Mel has a neighborhood grocery store that he would like to sell. Casey is interested in purchasing the business, but he is concerned because he knows that Mel has built up a lot of goodwill over the years, and he wonders whether Mel might not just open another store down the block and take all of the business from the old store with him. Casey asks for and receives from Mel a clause in the sale
agreement that Mel will not open another grocery store within a 150-mile radius of the old store for a period of at least ten years.
a. What is this agreement called?
b. Is the negotiated clause a valid one? Explain why or why not.
c. What guidelines would a court ordinarily use in determining whether to enforce such a clause?
a . The agreement is a covenant not to compete or a covenant in restraint of trade in connection with the sale of a business.
b. The agreement is probably invalid, because the grocery store is only a neighborhood store, but the agreement calls for Mel not to open another grocery store within a 150-mile radius. This geographic restriction would seem to be unreasonable under the circumstances. A time period of under five years would probably be upheld, but one of ten years may be unreasonable. However, students may make good arguments to support upholding the agreement and should be given credit for their arguments if they show an understanding of the guidelines given in the book regarding whether a court will uphold such an agreement.
c. While in some cases the extent of time is the major issue, most cases involve the area or territory covered by the restraint. The rule is that the restraint is reasonable if it is co-extensive only with the interest to be protected. The test is whether the purpose of the restraint is such only as to afford a fair protection to the interests of the party in whose favor it is given, and the restraint is no more extensive than is reasonably necessary to protect that interest. A court would consider the hardship the restraint imposes on the promisor and the public.
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