General Sale of Business Non-Competition Agreements
The law pertaining to non-competition agreements in the sale of a business is relatively uniform amongst Virginia, Maryland, and the District of Columbia. A non-competition agreement will be strictly construed against employers and will be found to be enforceable if the agreement as a whole is found to be reasonable. Courts require non-competition agreements to be as narrowly tailored as possible to protect the vital interests of the employer while still leaving opportunity for a former employee to pursue a career. A non-competition agreement will be enforced if (1) the covenant is narrowly tailored to protect the employer’s legitimate business interest, (2) the covenant is not unduly burdensome on the employee’s ability to earn a living, and (3) the covenant is reasonable from a public policy standpoint. The employer bears the burden of proving these factors. In determining whether an employer has met its burden of proving these factors, the court looks at the function of the restriction, the geographical scope of the restriction, and the duration of the restraint. The court analyzes these aspects together, rather than as separate inquiries. Although non-competition agreements are enforceable in these states, they are considered disfavored restraints on trade. Due to this, the employer bears the burden of proving any ambiguities in the agreement. Further, courts will construe any ambiguities in the agreement in the employee’s favor. If a provision in a non-competition agreement is capable of more than one reasonable interpretation, a court will find it to be ambiguous. If a provision is unambiguous, it is read according to its plain meaning.
Courts in Virginia, Maryland, and the District of Columbia have determined that non-competition agreements that are overly broad pertaining to the types of activities prohibited are unenforceable. Overly broad provisions are not effective in protecting an employer’s business interests because they encompass more aspects than necessary to protect that interest. “Covenants that are ambiguous, that prevent an employee from doing work unrelated to the work that they previously did for the employer, or that go beyond the employer’s legitimate interest are unenforceable.” Each non-competition agreement must be evaluated on its own merits, considering the particular circumstance of the individual case.
“Greater latitude is allowed in determining the reasonableness of a restrictive covenant when the covenant relates to the sale of business than those ancillary to an employment contract.” The sale of business framework is applied to agreements with two distinct features. The framework applies when the drafted agreement permits the business owner to sell the full value of his company by contracting not to destroy the goodwill of the business by immediately competing with it. The sale of business framework will also only be applied when the contracting parties are both sophisticated, have comparable bargaining power, and when the contract is supported by substantial consideration.
In Musselman, a non-competition agreement was executed between a buyer and seller in the sale of a business. Glass Works, LLC entered into an agreement to purchase B&L Auto Glass & Mirror, Inc. from its principal, Young. Young agreed in the non-competition agreement not to engage in any business similar to that of B&L for a period of five years within a 100-mile radius of the town. The non-competition agreement provided consideration in that Glass Works agreed to pay Young $615 per month for 60 months for a total of $36,900. Glass Works made monthly payments up until Young died. The executor of Young’s estate filed suit for breach of contract seeking recovery of the amounts due under the non-compete agreement. The executor argued that this payment was part of the purchase price and therefore did not cease when Young died. The court determined that the language of the agreement made it clear that the sum that was due was to be included in the purchase price. Glass Works’ payment for the non-competition agreements was referred specifically in the agreement to be part of the purchase price of the business. The court stated that Young’s death did not constitute a breach of the non-competition agreement and did not deprive Glass Works of the benefit of its bargain.
In Capital One Fin. Corp., defendant owners of North Fork, a bank holding company, sold the company to Capital One for $13.2 billion. The defendants signed a non-competition agreement that restricted the defendants from engaging in a competitive business for five years after ending their employment with Capital One in the capacity as a director, stockholder, investor, member, partner, principal, proprietor, agent, consultant, officer, or employee. The geographic scope of the restriction was limited to New York, New Jersey, and Connecticut. After the defendants ended their employment with Capital One, they formed a company called BankUnited in Florida. BankUnited subsequently acquired Herald National, a commercial bank with New York offices. BankUnited implemented a “ring-fencing” structure for the Herald National transaction that provided the defendants would be “fenced out” of providing services to Herald National. Herald National would remain a separate entity until the defendants’ non-competition agreements expired. Capital One alleged breach of contract. The court determined that Capital One’s restriction supported a legitimate business interest because of the defendants’ ability to grow a bank at such a fast rate. The defendants’ past success and goodwill made them a substantial threat to Capital One. Further, the covenants were reasonable in geographic scope and time because they were limited to the Tri-State area, where the defendants grew their market and had significant knowledge of the area’s customers. Based on the totality of the circumstances, the court found that the parties agreed to reasonable restrictions based upon the defendants’ ability to compete with Capital One.
In Checket-Columbia Co., Lipman owned the capital stock of Checket Company. Lipman transferred the assets of Checket to the complainant. The bill of sale stated Lipman intended to transfer all assets and that he agreed not to engage as an owner, agent, servant, or employee in a like or competing business within a radius of ten city blocks for a period of ten years except as an officer, agent, or employee of Checket. Lipman became dissatisfied with Checket and sold his capital stock in the company to his associates for $20,000. Lipman subsequently acquired a new business and invited the complainant’s employees to join him in making a corporation to operate the business. Although this new business was outside of the geographic scope of ten city blocks, Lipman had solicited business in that area. The court affirmed the chancellor’s decree enjoining Lipman from engaging in business in competition within the ten block radius for ten years and enjoining the new company as long as Lipman has an interest in it.
A non-competition agreement between a buyer and seller of a business will be given greater deference than an agreement simply between an employer and employee. There are greater risks involved in the sale of a business. The buyer has a legitimate interest in maintaining the goodwill of the business that he has purchased. The seller has a greater obligation to refrain from competing with its former business because it is receiving financial consideration in exchange for the goodwill of the business. As was shown in Checket-Columbia Co., a court will enforce a reasonable geographic restriction even when the former owner’s business is outside the area but is soliciting in the restricted area. Non-competition agreements may be more broadly drafted in the context of a buyer and seller of a business and still be found to be enforceable. Further, each non-competition agreement will be evaluated based upon the facts and circumstances of the individual case. As was displayed in Capital One Fin. Corp., a restriction that may be read to be overbroad may nonetheless be enforceable due to particular capabilities of the parties.