Can a no compete agreement extend beyond the employee to immediate family members?

First of all, asking "on behalf" of another individual, even if family, is not particularly likely to secure reliable information. Would you consider asking a doctor for a diagnosis on behalf of your grandfather?

Nonetheless, and without knowing the particulars of the situation, not just because it isn't the actual individual involved in the transaction asking, transactions involving the sales of a business are complex commercial transactions which typically involve an employment agreement or "stay away" provisions for the individual selling the business (and hence the goodwill). How far that non-compete extends, whether geographically, temporally, or to which individuals will vary from transaction to transaction depending upon the needs of the business and the buyer.

It would be extremely foolhardy for your grandfather to sell a business without retaining legal counsel, who could also advise him about such things.

posted by Harold Goldner  |  Sep 21, 2011 11:27 AM [EST]

It is common for a noncompete to be a part of the sale of a business. However, your grandfather cannot bind other members of his family, other employees, etc. If he sells his 49% interest, he can certainly agree not to compete. But he can only bind himself since only he is part of the sale and the agreement. If they want to bind any other members of his family to the noncompete, they need to make them parties to the sale, so that they have to sign the agreement. They would also have to receive some consideration in return for the noncompete.

As to the time and distance of the noncompete, Pennsylvania generally requires that the terms be "reasonable." There are no magic numbers as to what is reasonable or not, it depends on the circumstances.

The 5 year term for the noncompete is a little high, but may be reasonable under the circumstances. The restriction within the county may also be reasonable under the circumstances. I would need to know more facts about the business to be able to give an opinion as to whether those terms are reasonable here.

I would be happy to review the terms of the sale for your grandfather if he does not already have legal counsel, or for you or another family member if you are being asked to be a party to it.

posted by Scott Leah  |  Sep 21, 2011 10:57 AM [EST]

Before I respond to your inquiry, I must state that we have not spoken, I have not reviewed the relevant documents and facts, and I do not represent you. Therefore, my discussion below is not a legal opinion, but is informational only. Finally, my discussion applies only to issues to which Pennsylvania or Federal law apply, unless otherwise specified.

That being said, you cannot be bound by a noncompete that you do not sign or to which you are not a party. I do not believe that if you were to violate the purported noncompete that your grandfather's partner could even sue him for it, much less you. That being said, if you were to engage in competition in the county as a proxy or "straw man" for your grandfather, that might subject you both to liability.

The 5-year term and the county-wide geographic scope are likely to be enforceable against your grandfather.

Your grandfather should also be aware that how the noncompete is structured within the deal will have potentially significant tax effects; if done incorrectly, it could subject a large portion of the proceeds to tax at ordinary income rates (up to 32% or more) instead of long-term capital gains rates (15%).

If you would like to discuss this matter further, please feel free to contact me at the below address(es) or number.

/Christopher E. Ezold/
The Ezold Law Firm, P.C.
One Belmont Avenue,
Suite 501
Bala Cynwyd, PA 19004
(610) 660-5585
Cezold@Ezoldlaw.com
www.ezoldlaw.com

posted by Christopher Ezold  |  Sep 21, 2011 10:55 AM [EST]