When acquiring a business, the buyer will most always require that the purchase agreement contain a covenant whereby the seller agrees not to compete with the buyer for some period of time. In June 2003, in a case involving the sale of an alarm company, the validity of such a covenant was challenged.

The plaintiff was the president and sole shareholder of a company which was engaged in the business of selling, installing and servicing electronic security and alarm systems. The company was headquartered in Oklahoma. The plaintiff and the defendant entered into a stock purchase agreement whereby the defendant purchased all of the shares of the outstanding capital stock of the plaintiff. Under the terms of the agreement, the plaintiff agreed that for a period of five years from the closing date he would not undertake certain activity which would compete against or devalue the business acquired by the defendant within the defined territory.

The plaintiff became employed by the defendant and continued to work for the defendant until his termination approximately two years later. Thereafter, the plaintiff filed this action for declaratory relief against the defendant seeking to have the court declare the parties’ non-compete agreement (NCA) invalid and unenforceable under Oklahoma law. Each of the parties then filed respective motions for summary judgment.

The agreement contained a provision whereby the parties agreed that the choice of law would be the State of Delaware. The plaintiff, seller, argued that the agreement could not be enforced under Delaware law without violating the public policy of Oklahoma.

Under Delaware law, in the sale of a business and its good will, a promise by the seller not to compete will be enforced if reasonably limited as to time, area and purpose and if such promise does not constitute an unreasonable restraint of trade or otherwise contravene public policy. Or, if at the time of the sale of a business, a covenant not to compete is no broader than is necessary for the adequate protection of the buyer and does not tend to create a monopoly, in which event the NCA agreement is generally valid.

Under Oklahoma law, NCA agreements are generally void as against public policy; however, Oklahoma statutes allow a party selling the good will of his business to agree not to compete within a specified county or city for as long as the purchaser carries on a similar business. Non compete agreements in connection with the sale of good will, which are otherwise valid, are subject to modification with respect to the territorial restrictions found in the statute. The Oklahoma Supreme Court had previously approved non-compete agreements with five year terms.