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Your Legal Corner - Client Alert Blog

Post Termination Noncompete and Nonsolicitation Clause in Employment Agreements Ruled Void

Written By: Melissa C. Marsh, Esq., California Attorney, October 2012 Add to Favorites
Surprise Surprise…California hates non-competition agreements and its courts are loathe to enforce them except in very limited circumstances. One such circumstance is Bus. & Prof. Code § 16601, which permits the enforcement of a reasonable covenant not to compete entered into in connection with the sale of a business. The stated policy behind this limited exception is to protect an acquired business's goodwill. On August 24. 2012, the Fourth Appeallate District Court of Appeal's decision in Fillpoint, LLC v. Maas, __Cal.App.4th ___ (2012), held that: (1) an attempt to restrict competition beyond the scope of the acquired entity's business violates Bus. & Prof. Code § 16600 even if in connection with the "sale of business" and (2) a noncompete and nonsolicitation clause in an employment agreement is also void.

In Fillpoint, the plaintiff purchased the assets of a video game company known as Crave Entertainment Group, Inc. (Crave). Prior to the purchase, Maas (a former employee of Crave) sold all of his stock in Crave and entered into a 3 year employment contract which contained a clause whereby Mass agreed not to compete with Crave not only for the 3 year period of employment, but also for one-year after the expiration of the employment agreement, or his earlier termination. After working for Crave for three years, Maas resigned and six months later began working for a competitor to Crave. Plaintiff sued Maas and his new employer for breaching his employment agreement. The trial court dismissed the case, and the plaintiff appealed.

The covenant not to compete in the purchase agreement provided:

"For a period ending 36 months after the Closing Date, none of the Major Shareholders shall, either directly or indirectly, (1) engage in the Business, other than on behalf of the Company, or (2) undertake any efforts or activities toward pre-incorporating, incorporating, financing, commencing or continuing any business that, if conducted by any of the Shareholders, would be a violation of clause (1), including, without limitation, engaging in the Business through [a competing business], or (3) advise, serve or consult with any person or entity which is, or, to the Major Shareholders' knowledge, will be undertaking efforts towards, incorporating, financing, commencing or continuing any Competing Business or activity which engages in a Competing Business."

The purchase agreement defined "Business" as: "The Company is a distributor and publisher of interactive entertainment (videogames) software, hardware and accessories and provides videogame software, hardware and accessories category management services for certain game retailers (the "Business")."

The employment agreement's covenant not to compete or solicit provided:

"For a period of one (1) year after the expiration of the Agreement, or earlier termination of Employee's employment for any reason, Employee will not engage in any action that Employee knows, or should have known upon reasonable inquiry, violates any of the following provisions: [¶] (i) solicit or otherwise contact, either directly or indirectly, for purposes of selling or otherwise promoting any product or service competitive with any product or service sold or actively in development by the Company at the time of the termination of the Agreement, or sell any such product or service to any person, firm, association, or corporation: [¶] (A) to which the Company sold any product or service during the twenty-four (24) months immediately preceding the termination of this Agreement; or [¶] (B) which Employee solicited, contacted or otherwise dealt with on behalf of the Company during the twenty-four (24) months immediately preceding the termination of this Agreement; [¶] (ii) make any such sale either for the benefit of him or for the benefit of any other person, firm, association, or corporation; [¶] (iii) in any manner, directly or indirectly, assist any person, firm, association, or corporation to make any such contact, solicitation, or sale; [¶] (iv) participate, engage, or have an interest in, directly or indirectly, whether as director, officer, employee, advisor, consultant, stock broker, partner, joint venture, owner, agent, or in any other capacity, in any business, in whole or in part, in the nature of or competitive with the business of the Company in any county in which the Company does business at any time during the Term of this Agreement; or [¶] (v) directly or indirectly, employ or solicit for employment (by any person, firm, association, or corporation other than the Company), or engage in any manner any employee of the Company or consultant to the Company (including any person who was, in the six (6) months prior to such employment or solicitation, an employee of the Company), without the prior written consent of the Company, except as provided for in the Securities Purchase Agreement among Handleman Company and the Shareholders, Option Holders and Warrant Holders of Crave Entertainment Group, Inc. dated October 18, 2005."

After Fillpoint presented his opening statement at trial, counsel for defendants moved for nonsuit which the trial court granted. The Plaintiff appealed. The Court of Appeal affirmed the Trial Court's judgment of nonsuit in favor of Maas. According to the Court, the 3 year covenant not to compete that Maas entered into in connection with the sale of his stock protected the goodwill of Crave and satisfied the purpose of the "sale of business" exception. In contrast, the one year post-employment covenant not to compete and not to solicit both existing and potential customers of Crave was illegal, void, and unenforceable under California law.

Tags: compete clause, noncompete, nonsolicitation
Posted In: Employment Law News 

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Located in Los Angeles, California, the Law Office of Melissa C. Marsh handles business law and corporation law matters as a lawyer for clients throughout Los Angeles including Burbank, Sherman Oaks, Studio City, Valley Village, North Hollywood, Woodland Hills, Hollywood, West LA as well as Riverside County, San Fernando, Ventura County, and Santa Clarita. Attorney Melissa C. Marsh has considerable experience handling business matters both nationally and internationally. We routinely assist our clients with incorporation, forming a California corporation, forming a California llc, partnership, annual minutes, shareholder meetings, director meetings, getting a taxpayer ID number (EIN), buying a business, selling a business, commercial lease review, employee disputes, independent contractors, construction, and personal matters such as preparing a will, living trust, power of attorney, health care directive, and more.