Covenant, Shmovenant? Ten-Year Nationwide Non-Compete in Asset Purchase Agreement Forms the Basis for Tortious Interference With Contract Claim
Written by Erin C. Horton
Once again we are reminded that covenants not to compete given in connection with the sale of a business are an entirely different species from the employment kind. Last week, in Oros & Busch Application Technologies, Inc. v. Terra Renewal Services, Inc., a federal district court in Missouri refused to dismiss an asset buyer’s claim for tortious interference with an asset purchase agreement’s non-compete provision on the grounds of unenforceability even though the covenant restricted the seller from certain activities for a ten-year period.
The federal court found that the non-compete was not necessarily unenforceable even though it extended for ten years and throughout the entire United States, because, unlike a non-compete in an employment agreement, this non-compete was negotiated between a buyer and seller on equal footing and in exchange for the purchase price of the company – including the sale of the goodwill -- and assumption of its debt.
Environmental clean-up company Oros & Busch Application Technologies, Inc. (“Oros & Busch”) sought to break into the southwestern Missouri and northern Arkansas markets, which its competitor Terra Renewal Services, Inc. (“Terra”) had long dominated. Key to its plan was the purchase of the goodwill of Clear Creek Environmental, Inc. (“Clear Creek”), a failing and indebted company owned by former Terra employees Charles Golden and Gabriel Timby. As part of the asset purchase, Oros & Busch agreed to pay $399,000 for Clear Creek’s assets and to pay down Clear Creek’s debt. In exchange, Golden and Timby agreed to work for Oros & Busch, using their impressive rolodex to help Oros & Busch break into the new market. They also agreed that they would refrain from competing anywhere in the U.S. for ten years. Of course, all was well and good for Oros & Busch until Terra courted Golden and Timby back to its ranks in an obvious effort to sideline Oros & Busch and maintain its market share in the region.
The Missouri federal district court denied Terra’s attempt to have Oros & Busch’s tortious interference claim thrown out based on Terra’s argument that the non-compete was overbroad and therefore unenforceable. As the sellers of assets, the court found that Golden and Timby had strong bargaining positions from which they could and did negotiate the best price for their promise not to compete. The court further explained that, although very broad, the ten-year, nationwide non-compete was justified as a means of protecting Oros & Busch’s goodwill purchase.
For asset sellers, the Terra decision is a reminder to use caution in negotiating a covenant non-compete. Unlike employment covenants, sale-of-business covenants are often a key and material term to the sale of the goodwill of the business.