Non-Compete Agreement In Sale of Business

New Jersey courts will only enforce a covenant not to compete (non-compete agreement) in an employment contract if it is reasonable under the Solari/Whitmyer test.  A non-compete agreement or restrictive covenant is reasonable under that test if it: (1) protects legitimate interests of the employer; (2) does not impose an undue hardship on the employee; and (3) is not injurious to the public.  However, even if the restrictive covenant is found to be enforceable, it may be limited in its application concerning its geographical area, its period of enforceability, and its scope of activity under what is known as the blue pencil rule.

When a non-compete agreement or restrictive covenant is ancillary to the purchase of a business, it is accorded far more latitude than a non-compete in an employment contract.  This is why you will see non-compete provisions regarding the sale of a business that has a period of enforceability for 5 years.  Whereas a non-compete agreement in an employment contract is typically has a period of enforceability of 2 years.

Dated: March 30, 2010 – Tom McKinney