Clients often want noncompetes to last as long as possible, especially when they are buying a business and paying a premium for the business' goodwill. They DO NOT want the seller to cash the check and promptly open up shop down the street, thereby diminishing the client's likelihood of future success with the newly purchased business.
But, just how long can a business-purchase noncompete reasonably last under Texas law?
Last month the Fort Worth Court of Appeals held that a 10-year noncompete given in connection with the sale of propane cylinder exchange business was not per se unreasonable. Heritage Operating, LP v. Rhine Bros., LLC, 2012 Tex. App. LEXIS 2065 (March 15, 2012). The Court recognized that a noncompete signed by an owner selling a business is quite different than a noncompete signed by an employee, in part because goodwill is a protectable, valuable asset and the parties may agree upon its value and the length of a noncompete necessary to protect it. Heritage's chief legal officer testified that the parties attributed $7 million of the purchase price to good will and other intangibles. Clearly the goodwill had material, substantial value. The seller tried to reduce the noncompete term by arguing that 5 years longest reasonable length of time for the noncompete because the value of any confidential information sold to the buyer would substantially diminish after that time. But, there was no evidence that the goodwill's value would cease after 5 years.
Although not explicitly stated in the opinion, we believe the Court may have been also been swayed by the seller's own testimony. When asked if he thought it was fair for him to have signed the noncompete, he replied, "Yeah, I got money for it." In fact, he got paid half a million dollars solely to agree to the 10 year noncompete. Under the circumstances, I can think of seven and a half million reasons why the court would enforce the 10-year noncompete.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
