California Appeals Court Affirms Stringent Limits on Non-Compete Provisions

The California Court of Appeal recently struck a post-employment non-competition provision in an employment agreement which was part of a broader acquisition deal. The opinion, Fillpoint, LLC v. Mass (August 24, 2012), demonstrates California’s strong public policy in favor of competition and against overly restrictive covenants, including the limitations to the exception to the general policy against such covenants found in California Bus. & Prof. Code Section 16601. That Section specifically allows a non-competition provision in connection with the sale of a business. Quoting an earlier case, the Fillpoint court explained the rationale for this exception to the general rule: Section 16601 “serves an important commercial purpose by protecting the value of the business acquired by the buyer. In the case of the sale of the goodwill of a business it is ‘unfair’ for the seller to engage in competition which diminishes the value of the asset he sold.”

The plaintiff in the case, Fillpoint, LLC, purchased the company of the defendant, Maas. The purchase agreement contained a three-year covenant not to compete. In connection with the sale, Maas also became an employee of Fillpoint, signing a separate employment agreement containing an additional twelve month non-compete and non-solicitation provision that was triggered by Maas leaving Fillpoint. After three years Maas left Fillpoint and immediately joined a competitor as president and CEO. Fillpoint then sued to enforce the non-competition provision in the employment agreement.

Importantly, the opinion makes clear that the separate non-competition provision found in the employment agreement could be considered part of the purchase transaction, and therefore, subject to the exception found in Section 16601. The court, however, refused to enforce the specific provision at issue on the grounds that it was not meant to protect the goodwill purchased by Fillpoint, but rather was targeted at the “employee’s fundamental right to pursue his or her profession.” The opinion highlights both the importance of the exception to California’s general policy against provisions not to compete found in Section 16601, and the limitations of that section. This issue is an important one in any purchase agreement. Businesses should take care to tailor these provisions to protect their interests and establish their intent to fall within the exception found in Section 16601 from the outset.

For further information about these provisions, please contact the author at sarah.weber@jackolg.com or (619)298-2880.

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