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The Court of Appeal highlights the importance of reflecting a clear purpose to protect business goodwill in non-compete provisions in separate agreements connected to sale of business

Fillpoint, LLC v. Maas (2012) 208 Cal.App.4th 1170, 146 Cal.Rptr.3d 194

Background: The court’s summary of facts is clear and concise, it states as follows:

“When Michael Maas (Mass) sold his stock in Crave Entertainment Group, Inc. (Crave), to Handleman Company (Handleman), he signed a stock purchase agreement, which contained a three-year covenant not to compete. As part of Handleman’s acquisition of Crave, Maas- a Crave employee- also signed an employment agreement containing a one-year covenant not to compete, which would become operative when Maas’s employment with Crave was terminated. Maas resigned from Crave three years after its acquisition by Handleman. About six months later, he began working for Solutions 2 Go, Inc., a competitor of Crave, owned by Nima Taghavi.” (Fillpoint, LLC v. Maas (2012) 208 Cal.App.4th 1170, 146 Cal.Rptr.3d 194)

Court History: Fillpoint, LLC (Fillpoint), which had acquired Crave from Handleman, sued Maas for breaching his employment agreement, and also sued Solutions 2 Go and Taghavi for interference with contract. (Maas, Solutions 2 Go, and Taghavi are collectively referred as defendants.) The trial court granted the nonsuit motion, finding the covenants not to compete in the purchase agreement and in the employment agreement were separate; the covenant not to compete or solicit in the employment agreement was unenforceable under Business and Professions Code section 16600; and the covenant not to compete or solicit in the employment agreement could be assigned. The trial court initially granted the nonsuit motion only as to the breach of contract cause of action. The court later determined that the interference cause of action must also be dismissed, because it was based on the covenant not to compete or solicit in the employment agreement, which the court had found to be unenforceable. Fillpoint appealed.  (Fillpoint, LLC v. Maas (2012) 208 Cal.App.4th 1170, 146 Cal.Rptr.3d 194)

Pertinent Issues addressed: Under the general rule in California, covenants not to compete are unenforceable. However, a limited exception under Business and Professions Code section 16601 allows non-compete covenants in connection with the sale of a business to protect the goodwill of the business being sold.

Fillpoint argued that the purchase agreement and the employment agreement must be read together. The Court of Appeal agreed with Fillpoint’s argument, however clarified that the fact that the purchase agreement and the employment agreement should be read together does not automatically mean the covenant not to compete in the employment agreement is enforceable.  The Court of Appeal examining, comparing and analyzing the terms of the covenant found as follows:

a.  The three year covenant not to compete in the purchase agreement protected the goodwill of Crave, served the purpose of Business and Professions Code section 16601, and was fully performed by Mass.

b.  The employment agreement’s covenant not to compete affected Maas’s rights to be employed in the future, in the present case, for a year after the end of the three-year period of the purchase agreement’s covenant.

The concluded as follows:

“… by their very nature, the restrictions in the covenants not to compete in the purchase agreement and the employment agreement are different. The purchase agreement’s covenant was focused on protecting the acquired goodwill for a limited period of time. The employment agreement’s covenant targeted an employee’s fundamental right to pursue his or her profession.”

Accordingly, the Court of Appeal affirmed the trial court’s decision to grant defendants’ motion for nonsuit.

Pointers:

  • While executing separate agreements containing non-compete provisions pursuant to sale of business, the employers should clearly reflect a clear purpose to protect business goodwill in both the agreements.
  • The employers should focus more on negotiating the tenure of the non-compete provision, pursuant to sale of business.