Sellers of Businesses May Be Barred from Competing Even Without a Non-Compete – What is a purchaser to do?
In the course of the sale of a business, the purchaser will often obtain a noncompetition agreement from the seller. Occasionally a purchaser may not bargain for such an agreement, only to discover later that the seller intends to compete with the purchaser. What is a purchaser to do?
In some cases a formal agreement may not be needed to protect the purchaser. While most people are aware of obligations imposed upon them as a result of written contracts, they may not be aware of implied obligations limiting their business activities. It is a well-established principle of law that a seller cannot retake goods that are the subject of the purchase agreement. Even without a non-compete agreement, the seller of a business may be barred from soliciting the business’s customers when the purchased assets include the company’s goodwill and customer lists rather than merely the company name and related physical assets.
Goodwill is generally defined as the intangible advantages or benefits attached to a business such as a good reputation with the public, prospective profits or, most importantly, customers. Where the sale agreement includes goodwill, courts may find an implied agreement not to solicit former customers of the sold business.
Michigan courts have adhered to this principle to prevent the seller from recapturing the very goods that he or she sold. The courts generally apply a standard test to determine whether the seller has broken the implied agreement not to solicit former customers of the sold business. The court will assess whether, according to the facts of the particular case at hand, the seller refrained from soliciting the former customers for a long enough time to enable the purchaser to take over the business and attract the customers the seller once held. In determining this question of fact, the courts look to certain factors, such as:
- the length of time since the seller’s last contact with the customers;
- whether the seller continued on to work or consult for the purchaser;
- whether the entire purchase price had been paid when the seller began soliciting his or her former customers; and
- other relevant factors appropriate to the facts of the case.
Michigan courts are likely to apply the above factors in evaluating the violation of this implied agreement not to compete. Therefore, restrictions on competition may exist even where they are not expressly part of the agreements underlying the sale. Both sellers and purchaser should keep this in mind if the question of improper solicitation of customers arises.