Court holds that Oklahoma does not permit a buyer to hold the owner of the selling company responsible under a noncompete for the competitive actions of her grandson (a non-owner of the company).
March 23, 2023
A buyer can usually require the owner of a company selling its assets to promise not to compete against the business after the closing.
This deal involved the sale of the assets of a small manufacturing company. In the asset purchase agreement, the seller’s owner promised to not compete against the buyer and to indemnify the buyer for damages if the owner or certain members of her family competed against the purchased business.
After the closing the owner’s grandson formed a company to compete against the sold business. He also persuaded the former seller general manager, to leave his employment with the buyer and work for grandson’s company.
The buyer sued the seller owner for damages, for the competitive actions of her grandson. The owner argued that she cannot under Oklahoma law be responsible for the actions of her grandson.
The court agreed: “Under Oklahoma law, which expressly controls here, contracts in restraint of trade are generally void, subject to a few exceptions.” One of the exceptions is when the goodwill of a business is sold. In that case the selling company and its owner can agree to not compete against the buyer to protect the goodwill as long as the terms are reasonable.
However, the court held that this exception did not permit the owner to be responsible for the competitive actions of a nonowner: “… (The buyer) … fails to cite to any authority indicating that the rule of reason test permits a party to contract, on behalf of a non-signatory, not to engage in a competing form of business. Thus, the Court is unable to conclude that the rule of reason test permits a finding that … (the seller’s owner) … is liable under the APA based solely on the actions of her … (her grandson) …”
See Aceco Valves, LLC v. Wolf, Case No. CIV-21-368-D, United States District Court, W.D. Oklahoma (March 17, 2023).
The owner could be held accountable for damages for any competitive actions undertaken by her. Thus, the case continues.
By John McCauley: I write about recent legal problems of buyer and sellers of small businesses.
Telephone: 714 273-6291
Check out my books: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles and Selling Assets of a Small Business: Problems Taken From Recent Legal Battles
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