Mel owns a neighborhood grocery store that he would like to sell. Katrina is interested in purchasing the business, but she is concerned because she knows that Mel has built up a lot of goodwill over the years, and she wonders whether Mel might not just

Question

open another store down the block and take all of the business from the old store with him. Katrina asks for and receives from Mel a clause in the sales 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?

Answer 1

a.
The agreement is a covenant in restraint of trade in connection with the sale of a business or a covenant not to compete.

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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 ten years may also 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.

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c. A court examines the extent of time as well as the area or territory covered by the restraint. The restraint is reasonable if it is co-extensive only with the interest to be protected. The restraint is enforceable if 1. the purpose of the restraint is to protect a property interest of the promisee and 2. the restraint is no more extensive than is reasonably necessary to protect that interest. Each case must be considered on its own facts.