Owner of bowling alley promises not to sell alcoholic beverages in competition with neighboring restaurant and bar. The owner and operator of a restaurant and bar where liquor was sold and consumed conveyed an adjacent unimproved portion of the lot to purchasers who intended to and did construct and operate a bowling alley there. In connection with the real property purchase and sale, the parties executed a party wall agreement which included the purchasers’ covenant not to sell alcoholic beverages on the premises of the bowling alley. There was no time limit on the covenant. Subsequently, the purchasers began selling liquor there.
Wyoming Supreme Court rules that the covenant is enforceable. The seller demanded that those sales cease. In response, the purchasers filed a declaratory judgment action in a Wyoming state court, seeking entry of an order that the covenant was unenforceable and void as a matter of law because it purportedly continued indefinitely. Both parties filed motions for summary judgment. The trial court granted the purchasers’ motion. On appeal, the Supreme Court of Wyoming reversed and remanded with directions to enter summary judgment for the seller. Oliver v. Quynn, No. S-12-0161 (6/5/13).
Reasons for the Supreme Court’s decision. Citing the Restatement (Third) of Property: Servitudes § 3.6, Comment b (2000), several non-Wyoming cases, and a 1982 New York University Law Review article, the Supreme Court held that the following factors were particularly significant in deciding that the covenant was valid:
- The covenant was made in connection with a purchase and sale of property, not as part of an employment contract.
- The covenant related to a single parcel of land.
- The purchasers were well aware of the covenant when they signed the party wall agreement.
- The restriction had only a minimal effect on competition.
- Measured by the remaining useful life of the existing buildings, the likely duration of the restraint was not unreasonable.
Takeaway. A covenant not to compete is a restraint on trade which, therefore, must be reasonable or it will not be enforced. The decision concerning enforceability of any such restraint requires balancing the conflicting legal principles of freedom of contract versus freedom to work or conduct a business. This decision illustrates the circumstances which may lead a court to opt in favor of freedom of contract by enforcing a non-competition covenant without a time limit.