Severability Contract Provisions - Impact on Non-compete Provisions Part 5
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.
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.
Today, let's look at an commonly found alternative to Choice C (discussed in my previous column).
Here is Choice C.
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.”
Here is the alternative (let’s call it Choice D), which can be placed directly at the end of the non-compete provision.
“In the event a court finds this non-compete provision unenforceable as to geographic scope or duration, then the court has the power to reduce the geographic scope or duration to the extent necessary to render the provision enforceable.”
Like Choice C, Choice D also works to salvage the non-compete provision if a court finds it to be overreaching in scope (that is, in duration or geographic scope). And Choice D similarly 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”. If you look closely, however, Choice D doesn’t cover the situation where the non-compete overreaches in terms of the scope of activity or other problems that a court may find with the non-compete provision. Keep in mind also that Choice D is typically found directly in the non-compete provision (because it's intended to cover only problematic non-competes). You’ll still need to have severability language in the boilerplate section of the agreement to cover the rest of the agreement. Make sure your attorney confirms to you that the severability provision (typically one of Choice A, Choice B or Choice C) in the boilerplate section isn’t internally inconsistent with the Choice D language in the non-compete provision.
Good hunting.
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