Severability Contract Provisions - Impact on Non-compete Provisions Part 4
Hello Entrepreneurs!
In this series of columns, we're looking at the impact of including severability language on a non-compete provision. In my hypothetical, you are purchasing a one-store clothing retail business, and want the seller, Fred, to agree to a non-compete provision in the asset purchase agreement (APA). In the first of these columns (October 1st column), I present a choice of three severability provisions - Choice A, Choice B and Choice C. In the October 2nd column, we looked at the impact of Choice A. In the October 3rd column, we looked at the impact of Choice B.
Today, let's look at Choice C, as follows...
Choice C - “If a court of competent jurisdiction finds any provision of this Agreement to be unenforceable, then such provision remains in full force to the extent not held invalid or unenforceable.”
Again, here is the hypothetical non-compete provision.
“For a period of three (3) years after the Closing, Seller shall not directly or indirectly (i) own, operate or otherwise engage in any clothing retail business in any location within 15 miles of the Retail Store*, or (ii) own an interest in, manage, operate, control or render financial assistance to, or become an officer, employee, partner, stockholder, or consultant of or otherwise participate in, any person that engages in a clothing retail business in the above-described restricted area.”
*"Retail Store" is defined elsewhere in the agreement as the store being sold under the APA.
Of the three choices, Choice C is the best choice to salvage the non-compete provision if a court finds it to be overreaching in scope (that is, duration, scope of restricted activity, geographic scope). Choice C allows a court to easily substitute a shorter duration if it finds that three years is too long. It can replace “three (3)” years with, for example, “two (2) years” without changing the sentence structure. If the court finds that 15 miles is too large in geographic scope, then it can replace “15 miles” with, for example, “5 miles”.
The above underlined portions of the non-compete provision, dealing with duration, scope of restricted activity and geographic scope, are the parts that are the most likely to be challenged by the parties being restricted, and therefore the most likely to be scrutinized by the court. Therefore, be proactive with your attorney to make sure that your non-competes are drafted in a way that a court can easily replace the offending words without having to restructure the sentence. A good test of this is to imagine that the court has a “find” and “replace” program like most word processing programs. If you can “find” three (3) years, and “replace” it with “two (2) years”, and the resulting sentence still makes sense (doesn’t have to be rewritten grammatically), then your non-compete provision stands a good chance of making the cut even in a blue-pencil jurisdiction.
Tomorrow, I’ll present a commonly used alternative to Choice C that also works to repair broken non-competes.
Good hunting.
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