A business seller failed to convince a Michigan Business Court Judge that his noncompetition and nonsolicitation restrictions stemming from the sale of a Business should be enjoined.
For business owners considering or involved in transactions to buy or sell a business, the opinion from the highly respected Kent County Business Court Judge Christopher Yates, highlights several important points for calculating the benefits and costs associated with post-sale competition restrictions. Here is a link to the opinion, Wilbers v Acrisure Wallstreet Partners, Case No. 20-08762-CBB.
The Transaction to Sell the Business:
The plaintiff, Leroy Wilbers, built a successful insurance agency. In 2017, he was offered what the Court described as a “king’s ransom” (the opinion notes the purchase price appeared to be over $10 million). Wilbers and his partners agreed to sell.
As part of the asset purchase agreement, Wilbers agreed to noncompete and non-solicitation restrictions. The Court described these restrictions as “sweeping noncompetition and non-solicitation obligations,” which extended for three years from his termination date. Wilbers also agreed to continue to run the business as an employee and under a separate employment agreement.
Three years later, the purchaser terminated Wilbers. Not content to sit on the sidelines, Wilber sued for a determination that the restrictive covenants were unenforceable so he could start an insurance agency to compete against the purchaser.
As part of the lawsuit, Wilbers sought a preliminary junction barring Acrisure and its related entity (Acrisure Wallstreet Partners, LLC) from enforcing the noncompete and non-solicitation restrictions. But on March 4, 2021, the Court denied this request. As the Court noted in its opinion, Wilbers may end up victorious in the lawsuit, but until then Defendants may enforce the restrictions while the case continues.
Why post-sale restrictions matter:
Post-sale restrictions are important but will impact the seller and the purchaser for different reasons.
First, business owners need to understand an essential distinction between a noncompetition provision and a non-solicitation revision. The first must be reasonable under Michigan law. And if it is not reasonable, a Court may opt to modify the noncompetition restriction. But a judge is not required to essentially give free legal services in the form of revising your noncompete agreement. So make sure your noncompetitive is enforceable by having it drafted or reviewed by an experienced noncompete attorney.
In contrast, Michigan courts lack the authority to rewrite a non-solicitation provision, even if it is unreasonable. And, as the opinion makes clear, claiming a non-solicitation restriction is unfair after receiving millions of dollars does not make for a compelling argument to strike it.
Second, and relating to the prior point, if you are purchasing a business, you will want to ensure the purchase price you pay does not become the seed money for the seller to start a competing business immediately. This protection should be achieved through reasonable noncompete restrictions and favorable non-solicitation provisions.
Third, the Court noted Wilbers “wisely chose to seek a declaratory judgment before entering the insurance market on his own to compete against” Acrisure. Based on our almost 20 years focusing on noncompete litigation, we agree: it is a risky and often costly gamble to start competing first and wait to see what happens with your noncompete restriction. And adding injury to insult, you may end up expending high startup costs, only to be later told by a judge that you can no longer pursue the business.
For every entrepreneur and business owner, there comes a time when you will be buying or selling a business. And there are many moving pieces to buy/sell situations. But two critical pieces are the post-sale restrictions like noncompete and non-solicitation restrictions. For purchasers, make sure you get it right to protect your investment. For sellers, make sure you understand your obligations and receive acceptable value for what you agree to give up.
Use this link to contact Michigan attorney Jason Shinn if you have questions about this article. Since 2001, Mr. Shinn has represented companies and individuals concerning noncompete disputes and related business claims under federal and Michigan employment laws.