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A covenant not to compete which is contained in a contract for sale of a business is a seller's self-imposed restraint from trade and is frequently necessary to make goodwill in the seller's business a transferable asset and ensure that the buyer receives the full value of acquired goodwill.
The insurance agent sold his business to the corporation and became an employee of the corporation after the sale. The contract for sale of the business contained a noncompetition clause in connection with the sale of goodwill that prevented him from contacting existing clients of the business for seven years. His employment contract contained a noncompetition clause that prevented him from contacting clients of the corporation for two years after termination of his employment. The agent terminated his employment and went into competition with the corporation, immediately taking on former clients of his business and clients of the corporation. The district court granted permanent injunctions enforcing noncompetition agreements against the agent in favor of the corporation. The agent claimed that the noncompetition clause contained in the agreement to sell his business was an unreasonable restraint of trade and the clause in an employment agreement was unduly harsh and oppressive.
Was the noncompetition clause contained in the agreement to sell the agent’s business an unreasonable restraint of trade?
The court held that the noncompetition clauses were reasonable restraints of trade. The clause in the contract for sale of the agent's business was necessary to protect the corporation's investment in the business' goodwill. The clause in the agent's employment contract was not unduly harsh or oppressive on the agent. He was not prevented from competing with the corporation, merely from using the pool of clients established by the corporation, including his prior clients.