As readers of Billboard Insider, you’ve undoubtedly seen from the frequent notices in the publication the tremendous amount of acquisitions of out of home assets recently. In addition to asset purchase agreements and assignment of interests, these transactions often include covenants not to compete. More specifically, the purchaser of the billboard assets often attempts to secure from the seller a promise not to compete by engaging in the billboard business for an agreed period of time within an agreed local. Similar restrictive covenants are sometimes negotiated in employment agreements.
In either case, the agreed restrictions on the geographic, temporal, and scope of competitive employment are designed to protect the business and good will of the purchaser or employer. For example, a seller of an outdoor advertising plant might need to induce a potential buyer by promising not to solicit billboard advertisers or build new billboards within a 50 mile or so radius for two or three years. Otherwise, the buyer might justifiably fear that the seller could quickly turn around and exploit his years of rapport with local lessors and advertisers into an unfair competitive advantage, right after paying the seller substantial sums for his billboard business. Similar legitimate business interests are protected by such covenants in employment agreements, where employers may be especially vulnerable to former employees who unfairly utilize confidential customer, pricing, and leasing lists when undertaking new employment with competitors.
Tension arises in these special types of contracts due to the duel societal goals of promoting free enterprise, fair competition, and robust employment on the one hand, while on the other facilitating these agreements by protecting the legitimate business and good will of buyers and employers. Thus, the law in most states requires more than merely demonstrating a breach of contract to entitle the buyer or employer to monetary or injunctive relief.
In Texas, for example, the special rules governing liability and remedies arising from covenants to compete are codified in the Texas Free Enterprise and Antitrust Act, Sections 15.50 through 15.52 of the Texas Business & Commerce Code. First, the Act requires the covenant not to compete to be “ancillary to or part of an otherwise enforceable agreement,” such as an asset purchase or employment agreement. Second, the covenant must “contain limitations as to time, geographical area, and scope of activity to be restrained that are reasonable and do not impose a greater restraint than is necessary to protect the goodwill or other business interests of the promisee.” Third, the Act distinguishes between covenants not to compete that are part of employment agreements versus asset purchase agreements, by providing “if the primary purpose of the agreement to which the covenant is ancillary is to obligate the promisor to render personal services,…the promisee has the burden of establishing that the covenant meets the criterial specified [above].” Otherwise, “the promisor has the burden of establishing that the covenant does not meet those criteria.” In other words, the employer has the burden of proof under an employment agreement, whereas the seller has the burden in an asset purchase agreement, in either case to prove the covenant is reasonable. Fourth, “a court may award the promisee under a covenant not to compete damages, injunctive relief, or both damages and injunctive relief for a breach by the promisor of the covenant,” and this usually takes the form of a temporary and permanent injunction against the continued unfair competition.
The fight in these covenant not to compete cases usually boils down to whether the restraints on time, geography, and scope of employment are reasonable. And, reasonableness often depends on the evidence, such as how long the seller or employer has been operating, the size and competition of the market, and the potential theft of confidential information. A few overly broad restraints have been repeatedly stricken, however, such as nation-wide and/or perpetual prohibitions on competition.
My law partners, Mike Falick and Chris Rothfelder, and I will be presenting on billboard acquisition transactions, including covenants not to compete, at the IBO conference in Kansas City in May. We hope to see you there!
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