8th Circuit rules on noncompetes involving the sale of a business

When addressing the enforceability of a covenant not to compete, Arkansas courts have treated covenants associated with the sale of a business more favorably than those associated with an employment contract. The U.S. Court of Appeals for the 8th Circuit (which governs Arkansas) recently addressed how this difference is applied when a business sale also includes a provision for continued employment.

Facts

David Chaffin owned Arkansas State Security, Inc., which sold and maintained video security equipment for school districts. Progressive Technologies, Inc., is a low-voltage cabling and systems contractor. In 2013, Progressive bought Arkansas State Security from Chaffin. Three relevant contracts governed the transaction.

The first was the asset purchase agreement in which Progressive agreed to pay $1.9 million over three years to purchase Arkansas State Security's assets, including its customer lists and goodwill. The second was an employment agreement in which Progressive agreed to employ Chaffin for a one-year term, followed by indefinite at-will employment.

The third contract was a noncompete agreement, which barred Chaffin from being involved in the "video security business" throughout the state of Arkansas for five years and from soliciting any of Progressive's current or prospective customers for video security sales for five years. The time limitation was to begin on either the noncompete agreement's signing date or the termination of his employment, whichever occurred later.