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Subject: |
When "NonCompetes" Come Back To Haunt You |
| Date: |
2009-05-04
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When "NonCompetes" Come
Back To Haunt You
By Cliff Ennico
www.creators.com
"Several years ago, I ran a small retail business in my home
town. I sold out to a competitor, who made me sign a noncompete
agreement saying that I wouldn't run or own a similar business anywhere
in my home state for a period of 10 years. I didn't think that
would be a problem, as I had landed a job with a big corporation and
never thought I would go back into that business. Well, the
corporate job didn't pan out, and an old college friend of mine said he
would provide me with financing if I opened up another retail store
like the one I had. The problem is that stupid noncompete I
signed. Several people have told me not to worry because
noncompetes like this are rarely enforced, especially since it’s been
over six years since I signed the noncompete. But I'm afraid of
getting sued, and the noncompete has four years yet to go. Do I
have any recourse here?"
When selling a business, the buyer always asks the seller to sign a
noncompete agreement, to ensure that the seller doesn't move across the
street, open up a new store, and steal all the business from the store
he or she just sold. The buyer's lawyer who drafts the
agreement always tries to make these as broad as possible, and the
seller's lawyer always tries to keep the noncompete as narrow as
possible so the seller can still make a living if he's forced by
circumstances (as this reader is) to go back into the business.
A lot of people think noncompetes aren't enforceable, and sign them
without thinking. That's a very bad idea, because in almost all
states noncompete agreements are indeed enforceable if they are
"reasonable in scope and time". In plain English, that means:
- the noncompete cannot last
forever, or for an unreasonably long period of time; and
- the noncompete must prohibit
competition only within a radius that is reasonable for the type of
business.
For example, a noncompete that
forbids the owner of a doughnut shop from opening another shop anywhere
in the state is almost certain to be stricken down as "unreasonable",
since studies show the average person will not travel more than one or
two miles out of their way to buy a doughnut and coffee for
breakfast. On the other hand, a noncompete agreement forbidding
the seller of a software publishing business from creating or selling
similar software products anywhere in the United States for several
years might well be enforced as "reasonable", since most software
products are sold over the Web and so are not limited to a local
marketplace.
In short, whether or not a noncompete will be enforced will depend on
the type of business, the actual language used in the noncompete, and
the laws of your state.
But even if a noncompete is technically unenforceable, it can still
muck up your life.
The sad and dirty truth is that most people who want you to sign a
noncompete agreement don't have any intention of winning their day in
court. All they want to do is get into court. Once they're
there, they will ask the court for an "injunction" - a restraining
order forbidding you from competing until the lawsuit is
resolved. If the court issues an injunction, you're toast.
Even though you have an excellent chance of winning the lawsuit,
getting that judgment will take years of your life and cost you
thousands and thousands of dollars in legal fees. By the time you
get your judgment, it won't be worth anything.
When faced with a noncompete agreement from your past, talk to a local
attorney and scrutinize the exact language of the noncompete very
carefully. In this case, one possible loophole is the fact that
is prohibits the reader from "running or owning" a competing
business. It doesn't say anything about "being employed by",
"managing" or "working for" a competing business elsewhere in the state.
So -- if your local attorney agrees that's how the agreement should be
interpreted -- you could set up the business with your old college
friend as the sole owner. You would then be employed by him for
the four years remaining on your noncompete, earning a fixed salary as
well as a percentage of the business profits each year as a performance
incentive. At the end of the four years, you would have the
option of buying an ownership interest in the business from your friend
for a specified price.
I would also suggest opening the business as far away from your buyer
as possible, and avoid soliciting business from your old
customers. That way, even if he finds out you're back in
business, the fact that you're not actually hurting him may lead him to
ignore the noncompete, or offer you the chance of "buying out" the
noncompete for a reasonable price.
Cliff Ennico (cennico@legalcareer.com)
is a syndicated columnist, author and former host of the PBS television
series 'Money Hunt'. This column is no substitute for legal, tax or
financial advice, which can be furnished only by a qualified
professional licensed in your state. To find out more about Cliff
Ennico and other Creators Syndicate writers and cartoonists, visit our
Web page at www.creators.com.
COPYRIGHT 2009 CLIFFORD R. ENNICO. DISTRIBUTED BY CREATORS SYNDICATE,
INC. Permission granted for use on DrLaura.com.
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