Sale of Business Agreement’s Non-Compete Not Upheld by Virginia Supreme Court

In Parr v. Alderwoods Group, Inc., 268 Va. 461 (2004), a family sold its funeral home business to a holding company. The holding company signed a lease for the funeral home property, and the family signed a non-compete that prohibited them from opening a competing funeral home after the sale of the business.

After the sale closed, the holding company began making regular lease payments. Several years into the lease, the holding company went bankrupt and stopped payments. The family terminated the lease and opened a competing funeral home on the property.

The holding company sued to enforce the non-compete, even though it had defaulted on the lease. When a party is the first to materially breach a contract, can it still enforce a non-compete that is also part of the contract?

If a Party Commits “First Material Breach”, the Non-Compete is Likely Invalid

When a party defaults on a contract, it often cannot thereafter sue to enforce a non-compete that is part of the contract.  This rule is called the “first material breach” doctrine.  Under Virginia law, a party cannot sue to enforce a non-compete contract when they have first breached a material term of the contract.

A common example is failure to pay past-due wages. If an employer fails to pay its employee past-due compensation, the employer cannot then sue to enforce a non-compete.

In this case, the Virginia Supreme Court held that the Lease Agreement and the Non-Compete Agreement were integrated contracts. Therefore, when the holding company breached the terms of the lease, it could not later enforce the non-compete against the family.

Sale of Business Non-Compete More Broadly Construed

Had the holding company not committed the first material breach, it may have been entitled to enforce the non-compete.

The court was silent on whether the non-compete’s terms were otherwise reasonable. Under Virginia law, a non-compete must be reasonably limited in duration, function, and geographic scope.

Here, the duration (10 years) would be overbroad for an employee, but it it would probably be reasonable in the context of the sale of a business.  For an asset purchase agreement, a 10-year non-compete is generally held to be reasonable given the relative sophistication of the parties to the contract.