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Principal Who Sold Agency Sued Over Non-Compete

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Merger and acquisition activity among insurance agencies has been rampant for several years. In addition to growing organically, large and medium-sized agencies are growing by purchasing their peers. Agency owners have received high sale prices for the businesses they’ve built.

 

Often, agency sellers are planning to retire, but in some cases the seller agrees to work for the purchaser after the sale. Tension may result if the seller eventually decides to leave the company. The seller of an Arkansas agency found himself in a court dispute over the non-compete agreement that was included in the purchase agreement.

 

He sold his agency to a large national broker for “substantial monetary compensation.” The purchase/sale agreement included a separate employment agreement pertaining to the agent’s future work for the merged organizations. He was hired as a benefits consultant with “significant managerial and servicing responsibilities for national accounts throughout the United States.” He received a “generous salary plus opportunities for performance-based bonuses,” and was permitted to “retain limited duties” with the purchased agency “provided they did not detract from his obligations” to the purchaser.

 

The employment agreement made clear that all information was the purchaser’s property. It also included a “non-compete agreement,” under which the seller’s activities were restricted for five years from the agency sale date. The agreement prohibited the seller from competing with the merged organizations “within a 25-mile radius of the location of any client, customer or Prospective Account.”

 

Three and a half years after the sale, the seller resigned his position with the buyer. Before leaving, however, he sent a number of emails to his personal address that contained “plan design information, quotes, and a prospect list.” He even emailed himself his entire contact list on the day of his resignation. Three weeks later, the company’s in-house counsel wrote a letter reminding him of the prohibitions in the non-compete agreement.

 

The company subsequently sued him for violating the agreement; they sought damages and an injunction to prevent him from committing further violations. He argued that the non-compete agreement was overly broad, while the company responded that it was “reasonable and narrowly tailored to protect its business interests.”

 

The judge agreed with the company. He noted that courts are less concerned about non-compete agreements connected to a business sale than they would be with solo employment contracts. Unlike an employment agreement negotiated between an employer and prospective employee, this one was negotiated between “bargaining partners of equal stature.” He ruled that:

 

The agreement’s scope was reasonable to protect against the legitimate concern that the seller could “unfairly drain competition away” in his post-employment activities.

 

The geographic reach reasonably protected the market and customers the buyer had purchased.

 

The five-year duration reasonably protected the buyer against unfair competition from the seller.

 

The buyer, he noted, paid the seller more than five times his annual base salary for his accounts with no requirements for future performance. Accordingly, he found the agreement to be reasonable, valid and enforceable.

 

The time for the selling agent to object to the non-compete agreement was while he was negotiating the sale. He could have used  the specifics as bargaining points. If the buyer would not agree to his terms, he had the option of looking for another buyer. Instead, he signed a contract that a court found to be reasonable, and he was bound by it.

 

An agency principal who is looking at selling is primarily concerned with the purchase price. However, as this case shows, unrelated details can be almost as important. When a sale is negotiated, the details must be negotiated to both parties’ satisfaction.

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