MISCELLANEOUS DEFENSES: ILLEGALITY, DURESS, MISREPRESENTATION, UNCONSCIONABILITY, AND LACK OF CAPACITY

4. Covenants not to compete: There are two main situations in which a person can promise not to compete with another person: as part of a sale of his business to that other person, and as part of his employment by that person. Since our economy is supposedly based on free competition, such covenants not to compete are carefully scrutinized; if they are unreasonably broad, they will be held to be illegal and not enforced. See Rest. 2d, § 188.

a. Sale of business: If the seller of a business is selling its “good will” as well as its physical assets, her ancillary promise that she will not compete in the same business as the purchaser will be upheld, provided that it is not unreasonably broad either geographically or in duration.

i. Geographical overbreadth: If the geographical area specified is substantially greater than that within which the seller and the buyer are now doing business, and even beyond the buyer’s area of probable expansion, the covenant will probably be held to be unduly far-reaching.

Example: D sells P a liquor store, whose customers almost all come from no more than 3 miles away. D has no plans to open new stores. As part of the sale, D agrees that for 3 years, D won’t operate or work in any liquor store within a 200-mile radius of the store that’s being sold. One year later, D opens a store 190 miles away. P seeks an injunction. A court is likely to hold that the restriction is unreasonably broad, geographically, in which case the court will deny the injunction.

ii. Length of time: Similarly, if the non-compete is for a length of time longer than the seller’s goodwill is likely to continue, it will also be invalid. See C&P, p. 634.

Example: Same facts as above Example, except the non-compete is drafted to last for 15 years. Fourteen years later, D opens a competing store near the original store. A court is likely to hold that all the goodwill that D had at the time of sale has long-since been either lost, or transferred to P. Therefore, the court will probably deny the injunction.

b. As part of employment contract: An employee will often be required, as part of his employment contract, to sign an agreement in which he promises not to compete with his employer if he leaves the latter’s employ. Such covenants are usually more closely scrutinized than those mentioned above regarding sales of businesses. Courts will generally permit the employment covenant to stand only if it is designed to accomplish one of the following two purposes:

[1] Trade secrets: To prevent the employee from disclosing or using confidential information or trade secrets gained from the employer; or

[2] Taking of good will: To prevent the employee from taking advantage of his contacts with the employer’s customers by approaching them and trying to steal them from the employer.

i. Standards: Even where an employee non-compete does merely prevent the employee from disclosing confidential information or soliciting the employer’s customers, the non-compete will not necessarily be found “reasonable,” and thus not necessarily enforced by the court. A good summary of most courts’ approach is that “a restraint is reasonable only if it (1) is no greater than is required for the protection of the employer, (2) does not impose undue hardship on the employee, and (3) is not injurious to the public.” (73 Harv. L. Rev. 648-49, quoted approvingly in Hopper v. All Pet Animal Clinic, infra.) Courts pay close attention to whether the non-compete is reasonable as to the type of conduct proscribed, the geographical reach of the prohibition, and the length of time for which it applies.