The Non-Compete That Didn't Cover the One Person Who Mattered

The situation

Niloufar had owned and run her own pharmacy in Sault Ste. Marie for close to nine years, building it up from a single pharmacist behind the counter to a small team serving a loyal base of regular patients. Her spouse, Minh, worked full-time as an air traffic controller and had no day-to-day role in the pharmacy, though he had put in a portion of the original financing and held a minority ownership stake as a result. When a competing pharmacy across the city came up for sale, the two of them saw a chance to roughly double Niloufar's patient base and prescription volume in a single move, rather than spending years building a second location from nothing.

The seller was Reza, who had run the competing pharmacy for close to fifteen years and was ready to retire. The business, including its prescription files, its equipment, its lease, and its goodwill, was priced at roughly $2.7 million. Niloufar and Minh financed the purchase through a mix of their own capital, drawn largely from the equity built up in Niloufar's existing pharmacy, and a commercial loan secured against both businesses. Because they already operated a competing pharmacy themselves, they understood the value of what they were buying better than most buyers would — and they understood, too, exactly how easily that value could walk out the door if the wrong person decided to open up nearby after closing.

The covenant that didn't reach far enough

A sale between direct competitors almost always includes restrictive covenants — clauses in which the seller agrees not to compete with the buyer, and not to solicit the business's patients or staff, for a defined period and within a defined area. Reza's lawyer sent over a draft agreement that included a fairly standard version of this: a two-year, city-wide non-compete and non-solicit binding Reza personally. On its face, it looked like reasonable protection for what Niloufar and Minh were paying for.

The problem surfaced once we asked who actually worked the counter. Reza's brother had been employed at the pharmacy part-time for years as a technician, filling prescriptions, greeting regulars by name, and building exactly the kind of patient familiarity that drives repeat business at a small independent pharmacy. In conversations during due diligence, he had mentioned, casually but more than once, that he had thought about eventually opening a pharmacy of his own somewhere in the city. Reza's draft covenant said nothing about him. If Reza retired quietly while his brother opened a new pharmacy three blocks away and welcomed familiar faces through the door, nothing in the agreement as drafted would stop it, because the brother had never agreed to anything.

That gap mattered more here than in most deals, because the brother, not Reza, was arguably the person patients most associated with day-to-day service. A restrictive covenant is a contract term, and a contract binds the people who are parties to it. Signing is the usual way someone becomes a party, but not the only way — and the point that matters here is the flip side: someone who is not a party to the agreement is not bound by a promise made in it. Reza could not simply promise, on the brother's behalf, that his brother would not compete — the brother was never a party to Reza's agreement and had never received anything in exchange for a promise of his own, so a court asked to enforce the covenant against him would very likely find there was nothing binding him in the first place. Whatever protection Niloufar and Minh thought they were buying, on paper, protected against the wrong person.

There was a second wrinkle. Even a covenant that did reach the brother would have to be reasonable in scope, geography and duration to hold up if it was ever challenged — broader than necessary to protect the goodwill actually being purchased, and a court would be inclined to strike it down or narrow it regardless of what the parties had signed. Getting real protection here meant getting the right person's signature on the right kind of promise, not simply asking for the broadest restriction available and hoping it would stick.

What we did

1. Asked who actually ran the counter before reviewing the covenant language. Rather than assessing Reza's draft non-compete purely on its wording, we asked Niloufar and Minh who among Reza's staff had real patient relationships, since a covenant is only worth as much as the risk it actually addresses. That question surfaced the brother's role and his stated interest in opening his own pharmacy within minutes of asking it, long before the agreement's language was the focus of discussion.
2. Explained why Reza's signature alone would not protect them. We walked Niloufar and Minh through why a covenant binding only Reza would do nothing to stop his brother from competing, since a contract restrains only the people who are parties to it, and the brother was not one. Understanding that the existing draft left their real risk completely unaddressed changed what they asked their lawyers to negotiate for, from a wording tweak to a genuinely separate agreement.
3. Requested a standalone, independently advised agreement with the brother. Rather than trying to fold the brother into Reza's covenant, we asked Reza's lawyer to arrange for the brother to retain his own counsel and negotiate a separate restriction directly, in exchange for a payment made specifically to him. A covenant negotiated this way, with its own consideration and its own independent advice, stands a real chance of being enforced if it is ever tested, unlike one imposed on a non-party.
4. Kept the request proportionate to what the brother could actually threaten. Instead of asking for the same two-year, city-wide restriction Reza had agreed to, we proposed an eighteen-month, single-location radius around the pharmacy for the brother, tied to his actual patient-facing role rather than to Reza's broader ownership interest. A narrower, better-targeted request was also more likely for the brother's own lawyer to accept without a prolonged fight.
5. Secured an escrow holdback tied to compliance with both covenants. To give Niloufar and Minh real financial protection beyond the paper promises, we negotiated a holdback of part of the purchase price for the two-year covenant period, releasable to Reza only if neither he nor his brother breached their respective restrictions. This gave the buyers a remedy that did not depend on chasing anyone through the courts if a breach happened after the money had already changed hands.

The outcome

The negotiation took a little over five weeks and required two rounds of back-and-forth once the brother had retained his own lawyer to review what was being asked of him. Niloufar and Minh did not get everything they initially wanted. Reza's brother declined to sign the full two-year, city-wide restriction they had first proposed, and after some negotiation agreed instead to the narrower eighteen-month, single-location radius, in exchange for a payment of roughly $18,000 paid to him personally rather than folded into the purchase price. He kept the right to open a pharmacy of his own outside that radius, or inside it after the eighteen months passed.

Reza himself signed the standard two-year, city-wide non-compete and non-solicit tied to the pharmacy's existing patient base, and roughly $160,000 of the $2.7 million purchase price was placed in escrow for the two-year covenant period, available to Niloufar and Minh as a remedy if either Reza or his brother breached their respective restrictions. The sale closed on that basis about seven weeks after the original draft agreement had first raised the issue.

It was not the clean, fully locked-down protection Niloufar and Minh had hoped for going in. The brother remains free to compete within a year and a half, and within a smaller area than they originally wanted. But it was real protection where the original draft had offered essentially none for the person most likely to draw patients away, and it was protection built on an agreement that could actually be enforced if it was ever tested, rather than a broad promise resting on a signature that was never going to bind the right person. Reza, for his part, was relieved the deal closed without his brother's independent decisions becoming a reason for Niloufar and Minh to walk away from the purchase altogether.

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