Non-Compete Agreements in Nebraska

Businesses often ask employees to sign non-competition agreements to protect their businesses.  Non-competition agreements can be a good option in sales of businesses to be sure that the seller does not compete with the new business.  Nebraska has recognized the legitimate need of one who purchases a business to reasonably protect himself against competition from the seller.  In Swingle & Co. v. Reynolds, 140 Neb. 693, 695, 1 N.W.2d 307, 309 (1941), the Nebraska Supreme Court stated that "the purchase of the property and business of another furnishes a sufficient consideration for an agreement that the seller will not again engage in that business in the same vicinity" and that contractual restraints of this nature will not be considered unreasonable "when they are ancillary to any valid contract made in good faith and are apparently necessary to reasonably protect the parties, or either of them."

Non-Competes Related to the Sale of Businesses

The court noted that "it is almost intolerable that a person should be permitted to obtain money from another upon solemn agreement not to compete for a reasonable period within a restricted area, and then use the funds thus obtained to do the very thing the contract prohibits. Unless such contract [568 N.W.2d 239] be against the public interest, the parties should be held to their engagements."  Id. 

Applying these principles, the Nebraska Supreme Court held that a contract from the seller of a business that he would not engage in a similar business south of the Platte River for a period of 5 years after the sale was reasonable and, therefore, enforceable.  Id.  

D.W. Trowbridge Ford, Inc. v. Galyen, 200 Neb. 103, 262 N.W.2d 442 (1978), involved an agreement by the seller of a Ford dealership in Holt County that he would not engage in the business of selling new cars in that county for a period of 15 years following the sale. Restating the holding in Swingle & Co., the Nebraska Supreme Court stated: "Partial restraints are not unreasonable if they are ancillary to a purchase of property made in good faith and are necessary to afford protection to the purchaser. What is a reasonable restraint depends largely upon the facts of the particular case." 200 Neb. at 105, 262 N.W.2d at 445. We concluded that the restraint at issue in that case, "which was limited as to both time and space, was reasonable." Id. at 106, 262 N.W.2d at 445.

Chambers-Dobson, Inc., involved a covenant not to compete related to the sale of an insurance agency, as well as a separate non-competition covenant contained in an employment agreement subsequently entered into between the buyer and seller. With regard to the covenant connected to the sale, the Court cited the rules set forth in Swingle & Co., and D.W. Trowbridge Ford, Inc., and quoted with approval the following statement from Corbin on Contracts:

"The restraint of trade that is permissible [in connection with the sale of goodwill as a business asset] is no greater than is necessary to attain the desired purpose--the purpose of making good will a transferable asset. It is lawful for the seller to restrict his own freedom of trade only so far as is necessary to protect the buyer in the enjoyment of the good will for which he pays. The restraint on his own freedom must be reasonable in character and in extent of space and time."  238 Neb. at 755, 472 N.W.2d at 397 (quoting 6A Arthur L. Corbin, Corbin on Contracts § 1385 (1962)). 

A non-compete is binding unless it goes against the public interest. Regarding the public interest, the Court held in Swingle & Co., 140 Neb. at 696, 1 N.W.2d at 309, that the elimination of one competitor from a restricted area for a limited time in the business field ... does not constitute such a restraint of trade or tendency toward monopoly incompatible with the public interest as to warrant one of the parties to avoid his solemn agreement....

In Chambers-Dobson, Inc., the covenant contained in the sale agreement had no geographic limitations, but did prohibit business contacts with specific customers who were identified in the asset sale agreement. Because this "customer list" was specifically included in the assets being sold, the Nebraska Supreme Court held that the covenant not to compete was a reasonable method of protecting the property acquired by the purchaser. The Court further held that the covenant contained in the sale agreement was not incompatible with the public interest or against public policy.

Nebraska courts will generally consider whether the covenant not to compete was injurious to the public interest. The court will consider whether the covenant protected a legitimate business interest and, if so, whether the restraint on competition imposed by the covenant was "no greater than necessary" to attain its purpose. 

A covenant not to compete connected with the sale of a business may be utilized to make goodwill a transferable asset.  However, the restraint contained in the covenant must be reasonable in both space and time so that it will be no greater than necessary to achieve its legitimate purpose. See, Chambers-Dobson, Inc. v. Squier, 238 Neb. 748, 472 N.W.2d 391(1991); D.W. Trowbridge Ford, Inc. v. Galyen, 200 Neb. 103, 262 N.W.2d 442 (1978); Swingle & Co. v. Reynolds, 140 Neb. 693, 1 N.W.2d 307 (1941).

Whether a covenant not to compete is reasonable with respect to its duration and scope is dependent upon the facts of each particular case. See D.W. Trowbridge Ford, Inc., supra. The fact that Nebraska courts have upheld a covenant not to compete with a duration of 10 years or more does not automatically mean that a 10-year restraint reasonable. Courts will consider evidence which establishes that the 10-year restraint was a reasonable and necessary means of protecting the legitimate business interest.

At trial proving a legitimate business interest will normally require witness testimony as to reasons why the business needed a 10-year restraint on competition in order to protect itself.  It may be helpful to provide evidence that the number of years is an "industry standard" for a covenant not to compete ancillary to the sale of a business.  In Chambers-Dobson, Inc., the court noted that the duration of the restraint was reasonable in light of evidence that the acknowledged and accepted "useful life" of the sold customer list was 7 years. 

Likewise, evidence must establish that the covenant not to compete is reasonable in scope. Usually there will be a description of a trade area serviced.  There must be a reason why the business needed to restrain competition x miles away from each location within the trade area in order to protect the value of the assets which it purchased.

In Chambers-Dobson, Inc., the scope of the restraint upon competition by the seller of business was defined by the specific accounts which were being transferred, rather than in geographic terms. The seller of the insurance agency was restricted from soliciting insurance business from specific customers identified in the asset purchase agreement with whom he had previously had a personal business relationship.  The Nebraska Supreme court upheld the reasonableness of this restriction, stating: "The absence of specified geographic applicability of the non-competition covenants presents no problem under the circumstances inasmuch as [the seller] can conduct an insurance agency in Lincoln or any other location, provided that he does not draw customers from the pools prohibited by the covenants."  238 Neb. at 763-64, 472 N.W.2d at 402.

Non-compete agreements in employment contracts are covered in the firm's blog posting here.

If you need help drafting or determining the validity of a Nebraska non-compete agreement you should consider contacting Angela Madathil.  Madathil Law Office specializes in employment law in Nebraska, and offers free consultations.   

Madathil Law office serves Nebraska employment clients in Omaha, Lincoln, Lancaster County, Douglas County, Otoe, and Cass County Nebraska.  If need a Nebraska employment lawyer, consider contacting Angela Y. Madathil and the Madathil Law Firm.  

Contact us at angela@madathil-law.com or by telephone at 402.577.0686.  The firm offers free consultations.  For more information feel free to look at our website www.madathil-law.com.

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