A Lawsuit for 2.5 Million NIS Due To Violation of a Non-Compete Clause

In 2015, A.A. Hakol LaGan 2015 Ltd. purchased the business activity of Hakol LaGan M.N. Ltd. from Nathan and Tehila Shine. According to the Company, the purchase also included the accumulated goodwill. Several years later, in 2021, the Shines began selling products similar to the Company’s.

Hakol LaGan filed a claim for 2.5 million NIS against the Shines. The Company claimed that the Shines violated the business sale agreement, especially the non-compete clause, and therefore sought to require them to pay damages.

On the other hand, the Shines claimed they did not sign an agreement containing a non-compete clause, but only a prior memorandum that did not include any such restriction. They further claimed that even if such a clause existed, it would not be reasonable to prohibit a person from working in the field for many years, as this would be contrary to freedom of occupation.

The court examined the testimony, the documents submitted, and a handwriting expert’s opinion, and determined that the purchasing company failed to prove that the sellers signed an agreement containing a non-compete clause. It was found that the main document on which the company relied was not signed by the Shines, and that the only agreement proven to have been signed was an early memorandum that contained no such clause.

Furthermore, the court emphasized that even if such a clause had been signed, it had not been proven to meet the reasonableness requirement under the Economic Competition Law. When it comes to an indefinite prohibition, it must be shown that it is necessary to preserve the business’s reputation or another legitimate interest, and the company did not provide sufficient evidence to support such claim.

Ultimately, the lawsuit was dismissed, and the Company was ordered to pay Nathan and Tehila Shine legal costs and attorney fees totaling 50,000 NIS.

What can one learn from this case?

Signing a proper legal agreement is a must – ​​In any legal action involving significant sums of money, one must consult lawyers and sign a proper legal agreement. Attempting to shorten proceedings through preliminary and impromptu memoranda usually leads to many disputes later.

The Non-compete clause must be limited and reasonable – A clause that is unlimited in time or location may be invalidated unless it is proven essential to maintaining the acquired reputation.

Evidence is the key – Anyone claiming a Non-compete violation must present documents, reports, and data proving the reputation damage and its extent.

It is possible and even acceptable to include a Non-compete clause in an agreement for the sale of a business, but it is important to ensure that it is clearly worded, limited in time and location, and consistent with reasonable practice. Otherwise, the court may decide not to enforce it.

The lawyers in our firm’s commercial department are at your disposal for any matter similar in nature.

Case 45423-10-21 A.A. Hakol LaGan 2015 Ltd. v. Nathan Shine and Tehila Shine, was given on August 17, 20225 in the Jerusalem Magistrate’s Court.

Note: Both parties appealed the ruling to the District Court, which dismissed both appeals.