Presto-X-Company v. Beller
568 N.W.2d 235, 253 Neb. 55, 1997 Neb. LEXIS 193 (1997)
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Rule of Law:
Covenants not to compete ancillary to the sale of a business are enforceable only if they are no greater than reasonably necessary to protect the legitimate business interests of the purchaser and are not injurious to the public interest, requiring careful consideration of the covenant's duration and geographic scope, which must be supported by evidence.
Facts:
- John Beller began his own pest control business, Beller Pest Control, Inc., in Columbus, Nebraska, in June 1988, servicing accounts in several Nebraska towns.
- In September 1990, Beller Pest Control sold its trade name, customer accounts, and goodwill to Presto-X-Company for $45,000 via an "Asset Purchase Agreement."
- The Agreement included a covenant not to compete, prohibiting Beller Pest Control, its shareholders, directors, and officers (including John Beller) from competing directly or indirectly with the sold business for 10 years within 100 miles of Beller's existing trade area, namely Columbus, Nebraska.
- Following the asset sale, John Beller was employed by Presto-X as a service technician until he resigned in December 1992 due to dissatisfaction with his employment.
- Immediately after leaving Presto-X, Beller started a new pest control business, Pest Tech, Inc., focusing exclusively on pest maintenance services for the swine industry.
- In February 1993, Sand Systems, a former customer of Beller Pest Control that had transferred to Presto-X, terminated its business with Presto-X due to dissatisfaction and later contracted with Beller's new company for services.
- In February 1994, Beller solicited and obtained a contract from Hastings Pork, a new customer located 102-105 miles from Columbus, which had been using Presto-X and then terminated that relationship.
Procedural Posture:
- Presto-X-Company filed an action against John Beller in the district court for Platte County, alleging breach of the covenant not to compete and seeking injunctive relief and an accounting.
- Following a bench trial, the district court entered judgment for Beller on June 28, 1995, finding the covenant not to compete void.
- Presto-X-Company appealed this judgment to the Nebraska Court of Appeals.
- The Nebraska Supreme Court transferred the case to its docket.
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Issue:
Is a covenant not to compete, ancillary to the sale of a pest control business, void as unreasonably restrictive if it imposes a 10-year duration and a 100-mile radius restriction from the seller's former trade area without specific evidence justifying such scope and duration?
Opinions:
Majority - Stephan, J.
Yes, a covenant not to compete ancillary to the sale of a business is void if it imposes a 10-year duration and a 100-mile radius restriction from the seller's former trade area without specific evidence justifying such scope and duration, because it is unreasonably restrictive. The court reviewed the factual findings de novo, treating the covenant as one ancillary to the sale of a business, which typically allows for broader restraints than employment contracts. While Presto-X had a legitimate interest in protecting the purchased assets, including goodwill and customer accounts, the restraint must be "no greater than necessary" in space and time. The court found no evidence in the record to justify the 10-year duration, noting that Presto-X failed to establish an "industry standard" or a specific "useful life" for the goodwill that would warrant such a lengthy restriction. Similarly, the 100-mile geographic scope, interpreted by Presto-X as applying to multiple towns within Beller's former trade area, was deemed unreasonable because no evidence explained why competition needed to be restrained so far from the actual trade area to protect the purchased assets. Citing precedents like Chambers-Dobson, Inc. v. Squier, the court emphasized balancing the buyer's need to protect goodwill with the seller's freedom to trade. Since the covenant was found to be unreasonable in both duration and scope, it was held contrary to public policy and void, and the court declined to judicially reform its terms.
Analysis:
This case reinforces Nebraska's strict approach to covenants not to compete, even those ancillary to the sale of a business, by requiring explicit evidence to justify the reasonableness of their duration and geographic scope. It signals that purchasers cannot rely on boilerplate language or unsubstantiated claims of "industry standards" but must demonstrate a clear nexus between the covenant's terms and the protection of specific legitimate business interests. The ruling reiterates the court's unwillingness to judicially reform unreasonable covenants, placing the burden squarely on parties to draft narrowly tailored agreements from the outset.
