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03-Sep-2014 The validity of non-compete agreements

NON-COMPETE AGREEMENT: A promise, in a sale-of-business, partnership, or employment contract, not to engage in the same type of business for a stated time in the same market as the buyer, partner or employer.  Black’s Law Dictionary


Although often overlooked, the most valuable asset of almost any successful business is its goodwill.

What is goodwill? Goodwill includes the business reputation, patronage and other intangible assets. Businesses are valued in large part by their goodwill, not by the tangible assets they own. Businesses spend considerable time and money to protect their tangible assets– which probably constitute a small portion of its valuation. Yet, very little time and money is spent protecting their most important asset– goodwill.

 

How does a business protect its goodwill?  As a business owner my first rule of thumb is– it’s all about the customer or client. Additionally, Nebraska law does allow businesses to create non-compete agreements. However, one should procede with extreme caution in this arena, as Nebraska courts strictly review non-compete agreements for reasonableness.

What is reasonable? It depends. I know, typical lawyer answer. But the truth is the answer is very fact specific. It is difficult to say with absolute certainty that an agreement is reasonable, but it is very easy to spot an agreement that is clearly unreasonable. Nebraska Courts have established a three-prong test to help determine if a non-compete agreement is reasonable.

First, the agreement must not injure the public.

Second, the agreement must not be greater than is reasonably necessary to protect the business in some legitimate interest. A business has a legitimate interest in protection against unfair competition, but is not entitled to protection against ordinary competition.

Finally, the agreement must not be unduly harsh and oppressive against the party against whom it is asserted.

 

What if my agreement is unreasonable?  Nebraska is an “all or nothing” state, meaning, if your agreement fails the test for reasonableness, it is entirely unenforceable. Ouch!

Therefore, if you are considering a non-compete agreement, very careful attention should be paid at the drafting stage.  Remember, the Court will not reform your agreement to make it reasonable. It will hold it to be completely unenforceable.


Businesses invest a lot of time, energy and money in developing their business. Non-compete agreements are just another tool available to help protect this investment. Due to the complexities involved in non-compete agreements, I would advise any business owner considering a non-compete agreement to obtain legal guidance to ensure their agreement is enforceable. Remember, when it comes to non-compete agreements, it really is all or nothing.



About the Author

Matthew D. Baack
Skalka & Baack Law Firm, L.L.C.
Matt was raised in Holdrege, Neb. and currently lives in Hastings. He received his business degree at UNL and continued his education at the University of Nebraska College of Law. He specializes in real estate, business and corporate law, as well as estate planning.




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