Texas Courts Enforce Sale of Business Noncompetes

August 24, 2012 / By Robert Wood

Noncompete agreements in the context of a sale of a business have long held to be more enforceable than restrictive covenants in an employer/employee context. This was recently reaffirmed in a case handed down by the Fort Worth Court of Appeals. There, the owners of Company A sold their shares to Company B. As part of the sale, Company A’s owners signed noncompetition agreements. One of the owners, Kendall, was paid $500,000 for his interest in Company A and for his agreement not to compete.

In a subsequent legal dispute involving the noncompetition agreement, the trial court found that the noncompete was unreasonable in time. The trial court reformed the agreement by giving the restriction a five-year duration.

The court of appeals considered the fact that some of the intangible interests purchased (including customer and pricing lists) lost value after five years. However, there was no evidence that all of the intangible interests eroded in the first five years. This was important because these intangible assets were argued to constitute part of the consideration given for the noncompete agreements. The party attempting to enforce the noncompete agreements was able to argue that not all of the consideration given was “stale.”

The court of appeals then noted the greater degree of enforceability afforded noncompete agreements in the context of the sale of business: “A noncompete signed by an owner selling a business is quite different than one signed by an employee. . . . Courts have been more inclined to enforce a long or limitless time barring competition after a sale of a business. . . . “

The court of appeals held that a ten-year restriction was reasonable in this case.

In the context of a sale of a business, restrictive covenants are far more enforceable in Texas than they are in the employer/employee context (which is saying a lot, given the relative greater enforceability of covenants in the employer/employee context as of late). Persons who are bound by covenants not to compete in Texas stemming from a sale of the business cannot be confident that they are unenforceable.

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About the Author

Robert Wood has been a Texas trial lawyer since 1993. During that time, he has represented small, mid-sized, and Fortune 100 companies in business and employment litigation matters all over Texas and the United States. He has also advised and represented hundreds of individuals in employment litigation matters. Read more about Robert Wood