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Watch out for the gray areas in non-competes.

   What if you are the seller of a previous business or shares amounting to more than an insignificant percentage of a previous business?  Certainly the buyer’s asset purchase documents included a non-compete clause, usually valid for two years from the date of the closing.  And because there was consideration paid to you in the sale, that clause is binding upon you and is effective almost everywhere.

                  Well, what if the buyer is now bankrupt?  That does nothing to regain your right to its purchased information.  The estate of the bankrupt company retains and can resell those rights into the infinite future.  (Patents expire after 14 or 20 years – depending upon type – and publicly disclosed patent information is no longer subject to the agreements after that expiration, as long as you use only the publicly disclosed information as filed within the patents themselves.)

 [Email readers, continue here…] What if the buyer abandons your previous product?  That does not change their purchased rights to it.  What if you invent a substantial enhancement or change to the product?  As long as you did not use patented processes or trade secret material from you previous company, you should be protected, but you might be prepared for a fight.

                How about after the two year limitation in your agreement?  Separate confidentiality from non-compete, and obey the confidentiality clauses.  The non-compete agreement does expire when stated.  But watch it. Some clever buyers try to slip in an unlimited non-compete, and some courts have upheld this.  And there are gray areas for former key employees who signed a non-compete with a limited life as part of the sale, but remained on for some time thereafter employed by the buyer.  Does the non-compete start anew upon the employee’s departure?  Courts tend to apply only the reasonableness standard to these gray area cases, looking to see how much the person now competing gained from the original sale.

                The safest advice is to avoid using any materials from the previous company, and compete only after the expiration of any written agreements or clauses signed with the buyer.

  • Dave

    I love your posts! But on this one, you might have been a little too conservative. There are several ways to contest a poorly drafted non-compete, and usually some room to negotiate for the encumbered worker.

    The only thing certain about these fights, unfortunately, is that they tend to run up high legal bills.

    Rich Bruder

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