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From Antitrust Law Daily, September 21, 2017

Business seller did not violate noncompete agreements

By Carol E. Potaczek, J.D.

By providing assistance to a purchaser of his lubricant product business, and maintaining a lease with him, the seller of the business and his son did not violate noncompetition agreements with the purchasers of the seller’s separate fuel-additive business, according to the U.S. Court of Appeals in Chicago. The court held that, while the noncompetition agreements were not overbroad or unenforceable, neither the seller nor his son had breached them (E.T. Products, LLC v. D.E. Miller Holdings, Inc., September 20, 2017, Sykes, D.).

Noncompete agreements. The owner of two Indiana businesses, E.T. Products and Petroleum Solutions, decided to sell the businesses and retire. In January 2011, he sold E.T. Products, a fuel-additive business, to a group of investors, and, as part of the sale, he and his son signed five-year noncompetition agreements prohibiting them from assisting anyone that was directly or indirectly engaged in the fuel-additive business anywhere in North America. Petroleum Solutions, a lubricant product business, was sold in January 2012 to an individual who also received, as part of the deal, low-interest financing, a lease for the land the business was on, training in lubricant blending, and consulting advice.

Prior to the second sale, Petroleum Solutions supplied some customers with E.T. Products fuel additives, and it continued to do so until December 2012, when E.T. Products ceased using it as a distributor, after Petroleum Solutions hired a salesman that had been fired by E.T. Products. Petroleum Solutions subsequently found a new supplier and began blending its own products. The seller, upon hearing of the break in the relationship between his two former businesses, advised the buyer of Petroleum Solutions that he could no longer provide assistance, as per the noncompetition agreements with E.T. Products. The lease of the business property continued uninterrupted, however.

When the seller and his son sued E.T. Products for violating a release, E.T. Products filed suit against them for breach of the noncompetition agreements. When a district court found in favor of E.T. Products regarding the violation of the release, and for the seller and his son regarding the noncompetition agreements, E.T. Products appealed. The district court had held that the noncompetition agreements were not, contrary to the seller’s argument, overbroad or unenforceable under Indiana law, but it also held that they had not been breached.

Enforceability. The Seventh Circuit first agreed that the noncompetition agreements were enforceable, as per the decision of the Indiana Court of Appeals in a case regarding a noncompetition agreement with nearly identical competition restrictions (Kunz v. EVI, LLC, 999 N.E.2d 425 (Ind. Ct. App. 2013). The court added that the broad geographic restrictions in the noncompetition agreements were reasonable, explaining that manufacturers and distributors can be expected to reach a wider range of customers, often necessitating broader geographic restrictions. The court added that the purchaser of E.T. Products had bought the company with plans to expand it throughout the North American continent, and this was evidenced by the fact that, within two years of the sale, the company had expanded to all 50 states and seven Canadian provinces. The court also stated that the seller had spent decades building customer relationships, so that the scope of the business corresponded to a significant amount of goodwill, and that the Indiana Supreme Court had previously concluded that a five-year time period for noncompetition agreements is reasonable.

No breach. The court then pointed out that E.T. Products had conceded that the seller and his son had only assisted the buyer of Petroleum Solutions up until the two companies parted ways in December 2012, and that, up until then, Petroleum Solutions’ only involvement with the additives business was as a distributor of E.T. Products additives. The court disagreed with E.T. Products’ characterization of those connections as "indirect" involvement in its industry. The court clarified that a company whose only conduct in particular market is the distribution of another company’s product is not that company’s competitor.

The court disagreed with the district court’s determination that the noncompetition agreements could not be triggered until Petroleum Solutions engaged in each and every one of the same additive activities as E.T. Products. Complete overlap is not necessary for a breach, the appellate court said, adding that the two companies definitely competed with each other after they ceased doing business together. At that point, however, the seller and his son had stopped assisting Petroleum Solutions, the court noted.

E.T. Solutions had also argued that the seller had continued to provide assistance to Petroleum Solutions by failing to revoke Petroleum Solutions’ property lease. The court responded that the noncompetition agreements did not cover the collection of rent payments on a preexisting lease, emphasizing that the seller had entered into the lease while Petroleum Solutions and E.T. Products were still business partners. The seller had not taken affirmative steps to lease to an E.T. Products competitor, and requiring the seller to break the existing lease would be a breach of contract, as well as an overbroad and unreasonable reading of the noncompetition agreements, the court found.

The case is No. 16-1204.

Attorneys: Holly A. Brady (Haller & Colvin PC) for E.T. Products, LLC. Brian E. Casey (Barnes & Thornburg LLP) for D.E. Miller Holdings, Inc.

Companies: E.T. Products, LLC; D.E. Miller Holdings

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