Partner found in violation of noncompete, $3 million in damages

When drafting an employment contract, an operating agreement for a Limited Liability Company (LCC) or any other business agreements, an important component of these instruments should be a noncompete clause.

A noncompete clause, when properly drafted, can help protect your business and your investments, and prevent employees and partners from stealing your business opportunities.

A judge has awarded $3 million in damages to two partners in a chain of Massachusetts-region health and fitness clubs, after a third partner started up a different chain of competing heath clubs.

The contract dispute arose because the partners had made a noncompete clause part of the operating agreement of their LLC in 2004. The noncompete applied to most of their 14 facilities. The clause prohibited any one of the partners from opening a health club or gym within 50 miles of the LLCs existing clubs.

In 2011, one of the partners began building a new chain of fitness centers, and he and a new partner eventually owned 13 of these facilities. They violated the noncompete clause by being within the 50-mile range and they even used the same name as the existing chain.

With noncompete clauses, an important factor is their reasonableness. You generally cannot prohibit any form of competition in any geographic location.

If you own a high-end restaurant in Boston, prohibiting any restaurant within 20 or 30 miles may be reasonable if you draw customers from that broad an area.

On the other hand, if it were a coffee shop, the reasonable geographic exclusion zone may shrink considerably.

By including effective noncompetition language in all of your agreements, you can protect the value of your business from unfair attempts to capitalize on the value of your business.

Source: Boston Business Journal, “Judge rules in favor of WOW gym owners in noncompete case, orders defendants to pay $3M,” Mary Moore, August 13, 2014