When it comes to selling or buying a business in New York, there's an important legal concept that both parties need to be aware of: the Mohawk Doctrine. This rule can have major effects on what happens after a sale, even if it's not written down in any contracts. Let's take a closer look at what the Mohawk Doctrine means and why it matters for business deals in New York.
What is the Mohawk Doctrine?
The Mohawk Doctrine is a rule that New York courts follow. It states that when someone sells a business, they aren't allowed to try and take customers or patients away from that business afterward. This happens automatically, even if the sale documents don't stipulate anything about it. It’s called a common law rule.
The main idea behind this rule is to protect the value of what was sold – the “Goodwill”. When someone buys a business, they're paying for more than just the stuff in the building. They're also buying the chance to keep doing business with the customers who already use that company. The Mohawk Doctrine helps make sure the buyer gets what he or she paid for.
Why is it Called the Mohawk Doctrine?
The name comes from an old court case in New York called Mohawk Maintenance Co. v. Kessler, which established a principle in New York law regarding the sale of businesses. New York courts use this idea to help determine what's fair when businesses are sold.
How Does the Mohawk Doctrine Work?
Let's say you own a bakery and decide to sell it. You agree on a price with the buyer, sign all the paperwork, and hand over the keys. The Mohawk Doctrine states that after the sale, you can't tell all your old customers to come buy bread from you at the new bakery instead. The Seller cannot solicit his or her old customers directly because they were part of the Goodwill sold to the Buyer.
This rule kicks in automatically. You don't have to write it down or agree to it. It's just part of how business sales work in New York.
The idea is that when the buyer paid for your bakery, they were also paying for the chance to keep selling to your regular customers. If you could just turn around and take all those customers with you, it wouldn't be fair to the buyer.
How Long Does the Mohawk Doctrine Last?
Here's where things get complicated. The Mohawk Doctrine doesn't have a set end date. It lasts for as long as the courts think is fair based on the situation. This could be a few years, or it could be much longer. It depends on things like what kind of business it is and how the sale was set up.
This open-ended timing can be tough for sellers to deal with. This means that they might have to be careful about their business moves for a long time after selling.
What Businesses Does This Affect?
The Mohawk Doctrine can apply to all sorts of businesses in New York. But it's extra important for some types of companies:
- Medical Practices: Doctors, dentists, and other health care providers need to be extra careful. Their patients often feel very loyal to them personally. The Mohawk Doctrine helps protect the value of a medical practice when it's sold.
- Professional Services: Lawyers, accountants, and other professionals who work closely with clients might also run into Mohawk Doctrine issues when selling their practices.
- Small Businesses: Any business where the owner has close ties with customers could be affected. This might include things like hair salons, repair shops, or small stores.
What Should Sellers Know?
If you're thinking about selling your business in New York, here are some key points to remember:
- Be Ready for Limits: Even if your sale contract doesn't mention it, you'll likely face some limits on contacting your old customers or patients after the sale.
- Plan Ahead: Think about what you want to do after selling. If you're planning to start a similar business nearby, you might run into trouble with the Mohawk Doctrine.
- Get Legal Help: Since this rule can be complicated, it's smart to talk to a lawyer who knows about legal issues affecting business sales in New York. At The Glennon Law Firm, P.C., we can help you understand how the Mohawk Doctrine might affect your plans.
- Be Honest with the Buyer: It's better to be upfront about your future plans. This can help avoid surprises and legal fights later on.
What Should Buyers Know?
If you're looking to buy a business in New York, the Mohawk Doctrine is good news for you. But there are still some things to keep in mind:
- Know Your Rights: The Mohawk Doctrine gives you some protection even if it's not in the contract. But it's still smart to include non-compete clauses in your purchase agreement. There is a difference between non-compete and non-solicitation agreements.
- Watch for Red Flags: If the seller seems eager to keep in touch with old customers or start a similar business nearby, that could be a warning sign.
- Do Your Homework: Try to understand how much of the business's value comes from repeat customers. This can help you figure out how important the Mohawk Doctrine protections are for your purchase.
- Get Everything in Writing: While the Mohawk Doctrine applies automatically as common law, it's still better to have clear agreements about what the seller can and can't do after the sale.
Can the Seller Work in the Same Field?
This is a tricky question. The Mohawk Doctrine doesn't ban the seller from working in the same type of business or industry. It is not a non-compete obligation. However, it limits their ability to go after their old customers or patients because it is a non-solicitation restrictive covenant.
What if the Seller Breaks the Rule?
If a seller violates the Mohawk Doctrine by direct solicitation of customers, luring them away from the business he or she sold, the buyer can take legal action. This might involve going to court to stop the seller from contacting customers and potentially seeking money to make up for lost business.
Can You Get Around the Mohawk Doctrine?
It's difficult to completely avoid the Mohawk Doctrine in New York. However, sellers and buyers can work together to set up clear rules about what will happen after the sale. This might include agreeing on a specific time limit or defining exactly what kinds of actions aren't allowed.
The key is to be clear and fair to both sides. At The Glennon Law Firm, P.C., our lawyers can help create an agreement that protects the buyer's investment while still giving the seller some freedom to move on with their career.
Does This Apply to All Sales?
The Mohawk Doctrine usually comes up with sales of small- or medium-sized businesses where the owner has close ties with customers. It might not be as big a deal for larger companies or those where customer relationships aren't as personal, but it still applies.
It's also worth noting that this is specifically a New York rule. Other states might have different laws about what happens after a business is sold.
Don't Try to Interpret the Mohawk Doctrine on Your Own
If you're dealing with a dispute after a business sale or purchase in New York, don't try to interpret the Mohawk Doctrine on your own. Reach out to our lawyers today. We can help you understand your rights, plan for the future, and make sure your business deal is set up right. With the right help, you can come out with a fair deal that works for everyone. Call our lawyers at (585) 294-0303 today to get started on making your business sale or purchase a success.
If you are facing concerns related to a similar issue or if you have questions about your Business Litigation situation, please feel free to contact us here. We have many years of experience handling such matters and will be able to assist you in resolving the dispute.
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This post is not intended as legal advice, but rather for educational purposes.