covenant not to compete


Also found in: Acronyms.

covenant not to compete

n. a common provision in a contract for sale of a business in which the seller agrees not to compete in the same business for a period of years or in the geographic area. This covenant is usually allocated (given) a value in the sales price. (See: covenant)

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(13) The statute further simplified enforcement by providing for the presumption of irreparable harm upon the showing of a valid, enforceable covenant not to compete. (14) However, the statute retained the overriding principle of reasonableness by providing that a covenant not to compete cannot be overlong or overbroad, and requiring that relief be narrowly tailored to protect the legitimate business interests proven by its proponent.
(27) In Hanchett Paper Co v Melchiorre, (28) the second district appellate court used this test in classifying the customers of a sales company selling non-unique packaging products to validate a covenant not to compete. The first district on similar facts found just the opposite concerning a company that sold shrimp.
(57.) See EMPLOYMENT LAW YEARBOOK, supra note 19, [section] 18.3.2[A] ("As a threshold matter, courts require an employer to have a 'legitimate interest' before they will enforce a covenant not to compete.").
A number of courts have held that an initial promise of new employment, or possibly a promotion to new job responsibilities, will support an otherwise valid covenant not to compete. See, e.g., Milner Airco, Inc.
The defendant denied the claim asserting that the liquidated damages provision in the contract was an unenforceable penalty and that the provision was actually a covenant not to compete and thus void as against public policy.
This point has been made effectively in some divorce cases by practitioners of both genders who have offered to put their practices on the market without the covenant not to compete and related services to demonstrate that there would be no prospective buyers whatever.
If a covenant not to compete is negotiated as part of the stock purchase, however, the covenant not to compete is an amortizable section 197 intangible, even if section 338 is not elected.
Similarly, in Estate of Adell, the Tax Court noted that Kevin Adell never transferred his goodwill to STN.Com through a covenant not to compete or any other agreement.
(142.) See Lester, supra note 72, at 76 ("I would share with a handful of other commentators some optimism about a hybrid approach in which restrictive covenants are deemed unenforceable by statute, with an explicit exception made for discrete training repayment contracts."); Stone, supra note 13, at 755-56 (arguing that the enforcement of a repayment agreement, "unlike enforcement of a broad covenant not to compete, does not undermine [the] psychological contract" between employer and employee).
Payments paid by a buyer under a covenant not to compete are ordinary income to the selling shareholders, but must be amortized by the buyer (and cannot be expensed) over 15 years, even though the covenant may be for a shorter period of time than 15 years.
Memo 1991556, the court held that a corporate medical practice had goodwill despite the lack of a covenant not to compete with its sole shareholder and only physician-employee.
S, who plans to retire immediately, also executes in P's favor a covenant not to compete. P pays S $3,000 in cash and assumes $1,000 in liabilities.

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