Non-Compete vs Non-Solicitation in Purchase Agreements

Non-Competition provisions and Non-Solicitation provisions are commonly found in asset purchase agreements and share purchase agreements. Both provisions are designed to protect a company’s business. In this article we will examine the differences between the two provisions and when they are appropriate to use.

1. Non-Competition Provisions:

   A non-compete provision restricts a party from engaging in direct competition with the other party. The agreement prohibits a party from working for or establishing a competing business within a geographic area for a negotiated duration.

2. Non-Solicitation Provisions:

   A non-solicitation provision generally focuses on the customers of a business instead of the business’ activity. Such provisions are intended to prohibit poaching the customers, clients, or employees of the other party.

Non-Competition provisions can be thought of as protecting the content of the business and the business network depending on how they are drafted. Non-Solicitation provisions are exclusively designed to protect the business’ network.

Acceptability and Enforceability:

When assessing the validity of each provision, several factors come into play. The court will ask.

1. Whether there was an inequality in bargaining power?
2. What the purpose of the restriction is?
3. Whether the duration and geographic area of the restriction is appropriate?

Inequalities in Bargaining Power

This generally refers to the size of the entities negotiating with each other and the leverage they have available. Generally, when businesses are negotiating with each other the courts are unlikely to find an inequality in bargaining power.

The Purpose of the Restriction

This factor is concerned with what actions are specifically prohibited. For example, it might be too restrictive if a Non-Compete provision prevented an automotive engineer from working as an aerospace technician. A Non-Solicitation provision might be too restrictive if it prevented all communication with prior clients instead of just soliciting. The business could be sufficiently protected even if the scope of prohibited activities was narrowed.

Duration and Geographic Limitations

This factor depends greatly on the circumstances of each case, but generally the scale of the geographic restriction must be in line with the size and reach of the business. The duration of the limitation must be reasonable as well. A restriction lasting an absurdly long time will not be looked on favorably by the court.

Conclusion

Non-Compete and Non-Solicitation provisions are powerful tools for the protection of a business but if implemented incorrectly a court may invalidate them and leave a business with little to no protection. A lawyer can ensure that Non-Solicitation and Non-Compete provisions are sufficient to protect a purchaser but loose enough to provide the seller with some freedom after closing the transaction. The information in this article is for educational purposes only, while the accuracy of the information has been evaluated it has been greatly simplified for the sake of brevity. If you need legal advice, please contact a lawyer.

Written by: Lucas Rotino

* Please note that the information in this article is not intended as legal advice, but rather as a general overview on the subject. If you are seeking legal advice, please consult with a lawyer.