Court Enforces Five-Year Noncompete Agreement in Connection With Sale of Business
Employers drafting and seeking to enforce noncompete agreements struggle with structuring the temporal and geographic scope of the proposed noncompete covenant. The Texas Supreme Court has wrestled over the last few years to define the boundaries of when noncompete covenants can be enforced against employees. A recent decision by the federal court sitting in San Antonio reminds employers that the law provides more latitude in structuring and enforcing noncompete agreements in the context of the sale of a business.
In Henson Patriot Ltd. Co. v. Medina, No. 5:14-cv-534 (September 11, 2014), the U.S. District Court for the Western District of Texas evaluated a motion for preliminary injunction filed by Henson Patriot. The company filed the motion seeking to enforce a noncompete covenant contained in a purchase agreement whereby Henson Patriot had purchased a specialty printer company, America Color Labs (ACL). The purchase agreement contained a five-year noncompete provision that restricted the competitive activities of the owners of ACL, including one of the defendants, Andrew Medina who had continued working for ACL after the purchase. The noncompete agreement covered Bexar County and contiguous counties and prohibited the signatories from aiding or abetting others in competing against Henson Patriot.
Henson Patriot sued and sought injunctive relief against Medina. Henson Patriot also sued two former low-level employees of ACL who set up a business, South Texas Digital, which competed with ACL. The two former employees, one of whom was Medina’s wife, were partners in Calderas Custom Printing, LLC (CCP) and South Texas Digital. The evidence reflected that Medina appeared to have discussed retrieving specific work product from ACL for South Texas Digital’s use, that he visited South Texas Digital’s store on multiple occasions, and that all three of his accounts with ACL eventually used South Texas Digital’s services after it was formed, largely abandoning ACL. There were also emails and voicemail messages left for him at ACL seeking opportunities for South Texas Digital.
As it related to Medina, the court granted Henson Patriot’s requested injunction without serious deliberation, recognizing that Texas law has upheld five-year noncompete covenants when necessary to protect the purchaser’s goodwill. The court further observed that Texas courts are more amenable to longer noncompetes in connection with the purchase of a business than in the employer-employee context. The court determined that the covenant was reasonable because of its limited geographic scope and limited restriction on activities which related only to specialty printing and other services provided by ACL. Finally, the court held that the five-year noncompete entered into in the course of the sale of a business was a reasonable restraint on trade because it was limited to a small industry in a relatively small geographic scope.
The court also evaluated whether the noncompete covenant could be enforced against the non-signatories to the purchase agreement to enjoin them from competing against Henson Patriot. The court noted that under Texas law, a noncompete can be enforced against a non-signatory in order to prevent fraud or where a signatory significantly aids, abets, consults or advises another entity’s or person’s competition with the buyer when the noncompete forbids aiding, abetting, consulting, or advising. In this case, the court found evidence of aiding and abetting because Medina, while still employed by ACL, had visited South Texas Digital’s store, communicated with former clients of ACL, received communications from South Texas Digital customers regarding orders from South Texas Digital, and had generally acted in a suspicious manner. However, the court held that given the extraordinary nature of enjoining non-signatories to a noncompete covenant, the court could not find that such assistance was significant, especially in light of the defendants’ denial that Medina had been involved in South Texas Digital’s business.
The court’s decision provides direction to employers and purchasers of businesses crafting noncompete covenants to protect the goodwill and business assets involved in a business purchase. The decision reminds employers that Texas law provides broader protection and enforcement of noncompete agreements when created in the context of a purchase and sale of a business. The decision also reminds employers that any transaction documents should always refer to the goodwill being purchased and prohibit any signatory to the purchase from aiding or abetting others in competing against the purchaser. Finally, as to non-signatories, the decision reminds employers that while relief is available, more than likely “smoking gun” types of evidence will be needed to establish a significant aiding and abetting which would justify granting injunctive relief against non-signatories.