Explore a significant M&A case in Texas where a court restricted the geographic reach of a noncompetition covenant in the sale of Hispanic grocery stores. The buyer, owner of La Michoacana and El Ahorro chains, faced noncompete breaches, leading to a legal battle. Discover the key takeaway for buyers to craft reasonable noncompete agreements and avoid prolonged litigation.
M&A Stories
August 29, 2018
In a notable M&A case, a Texas court has limited the geographic scope of a noncompetition covenant involving the sale of Hispanic grocery stores. The buyer, who owns La Michoacana and El Ahorro chains with a total of 150 stores in Texas and Oklahoma, had purchased five Mi Rancho stores from the seller in 2007.
As part of the agreement, the seller signed a noncompetition clause, preventing them from operating a Hispanic-themed grocery store within 10 miles of the sold stores, any existing La Michoacana or El Ahorro stores, or any future ones within 15 years.
In 2012, the buyer accused the seller of breaching the noncompete agreement by operating competing stores in Irving, Texas; Oklahoma City, Oklahoma; Houston, Texas; and Pasadena, Texas. The jury ruled in favor of the buyer, awarding damages, including punitive damages.
Post-trial, the seller sought to modify the noncompete agreement, presenting expert testimony that Hispanic grocery store customers typically travel no more than 3 miles. The trial court granted the motion, adjusting the exclusionary radius to 3 miles around the sold stores.
The appellate court upheld the decision, emphasizing that a reasonable noncompete agreement must have limitations on time, geographical area, and scope of activity. Texas law mandates reforming overreaching covenants to only prohibit competition against the business sold.
Key Takeaway: Buyers should craft reasonable noncompete agreements to avoid protracted and costly litigation, protecting the purchased business’s goodwill without imposing unnecessary restraints.
Case Reference:
Ortega v. Abel, No. 01-16-00415-CV, Court of Appeals of Texas, First District, Houston, (Opinion issued August 23, 2018). https://scholar.google.com/scholar_case?case=12751057774274517688&q=Ortega+v.+Abel&hl=en&as_sdt=400006
By John McCauley: I help people start, grow, buy and sell their businesses.
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