In general, in divorce convents not to compete happen in one of three forms. The first is a court-ordered covenant, which is executed when one spouse buys out the other’s interest in a business they operated together during the marriage, or when one of them is ordered to sell the business as part of the distribution of property. The second is a hypothetical covenant, which happens when a spouse owning the business or practice intends to keep it but claims the need to protection against a third party. The third is an actual covenant, which happens when an agreement has already been made in favor of a third party.

Questions may arise when one spouse uses a covenant not to compete to deflate the value of a marital estate. An inflated price for the covenant in a sale to a third party means a lower purchase price and less money for the marital estate. Courts make efforts to segregate marital goodwill in such transactions and thereby protect the marital estate.

Courts are divided about their authority to order one spouse not to compete with the other after a divorce. Such a covenant might protect the goodwill of a business awarded as part of the distribution of property.

Courts see hypothetical covenants not to compete as speculative, and they cannot be used to diminish the value of marital property for purposes of distribution.

An actual covenant in favor of a third party that restricts earnings during a marriage is marital property, but one which changes income after a divorce is the separate property of the party.

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