Restrictive covenants entered in connection with the sale of a business occupy a different place than ordinary employment noncompetes.
In a sale transaction, the buyer is not simply trying to limit a former employee’s next job. The buyer is paying for goodwill, customer relationships, confidential information, and the seller’s promise not to immediately undermine the value of what was sold.
That distinction still matters. Courts generally remain more receptive to restrictive covenants tied to a bona fide sale of a business rather than covenants imposed solely as a condition of employment. But recent decisions reinforce an important limit: the label “sale of business” is not enough. A covenant must be tied to the goodwill and competitive space the buyer actually purchased—not the buyer’s broader enterprise or an employment-style restraint on the seller’s future livelihood.
Delaware: More Latitude, But Not a Blank Check
Recent Delaware Court of Chancery decisions illustrate both sides of the enforceability line. In Arxada Holdings NA Inc. v. Harvey (Del.Ch. Jan. 28, 2026), the court enforced restrictive covenants against the founder, CEO, and longtime principal of a company sold for $450 million. The covenants were included in the stock purchase agreement and included a five-year noncompetition covenant, employee non-solicitation covenant, and customer/supplier non-solicitation covenant. The court held that the buyer bargained for those protections because the seller had built the company, served as its public face, and possessed the customer relationships, technical knowledge, and business know-how that could allow him to compete against the company he sold. Ultimately, the court found the seller breached the covenants by helping relatives start and operate a competing business, including by providing seed funding, sharing formulas, and assisting with laboratory operations, and issued an injunction prohibiting the seller from directly or indirectly violating his restrictive covenants, including by working for or with the competing business or pursuing competing projects through the related intellectual-property company. The court also tolled the restriction and extended the injunction to account for the period during which the buyer was deprived of the protection it purchased.
But in BluSky Restoration Contractors, LLC v. Robbins (Del. Ch. Mar. 4, 2026), the Court reached the opposite result. There, a national restoration company purchased a regional Tennessee restoration business. The equity purchase agreement contained noncompetition and non-solicitation covenants; the sellers also signed employment agreements with noncompetition, non-solicitation, and confidentiality provisions; and later incentive-unit agreements included additional restrictive covenants. The buyers alleged that the sellers breached those restrictions by resigning, forming a Tennessee business offering similar restoration-related services, retaining thousands of BluSky files, soliciting customers and employees, and using the new company to compete with BluSky.
The court nevertheless held that the covenants were unenforceable because they extended beyond the goodwill and competitive space of the business actually acquired. Specifically, the equity purchase agreement’s noncompete lasted five years and applied “anywhere in the world,” even though the acquired company was regional. The court held that the non-solicitation provisions likewise lacked meaningful geographic limits and used broad language restricting attempts to induce employees or persuade customers, including through affiliate-based language that expanded the provisions beyond the acquired company’s actual business. The court reasoned that the buyer paid for the regional goodwill and competitive reach of the company it purchased—not for a restriction protecting the company’s entire national platform.
The takeaway from these Delaware cases is straightforward: sale-of-business covenants will receive more latitude than post-employment covenants, but they should protect what the buyer purchased—not everything the buyer owns.
California: A Stricter Counterpoint
A recent California federal decision shows the same concern from a stricter statutory starting point. In Smarter HOA Solutions Inc. v. Peña, (S.D. Cal. Mar. 27, 2026), the Southern District of California considered a noncompetition and nondisclosure agreement involving a former 50% owner and employee of an HOA management company. The plaintiff sued a former employee and co-owner for violation of a non-competition and non-disclosure agreement. The defendant moved for judgment on the pleadings, arguing that the agreement’s noncompetition and non-solicitation provisions were unlawful under California’s general prohibition on contracts restraining lawful business or professional activity, Cal. Bus. & Prof. Code § 16600, et seq. The plaintiff responded that the covenants were enforceable because they fell within California’s sale-of-business exception under Section 16601, and the restrictions were necessary to protect plaintiff’s trade secrets.
The court rejected both of the plaintiff’s arguments. On the sale-of-business issue, the court found that while the agreement was entered into in connection with the sale of defendant’s ownership in a business, thereby triggering the 16601 exception, the restrictive covenants did not satisfy the intent and purpose of that exception. More important, the restrictions at issue were triggered by the end of defendant’s employment relationship with plaintiff—not by the closing of the sale. For that reason, the court concluded that the covenants operated more like post-employment restraints than protections for goodwill transferred in the sale.
The practical lesson from Smarter HOA is that even a sale-of-business connection may not save a restrictive covenant if the restriction is triggered by the end of employment and functions as a restraint on the seller’s future work, rather than as a protection for the goodwill actually transferred in the sale.
Practical Takeaways
1. Define the restricted business by reference to the business sold. The restriction should track the acquired company’s actual products, services, customers, and markets. Avoid defining the restricted business by the buyer’s entire enterprise, affiliates, future acquisitions, or unrelated business lines.
2. Match the geographic scope to the seller’s actual footprint. A nationwide or worldwide restriction may be difficult to defend if the acquired business operated regionally. Courts often evaluate geography and duration together, so broader geography may require a shorter term, and a longer term may require a narrower geographic scope.
3. Use affiliate language carefully. References to parents, subsidiaries, affiliates, portfolio companies, or future business lines can make a covenant appear untethered to the purchased goodwill. If affiliates are included, the agreement should explain why that scope is necessary to protect the acquired business.
4. Tailor non-solicitation provisions carefully. Customer non-solicits should focus on customers or prospects connected to the acquired business, ideally those with whom the seller had material contact or about whom the seller had confidential information.
5. Preserve confidentiality and trade secret protections separately. Buyers should separately protect confidential information, trade secrets, customer data, and return-of-property obligations. But those provisions should not be drafted so broadly that they operate as de facto noncompetes.
Conclusion
The national lesson is not that sale-of-business non-competition covenants are unenforceable. They remain so. Buyers still have a legitimate interest in protecting the goodwill, customer relationships, and confidential information they purchase. But courts are increasingly asking whether the covenant is truly transaction-based and tied to what was actually sold, or whether it functions more like a post-employment restraint.
Irrespective of the state, the best-drafted sale-of-business covenant is one that protects the business actually sold—not the buyer’s broader competitive ambitions.
