Noncompetition and Nonsolicitation Agreements

Noncompetition and Nonsolicitation Agreements


Buyers often want (or need) the seller to stick around after the sale is completed to transition key relationships with customers, suppliers, and lenders, or to provide training and know-how regarding business operations. Often this is documented in an employment agreement where the business re-hires the seller as a W-2 employee, or a consulting agreement where the seller provides services as an independent contractor.

In either case, buyers usually want to prevent competition with the former owner by placing restrictions on his or her ability to exploit relationships developed over time with customers, suppliers, and staff. This often is documented as a noncompetition or nonsolicitation provision.

A noncompetition agreement is a broad restriction that essentially prevents someone from working in a particular industry. Under Oregon law, noncompetition agreements are difficult to enforce against employees of a company. Noncompetition provisions in employment agreements signed on or after January 1, 2008 are voidable (unenforceable) unless:

•The employer tells the employee in a written job offer at least two weeks before the employee starts work that the noncompete is required, or the noncompete is entered into upon a bona fide advancement, AND
•The employee is exempt from Oregon minimum wage and overtime laws, AND
•The employer has a “protectable interest” (access to trade secrets or competitively sensitive confidential information), AND
•The employee makes more than the median family income for a family of four as calculated by the Census Bureau (currently about $65,000).

In addition, noncompetition agreements contained in employment contracts are only enforceable for up to two years after termination of employment.

When it comes to the sale of a business, however, the above restrictions do not apply. This means that buyers may insist on much broader terms when negotiating the duration and scope of noncompetition restrictions against the seller.

Nonsolicitation agreements are less restrictive in that they don’t prevent future work in the same industry. Instead, they are more narrowly tailored to prevent unfair competition by the seller. In the context of a business sale, nonsolicitation agreements typically prevent the seller from contacting, marketing to, or doing business with, customers or clients of the business for a reasonable period of time after the sale. Often they include similar restrictions preventing the seller from soliciting employees or contractors of the business to jump ship, and some agreements may go even further by preventing the seller from doing business with company suppliers or vendors.

As with all contracts, the devil is in the details. Whether you are the buyer or the seller, it pays to spend some time with your business attorney to make sure that the noncompetition or nonsolicitation restrictions are appropriate and do not contain hidden loopholes for either side.

Dangers in the Transition Zone of a Business Sale

Dangers in the Transition Zone of a Business Sale


Sellers must exercise caution in several areas when negotiating the sale of a business. For example, buyers often want to prevent the seller from setting up a competing business to lure away customers or clients. Typically this means signing a noncompetition agreement or a nonsolicitation agreement.

Watch Out for Noncompetition & Nonsolicitation Agreements

A noncompetition agreement prevents the seller from working in the same industry for a period of time, and within a defined geographic area. A nonsolicitation agreement doesn’t prevent the seller from working in the same field, but prevents him or her from doing business with company clients, customers, and sometimes vendors or suppliers for a specified period of time. In addition, nonsolicitation agreements often prevent the departing seller from recruiting employees or contractors to leave the business.

Remember Personal Guarantees

Another area of potential risk involves personal guarantees signed by the seller on behalf of the business. For example, if a business is sold midway through a commercial lease and the lease is guaranteed by the seller personally, the landlord may not be willing to release the seller until the lease expires. Sellers need to make sure that the buyer is legally obligated (and financially able) to step up.

Protect Intellectual Property

Yet another area of concern involves the need to protect intellectual property and trade secrets during and after the negotiation of a business sale. Often businesses use nondisclosure agreements during the pre-sale activities, including a buyer’s due diligence. Buyers may insist that seller’s maintain confidentiality of sensitive business information after the sale has been consummated. And savvy business owners place confidentiality and nondisclosure provisions in employment and independent contractor agreements to prevent their valuable information from ending up in the wrong hands.

We’ll address each of these risks in more detail over the next few postings.