to make sure that the purchase price is allocated in the most advantageous manner from a tax perspective and (3) you need a serious business litigation skill set. It is rare to get this all in one person. Usually, you need at least two lawyers on this (one for tax speciality and the other for the transactional/business litigation angle). Sometimes, you need three lawyers. It may seem aggressive, but it is money well spent. If you spend $3 million to buy a business and there are gaps in the sale agreement, you could wind up losing your entire investment. I’m not a tax lawyer so that’s not my wheelhouse. But I am a non-compete litigation lawyer, so I will offer the following input on that front:
- The Non-Compete: You need a well-structured, comprehensive sale of a business non-compete agreement. In order to do this correctly, you need to know what choice of law applies. If you’re in Florida and you can get Florida law to apply, then great — you’re halfway home. But be careful: Different states have different non-compete laws. Although sale of a business non-compete law is much more uniform than employment non-compete law, there are still significant variations in terms of what courts deem reasonable. If you are operating under Florida law, then here you go: You want 7 years and a geographic scope defined as wherever the selling company does business. That may sound simple, but every week, I see a sale of a business non-compete that was poorly written and defines the geographic scope too narrowly. Basically, that allows the seller to go right outside of the limited territory, set up shop and get back in.
- The Non-Solicitation: Much the same as above. You need a well-structured, comprehensive non-solicitation provision. Not only should you prohibit solicitation of existing customers and prospective customers, you should also prohibit solicitation of employees that will remain with the company. Again, I see it all the time: Sunrise Technologies buys Atlantic Technologies. There’s a poorly written non-compete. Say it bars competition and customer solicitation, but does not prohibit the seller from trying to take all the employees after the sale is closed. This is happening in one of my cases right now. Due to a poorly written sale agreement, the seller is raiding all the employees and moving them into a new business outside of the (far too limited) restricted territory. Bottom line: It’s better to invest money on the front end and have a sale agreement that covers all your bases.
Bad Sale Agreement
- Bad Sale Agreement: All the above begs the following question: What do you do if you already acquired the company, already paid the purchase price but have a poorly written sale of a business non-compete agreement? First, you cannot go back and re-write the deal. What’s done is done. However, even in the face of a poorly written sale agreement/sale non-compete, you may have some options:
- Geographic Scope: If the geographic scope was defined too narrowly (say Florida when the company does business throughout the entire Southeast), there may be some room to maneuver. The question of what constitutes competition within Florida is not entirely black and white. The seller might set up shop in Georgia and argue that the non-compete only prevents them from competing in Florida, but not Georgia, so they are not in violation. That’s not entirely accurate: If the seller’s new Georgia business sells to customers in Florida, that’s competition in Florida and can be enjoined under even the narrowly written Florida-only non-compete.
- Trade Secrets: If the sale non-compete is so poorly written that you have no remedy under the relevant non-compete statute (in Florida, 542.335), then you have to look for other options. In some instances, you may have a viable claim for misappropriation of trade secrets. Take customer lists as an example. The buyer acquired the business but the non-compete/non-solicitation provisions are poorly written. The seller is already back in the market soliciting its old customers. If the seller is using old customer databases or customer lists to engage in that solicitation, then there is a plausible argument that the seller has misappropriated trade secrets. There are other possible avenues of attack using the Florida Uniform Trade Secret Act (or the recently passed Defend Trade Secrets Act), but all of these hinge on the exact details of any given situation.
- Tortious Interference: Finally, as a tool of last resort, there may be a claim for tortious interference provided the seller has done something wrong/unfair to come between the buyer and the acquired customers. In the type of situation outlined here – where the non-compete and non-solicitation provisions are poorly written – there’s a strong chance that at least some competition/solicitation would be fair game (and actually privileged under competition privilege). But it’s worth considering.
Jonathan Pollard is a competition lawyer and the principal of Pollard PLLC. For more information, call 954-332-2380.