Restrictive Agreements

March 30, 2013

Building a business is not easy. It takes a lot of time, energy and money. But if you are lucky, you end up with a successful brand that stands for quality. At some point, you may want to sell your company, allowing it to live on and grow with someone else. If you do plan to sell your business, there are a lot of things to consider.

Take for example the old California case of Mahlstedt v. Fugit. In this case, C. A. Fugit sold his orchard heating business to J. F. Mahlstedt. For five thousand dollars, Mahlstedt received all salable goods used in the business, all machinery used in the business, patents for e heater and items used in advertising. Mahlstedt also received current customer information and promised to keep prices similar. Fugit also promised to refrain from entering into the orchard heater business as a manufacturer or owner in whole or in part, for a least ten years or to act as a salesman or representative of any orchard heater company. This case focuses on the last promise.

About four years after selling his business, Fugit partnered with Mr. Fabrey, who also manufactures orchard heaters in the same area as Mahlstedt’s orchard. The created the Fugit-Fabry Company and advertised that the company was prepared to furnish replacement parts for orchard heating systems already installed or new systems. This use of the Fugit’s name to sell heaters, prompted Mahlstedt to sue Fugit for failing to comply with the sales contract.

Fugit claimed that the ten year restriction in the agreement was invalid because it did not contain a location restriction. Most states do not like restrictive agreements, therefore they are held to strict requirements to make sure they are fair for all involved parties. Restrictive agreements require a reasonable time frame, locale and area of expertise. In this agreement the tries agreed to the time, ten years, and the area of expertise, manufacturing orchard heaters but not the local. The court decided at since the company sold was based in Los Angeles county, the contract to be limited to that territory, making the contract valid.

The next issue to be decided was whether Fugit was allowed to let Fabry use his name to sell in their new business. The court already concluded that Fugit sold his goodwill in his store to Mahlstedt because, in California, when a person sells the contents of a store and agrees not to engage in the same business in the same city as long as the purchaser continues in business, the contract is construed as carrying with it the good will of the business. Good will is essentially the reputation of the business. When a person transfers good will they may also transfer with it, the right of using the name under which the business is conducted. These, however, are two separate things. Therefore while the transfer of good will may be assumed, to transfer a name you must explicitly state it. In this case, the transfer of the name was not a part of the sales agreement. Accordingly, the court found that Fugit was allowed to use his name in business with Fabry as long as he does not solicit business on behalf of he company and is not in any way connected to the part of the business manufacturing and distributing heaters.

Restrictive terms in contract can be difficult to properly. Court do not like them and are wary of anything that may seem unfair. A business attorney can help you write a clear contract. If you need a business lawyer in the Sacramento area, please call our Sacramento business attorney.