Sale of a Business Non-Compete Agreements

JP Desk

When a business is sold, there is usually a non-compete agreement: As a condition of the sale, the seller agrees to exit the market in a certain geographic location and for a certain period of time. Some people who have a little knowledge about Florida non-compete law assume that employment non-compete agreements are treated the same as sale of a business non-compete agreements. That assumption is false. There’s a saying that a little knowledge can be a dangerous thing. That principle applies here. Under Florida law, non-compete agreements ancillary to the sale of a business are treated much differently than employment non-compete agreements.

Employee Non-Compete vs. Sale of a Business Non-Compete

First, when it comes to employee non-compete agreements, Florida law provides that with respect to time, restraints of less than a year are presumptively reasonable whereas restraints of more than three years are presumptively unreasonable. Over the years, I have talked with a number of folks believed this same standard applied to non-compete agreements connected to the sale of a business. It does not.  For instance: John Smith sells his car dealership. As part of the sale agreement, there is a seven year non-compete provision. After four years go by, John figures it’s safe for him to get back into the industry in the same geographic market— after all, five years have gone by. I have heard that sort of logic numerous times and it’s wrong. When it comes to the sale of a business, Florida law allows for a much longer restricted period: For a non-compete provision connected to the sale of a business, anything less than three years is presumed reasonable and anything over seven years is presumed unreasonable.

The upshot of this: In the hypothetical above, John is not safe just because five years have run. Instead, it’s still very much an open issue whether or not the non-compete would be enforced for those remaining two years of the term. The answer hinges on whether or not enforcement would be necessary to protect a legitimate business interest. This is where things get a bit more complicated. Under Florida law, a legitimate business interest generally takes the form of confidential information, customer relationships, extraordinary investment in an employee or business goodwill. In the business sale context, all of these interests could be at stake, but I often find that goodwill is the most difficult to defeat.

Let’s stick with the hypothetical: John sold Big J’ Auto four years ago. He sold the company to South Florida Motors. He now wants to get back into the business and has some very lucrative opportunities. As part of the sale to South Florida Motors, he signed a non-compete agreement for a seven year term. Four years have run. John wants back in.

Sale of a Business Non-Compete: A Hypothetical Analysis

  1. Confidential information: South Florida Motors can argue that enforcement of the non-compete is necessary to protect its confidential information. It acquired confidential information from Big J’s in the sale and that information now belongs to South Florida Motors. The non-compete should be enforced to prevent John from unfairly using that confidential information which now belongs to South Florida Motors. On this point, John has some strong counter arguments. Four years have run. Things have changed. Information that was valuable four years ago (and sold to South Florida Motors as part of the deal) would now be stale. Beyond this, John can challenge the claim that there is any confidential information at issue. John was in the industry for 20 years before selling his company. All the allegedly confidential information at issue is widely known throughout the industry and therefore not confidential.
  2. Customers: South Florida can argue that enforcement of the non-compete is necessary to prevent John from getting back into the industry and trying to take back his old customers. Basically, if there were long-time customers of Big J’s that are now customers of South Florida Motors, John might get back in and try to recapture those customers. This is a very common argument raised by plaintiffs in sale of a business non-compete cases. And although it’s a common argument and a plausible one, it is still subject to attack (particularly depending on the industry).
    1. First, South Florida Motors would need to adduce some evidence that they successfully retained many of those customers. I have seen numerous instances in which a successful business was sold and that business had a thriving customer base that was part of the sale. But the acquiring company did a terrible job of serving those customers, so those customers eventually left. In that sort of situation, if the customers have already broken off the relationship because of poor customer service, it’s unlikely that a substantial (read: protectable) customer relationship exists.
    2. Second, even if there are some substantial customer relationships at issue (e.g. some customers who were Big J’s customers, then became and are still customers of South Florida Motors), there are other avenues of attack: Is a full-blown non-compete necessary to protect those customers, or is there some narrower restraint? For instance, say John was able to go back into business but simply was barred from soliciting or doing business with those customers for the remainder of the non-compete term? That would protect the legitimate customer interest at stake in a less restrictive way
  3. Training/Education:  Not applicable here.
  4. Goodwill: This is the tough one. Even if there is no confidential information at issue and even if there are no customer relationships in play, the seller of a business can still raise goodwill as a legitimate business interest to justify enforcement of a non-compete agreement. This is critically important.
    1. With respect to confidential information and customers, plaintiffs will need specifics. For confidential information, they will need to establish (a) what information (b) that it is confidential and (c) that it is valuable. With respect to customers, they will need to establish (a) which customers and (b) that the relationship is substantial. Even though Florida is aggressively pro-non-compete, good lawyers who have experience in this area of law can often defend non-compete cases based on allegedly confidential information or allegedly substantial customer relationships. It can be done— we do it all the time. Goodwill, however, is a bit harder.
    2. Again, sticking solely to the sale of a business context: When the buyer raises confidential information and customers, they need specifics. When they raise goodwill, the concept is much more vague and wide-ranging. Goodwill is a sort of catchall for the intangible value of the business. For instance, when a buyer acquires a business, the buyer obtains the goodwill of the business. That goodwill includes things like the reputation of the business, customer loyalty, brand awareness, and use of a certain trade name or trademark in a particular market. But there is another related and more powerful goodwill concept at play: When a buyer acquires the goodwill of a business, it also acquires the right to enter that market unimpeded by the seller. In other words, the buyer acquires the right to keep the seller out of the market for a reasonable amount of time. The reasoning behind this policy is fairly straightforward: The buyer should be allowed a reasonable period of time to absorb the acquired company and its goodwill. So in a sale of the business non-compete case, where goodwill is raised, the court will automatically give the buyer a few years. Defendants can still challenge claimed goodwill in a few ways:
      1. Challenge the temporal restriction: I have seen sale of a business non-compete agreements written for 8, 10, 12 and even 15 years (dead serious). As the buyer, you get a reasonable amount of time and more than in the employee non-compete context. But there are still limits. Anything under 3 years is presumptively reasonable. From 3 to 7 years, you’re in a grey area where it’s neither presumptively reasonable nor presumptively unreasonable. Depending on the facts, a 4 or 5 year non-compete can be knocked out. And past 7 years, it’s presumptively unreasonable.
      2. Challenge the claim of sustained goodwill: Goodwill is not static, especially in the context of a business being sold. Acquiring companies routinely mess things up, run companies into the ground, ruin relationships and damage goodwill. Again, the buyer gets a few years to solidify things and absorb the goodwill. But after a few years—even after 3 or 4 years? If a plaintiff puts forward goodwill as a legitimate business interest, they’ll have to establish that goodwill is still on the table. If the buyer has destroyed the goodwill and something more than 3 or 4 years have run, there’s a compelling argument that goodwill no longer provides a legitimate business interest.
      3. One note of caution about goodwill: The buyer has a right to keep the seller out of the market for a reasonable period of time. Even if the buyer exits the particular market or stops selling a particular product line, the buyer still has the right to keep the seller out of the market for a certain time period. So do not assume that just because the seller changed product lines or exited a particular market for a time means you’re home free.

Sale of a Business Non-Compete – The Takeaways

  • Florida aggressively enforces non-compete agreements.
  • Non-compete agreements tied to the sale of a business can last longer than those in the employment context.
  • Non-compete agreements tied to the sale of a business are tougher to fight.
  • This is an extremely complex area of law. I see a ton of boilerplate on the plaintiff-side (because enforcing non-competes is so easy in Florida). But on the defense side? There is no boilerplate defense strategy. Any defense strategy – if it’s going to have a chance of being successful – requires in depth legal analysis based on numerous specific facts at issue.

Bottom line: If there are serious interests at stake, then take yourself and your case seriously and hire experienced Florida non-compete defense lawyers. I have litigated numerous non-compete cases in Florida state and federal courts and even in the United States Court of Appeals for the Eleventh Circuit. Beyond litigation, I have resolved hundreds of non-compete disputes out of court without a lawsuit ever being filed. And I have consulted with hundreds of individuals and companies about a wide range of non-compete issues. If you need my help, call me: 954-332-2380.

Learn More About Jonathan Pollard LLC

To read more about Jonathan Pollard and his boutique competition law practice located on Las Olas Blvd. in downtown Fort Lauderdale, please visit any of the following:

 

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