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Noncompete agreement language can be crucial

When a Texas company is sold, the purchaser often requests the seller's owner to enter into a noncompete agreement. These agreements are usually limited to a specified number of years and to geographic locations in close proximity to the company. In late 2016, a Texas appellate court ruled on the enforceability of one such agreement.

In the case, an office equipment company had purchased the assets of a similar business. As part of the transaction, the seller's owner agreed that he would not compete with the purchaser for a period of two years after the closing date. The purchase agreement also provided that he would become an employee of the purchaser for four years and that the noncompete provision would be voided if his employment was terminated within two years other than for cause.

Prior to the expiration of the two-year period, the seller's owner voluntarily resigned and started a new company in direct competition with the purchaser. He also filed a lawsuit that asked for a ruling that the noncompete agreement was no longer binding. The trial court agreed, and the purchaser filed an appeal. The appellate court upheld the trial court's decision, ruling that the plain language of the agreement stated that it would continue in effect only if the employee was terminated for cause. A voluntary resignation did not meet that test.

This case shows how the wording of a contract can be crucial despite the intent of one of the parties. Companies that are contemplating acquisitions may want to have the assistance of counsel when preparing purchase agreements in order to ensure that the noncompete provisions are enforceable and protect their interests.

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