California Court Strikes Down Post-Employment Non-Compete Agreement, Raising Questions about the Validity of Employee Non-Solicits

Wilson Sonsini Goodrich & Rosati

A recent California Court of Appeals decision, Fillpoint, LLC v. Maas (August 24, 2012), once again highlights California's strong fundamental public policy favoring open competition and disfavoring restrictive covenants.

Following the California Supreme Court's 2008 decision in Edwards v. Arthur Andersen LLP, California law is clear that, unless they fit within one of three narrow statutory exceptions, employee post-employment non-compete and customer non-solicitation agreements are void and unenforceable under Business and Professions Code §16600. Fillpoint does not deviate from that result. However, the decision does consider the conditions under which perhaps the most common exception to §16600—the §16601 exception—applies to an employee non-compete, a customer non-solicit, and an employee non-solicit. Such restrictions are found in many, if not most, merger and acquisition (M&A) transaction documents. Thus, Fillpoint provides useful guidance as to the parameters of §16601, as well as practical tips on the use of restrictive covenants in the M&A context. Perhaps most importantly, however, Fillpoint creates considerable uncertainty as to the continuing validity of post-employment covenants not to solicit employees where no statutory exception applies—an issue left unresolved by Arthur Andersen.


Michael Maas was a "key" employee and "Major Shareholder" of Crave Entertainment Group, Inc., which was acquired by Handleman Company. After the acquisition, the acquired company continued to go by the name Crave. As part of the transaction, and as consideration for the sale of his stock in the seller, Maas signed a stock purchase agreement containing a covenant not to compete. The non-compete prohibited Maas from engaging in a business competitive to Crave for 36 months following the closing date of the transaction. The stock purchase agreement also contained a provision requiring certain key employees of the seller, including Maas, to execute employment agreements with Crave following the acquisition.

After the closing of the acquisition, Maas entered into an employment agreement with Crave. The employment agreement contained not only a covenant not to compete, but also certain non-solicitation restrictions. Specifically, for a period of one year following Maas's termination of employment from Crave, he generally was prohibited from: (1) making sales contacts or actual sales to any Crave customer or potential customer; (2) working for or owning any business that competes with Crave; or (3) employing or soliciting for employment any of Crave's employees or consultants.

After satisfying the three-year non-compete provision in the stock purchase agreement, Maas resigned his employment with Crave. Shortly thereafter, Maas began working for a Crave competitor as its president and CEO. Crave (through its successor, Fillpoint) then sued Maas for breaching the employment agreement's one-year non-compete that was triggered as soon as Maas's employment with Crave ended. Crave also sued the company Maas joined for interference with contractual relations (i.e., the non-compete Crave enjoyed with Maas).

Analysis and Holding

The Fillpoint court first addressed whether the employment agreement and the stock purchase agreement should be read together as one integrated document. If the employment agreement was viewed as a stand-alone document unrelated to the stock sale, the court said it would run afoul of California's general prohibition on non-compete agreements found in §16600. However, if the two agreements are viewed as one integrated document, the post-employment non-competition and non-solicitation covenants contained in the employment agreement might survive under the §16601 "sale of business" exception to §16600's general prohibition of restraints against those engaging in a lawful profession, trade, or business.

In concluding that the two agreements constituted one integrated agreement, the court noted that nothing in the sale-of-business exception required that the covenant be contained in any particular type of document. Instead, the "purpose of the statute is served as long as the covenant is executed in connection with the sale or disposition of all of the shareholder's stock in the acquired corporation." In this case, the two agreements were between the same parties, both agreements referenced each other, and the employment agreement contained an integration clause providing that in the event of any conflicts between the two documents, the purchase agreement would prevail.

The Fillpoint court then addressed whether the non-competition and non-solicitation covenant contained in the employment agreement was void and unenforceable under California law. The court noted that the covenant contained in the purchase agreement (which was not the subject of dispute, as the parties admitted it had been satisfied because the three-year non-competition period had passed without being violated) was created to protect the goodwill acquired by the buyer. In contrast, the non-competition and non-solicitation covenant in the employment agreement served a different purpose and affected Maas's right to be employed in the future. As such, the non-competition and non-solicitation covenant was broader and "targeted an employee's fundamental right to pursue his or her profession." The court further noted that the non-solicitation provisions were overbroad in that they limited the solicitation of and sales to potential Crave customers (as opposed to just its actual customers). In light of these factors, the court held that the non-competition and non-solicitation covenant found in the employment agreement was void and unenforceable under California law.

Lessons Learned

  • Non-competition and non-solicitation covenants generally remain unenforceable under California law. Fillpoint and Arthur Andersen are but a few of the numerous state and federal court decisions making clear that restrictive covenants are disfavored in California. Unless the covenant is otherwise permissible under an exception such as §16601, it likely will fail.
  • Section 16601 retains its vitality. Fillpoint makes clear that §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, courts consider it "unfair" for the seller to engage in competition that diminishes the value of the asset sold.
  • The proper integration of non-competition and non-solicitation covenants in the M&A context is important. Without the protection of §16601, non-competition and non-solicitation covenants risk being void and unenforceable under §16600. A party desiring to secure an enforceable non-competition or non-solicitation covenant should take care to properly integrate such covenants with the underlying deal documents. The relevant documents should reference each other expressly and contain proper integration clauses. Without such tethering of the restrictive covenants to the transaction at issue (assuming it qualifies under §16601), parties risk having the standalone covenants viewed as separate from the underlying transaction and not entitled to the more favorable analysis available under the §16601 exception.
  • Recitals matter. Similarly, recitals in transaction-related agreements help to establish the applicability of §16601 and may inform whether non-competition and non-solicitation covenants will be enforceable or not. Specifically, non-compete agreements should evidence that they are being executed in connection with, and as consideration for, an underlying M&A transaction. The documents should reflect any separate consideration that is being offered in exchange for the execution of the non-compete provision. Finally, the recitals should indicate that the parties believe the non-competition and non-solicitation covenants are reasonable and no broader than necessary to protect the goodwill transferred between the parties. While not dispositive, such recitals help make clear the intentions of the parties and avoid the risk of a court refusing to consider other evidence offered to establish such intentions.
  • Section 16601 will not save restrictive covenants that do not advance the purposes of the exception. To qualify for the §16601 exception, the restrictive covenant actually must be necessary to protect the value of the business acquired or the goodwill transferred. Fillpoint makes clear that restrictions that are overbroad or that overreach will not survive §16601 scrutiny. Indeed, in Fillpoint the court disapproved of a customer non-solicitation provision that many practitioners might consider to be reasonable and one fostering the purposes of §16601.

What about Employee Non-Solicits?

As noted above, the non-competition and non-solicitation covenant at issue in the employment agreement contained three separate prohibitions: (1) an agreement not to work for any competing company; (2) an agreement not to solicit customers; and (3) an agreement not to solicit employees. The court expressly stated that the non-competition and non-solicitation covenant at issue in the employment agreement, standing alone, was not enforceable under §16600 and that it "depends entirely on section 16601 for its survival." The court did not analyze each covenant separately, nor did it consider whether any of the covenants could be severed and still be enforced. As a result, Fillpoint's conclusion as to the enforceability of the employee non-solicit covenant appears at odds with the seminal, but pre-Arthur Andersen, California case on employee non-solicit (non-interference) agreements, Loral Corp. v. Moyes. That case holds that employee non-solicits do not violate §16600 and therefore are enforceable under California law.

Fillpoint does not address Loral. It does not explain why the employee non-solicit at issue in the Crave employment agreement "depends entirely on section 16601 for its survival" if Loral permits employee non-solicits. Indeed, post-Arthur Andersen, many question the continuing viability of Loral's employee non-solicit analysis. Without addressing Loral, at least one federal court recently has found an employee nonsolicit to be in violation of §16600. In short, it remains to be seen whether Loral's days are numbered, and whether any employee non-solicit will fail under §16600 in the future unless it falls within the §16601 or other statutory exceptions.

Wilson Sonsini Goodrich & Rosati actively is following developments around the country with respect to restrictive covenants, and the firm is available to assist companies, employees, newly formed businesses, and investors with every aspect of employment and trade secret litigation and counseling. For more information, please contact Fred Alvarez, Rico Rosales, Marina Tsatalis, Laura Merritt, Charles Tait Graves, or another member of the firm's employment and trade secrets litigation practice.

Written by:

Wilson Sonsini Goodrich & Rosati

Wilson Sonsini Goodrich & Rosati on:

Readers' Choice 2017
Reporters on Deadline

Related Case Law

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
- hide

JD Supra Privacy Policy

Updated: May 25, 2018:

JD Supra is a legal publishing service that connects experts and their content with broader audiences of professionals, journalists and associations.

This Privacy Policy describes how JD Supra, LLC ("JD Supra" or "we," "us," or "our") collects, uses and shares personal data collected from visitors to our website (located at (our "Website") who view only publicly-available content as well as subscribers to our services (such as our email digests or author tools)(our "Services"). By using our Website and registering for one of our Services, you are agreeing to the terms of this Privacy Policy.

Please note that if you subscribe to one of our Services, you can make choices about how we collect, use and share your information through our Privacy Center under the "My Account" dashboard (available if you are logged into your JD Supra account).

Collection of Information

Registration Information. When you register with JD Supra for our Website and Services, either as an author or as a subscriber, you will be asked to provide identifying information to create your JD Supra account ("Registration Data"), such as your:

  • Email
  • First Name
  • Last Name
  • Company Name
  • Company Industry
  • Title
  • Country

Other Information: We also collect other information you may voluntarily provide. This may include content you provide for publication. We may also receive your communications with others through our Website and Services (such as contacting an author through our Website) or communications directly with us (such as through email, feedback or other forms or social media). If you are a subscribed user, we will also collect your user preferences, such as the types of articles you would like to read.

Information from third parties (such as, from your employer or LinkedIn): We may also receive information about you from third party sources. For example, your employer may provide your information to us, such as in connection with an article submitted by your employer for publication. If you choose to use LinkedIn to subscribe to our Website and Services, we also collect information related to your LinkedIn account and profile.

Your interactions with our Website and Services: As is true of most websites, we gather certain information automatically. This information includes IP addresses, browser type, Internet service provider (ISP), referring/exit pages, operating system, date/time stamp and clickstream data. We use this information to analyze trends, to administer the Website and our Services, to improve the content and performance of our Website and Services, and to track users' movements around the site. We may also link this automatically-collected data to personal information, for example, to inform authors about who has read their articles. Some of this data is collected through information sent by your web browser. We also use cookies and other tracking technologies to collect this information. To learn more about cookies and other tracking technologies that JD Supra may use on our Website and Services please see our "Cookies Guide" page.

How do we use this information?

We use the information and data we collect principally in order to provide our Website and Services. More specifically, we may use your personal information to:

  • Operate our Website and Services and publish content;
  • Distribute content to you in accordance with your preferences as well as to provide other notifications to you (for example, updates about our policies and terms);
  • Measure readership and usage of the Website and Services;
  • Communicate with you regarding your questions and requests;
  • Authenticate users and to provide for the safety and security of our Website and Services;
  • Conduct research and similar activities to improve our Website and Services; and
  • Comply with our legal and regulatory responsibilities and to enforce our rights.

How is your information shared?

  • Content and other public information (such as an author profile) is shared on our Website and Services, including via email digests and social media feeds, and is accessible to the general public.
  • If you choose to use our Website and Services to communicate directly with a company or individual, such communication may be shared accordingly.
  • Readership information is provided to publishing law firms and authors of content to give them insight into their readership and to help them to improve their content.
  • Our Website may offer you the opportunity to share information through our Website, such as through Facebook's "Like" or Twitter's "Tweet" button. We offer this functionality to help generate interest in our Website and content and to permit you to recommend content to your contacts. You should be aware that sharing through such functionality may result in information being collected by the applicable social media network and possibly being made publicly available (for example, through a search engine). Any such information collection would be subject to such third party social media network's privacy policy.
  • Your information may also be shared to parties who support our business, such as professional advisors as well as web-hosting providers, analytics providers and other information technology providers.
  • Any court, governmental authority, law enforcement agency or other third party where we believe disclosure is necessary to comply with a legal or regulatory obligation, or otherwise to protect our rights, the rights of any third party or individuals' personal safety, or to detect, prevent, or otherwise address fraud, security or safety issues.
  • To our affiliated entities and in connection with the sale, assignment or other transfer of our company or our business.

How We Protect Your Information

JD Supra takes reasonable and appropriate precautions to insure that user information is protected from loss, misuse and unauthorized access, disclosure, alteration and destruction. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. You should keep in mind that no Internet transmission is ever 100% secure or error-free. Where you use log-in credentials (usernames, passwords) on our Website, please remember that it is your responsibility to safeguard them. If you believe that your log-in credentials have been compromised, please contact us at

Children's Information

Our Website and Services are not directed at children under the age of 16 and we do not knowingly collect personal information from children under the age of 16 through our Website and/or Services. If you have reason to believe that a child under the age of 16 has provided personal information to us, please contact us, and we will endeavor to delete that information from our databases.

Links to Other Websites

Our Website and Services may contain links to other websites. The operators of such other websites may collect information about you, including through cookies or other technologies. If you are using our Website or Services and click a link to another site, you will leave our Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We are not responsible for the data collection and use practices of such other sites. This Policy applies solely to the information collected in connection with your use of our Website and Services and does not apply to any practices conducted offline or in connection with any other websites.

Information for EU and Swiss Residents

JD Supra's principal place of business is in the United States. By subscribing to our website, you expressly consent to your information being processed in the United States.

  • Our Legal Basis for Processing: Generally, we rely on our legitimate interests in order to process your personal information. For example, we rely on this legal ground if we use your personal information to manage your Registration Data and administer our relationship with you; to deliver our Website and Services; understand and improve our Website and Services; report reader analytics to our authors; to personalize your experience on our Website and Services; and where necessary to protect or defend our or another's rights or property, or to detect, prevent, or otherwise address fraud, security, safety or privacy issues. Please see Article 6(1)(f) of the E.U. General Data Protection Regulation ("GDPR") In addition, there may be other situations where other grounds for processing may exist, such as where processing is a result of legal requirements (GDPR Article 6(1)(c)) or for reasons of public interest (GDPR Article 6(1)(e)). Please see the "Your Rights" section of this Privacy Policy immediately below for more information about how you may request that we limit or refrain from processing your personal information.
  • Your Rights
    • Right of Access/Portability: You can ask to review details about the information we hold about you and how that information has been used and disclosed. Note that we may request to verify your identification before fulfilling your request. You can also request that your personal information is provided to you in a commonly used electronic format so that you can share it with other organizations.
    • Right to Correct Information: You may ask that we make corrections to any information we hold, if you believe such correction to be necessary.
    • Right to Restrict Our Processing or Erasure of Information: You also have the right in certain circumstances to ask us to restrict processing of your personal information or to erase your personal information. Where you have consented to our use of your personal information, you can withdraw your consent at any time.

You can make a request to exercise any of these rights by emailing us at or by writing to us at:

Privacy Officer
JD Supra, LLC
10 Liberty Ship Way, Suite 300
Sausalito, California 94965

You can also manage your profile and subscriptions through our Privacy Center under the "My Account" dashboard.

We will make all practical efforts to respect your wishes. There may be times, however, where we are not able to fulfill your request, for example, if applicable law prohibits our compliance. Please note that JD Supra does not use "automatic decision making" or "profiling" as those terms are defined in the GDPR.

  • Timeframe for retaining your personal information: We will retain your personal information in a form that identifies you only for as long as it serves the purpose(s) for which it was initially collected as stated in this Privacy Policy, or subsequently authorized. We may continue processing your personal information for longer periods, but only for the time and to the extent such processing reasonably serves the purposes of archiving in the public interest, journalism, literature and art, scientific or historical research and statistical analysis, and subject to the protection of this Privacy Policy. For example, if you are an author, your personal information may continue to be published in connection with your article indefinitely. When we have no ongoing legitimate business need to process your personal information, we will either delete or anonymize it, or, if this is not possible (for example, because your personal information has been stored in backup archives), then we will securely store your personal information and isolate it from any further processing until deletion is possible.
  • Onward Transfer to Third Parties: As noted in the "How We Share Your Data" Section above, JD Supra may share your information with third parties. When JD Supra discloses your personal information to third parties, we have ensured that such third parties have either certified under the EU-U.S. or Swiss Privacy Shield Framework and will process all personal data received from EU member states/Switzerland in reliance on the applicable Privacy Shield Framework or that they have been subjected to strict contractual provisions in their contract with us to guarantee an adequate level of data protection for your data.

California Privacy Rights

Pursuant to Section 1798.83 of the California Civil Code, our customers who are California residents have the right to request certain information regarding our disclosure of personal information to third parties for their direct marketing purposes.

You can make a request for this information by emailing us at or by writing to us at:

Privacy Officer
JD Supra, LLC
10 Liberty Ship Way, Suite 300
Sausalito, California 94965

Some browsers have incorporated a Do Not Track (DNT) feature. These features, when turned on, send a signal that you prefer that the website you are visiting not collect and use data regarding your online searching and browsing activities. As there is not yet a common understanding on how to interpret the DNT signal, we currently do not respond to DNT signals on our site.

Access/Correct/Update/Delete Personal Information

For non-EU/Swiss residents, if you would like to know what personal information we have about you, you can send an e-mail to We will be in contact with you (by mail or otherwise) to verify your identity and provide you the information you request. We will respond within 30 days to your request for access to your personal information. In some cases, we may not be able to remove your personal information, in which case we will let you know if we are unable to do so and why. If you would like to correct or update your personal information, you can manage your profile and subscriptions through our Privacy Center under the "My Account" dashboard. If you would like to delete your account or remove your information from our Website and Services, send an e-mail to

Changes in Our Privacy Policy

We reserve the right to change this Privacy Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our Privacy Policy will become effective upon posting of the revised policy on the Website. By continuing to use our Website and Services following such changes, you will be deemed to have agreed to such changes.

Contacting JD Supra

If you have any questions about this Privacy Policy, the practices of this site, your dealings with our Website or Services, or if you would like to change any of the information you have provided to us, please contact us at:

JD Supra Cookie Guide

As with many websites, JD Supra's website (located at (our "Website") and our services (such as our email article digests)(our "Services") use a standard technology called a "cookie" and other similar technologies (such as, pixels and web beacons), which are small data files that are transferred to your computer when you use our Website and Services. These technologies automatically identify your browser whenever you interact with our Website and Services.

How We Use Cookies and Other Tracking Technologies

We use cookies and other tracking technologies to:

  1. Improve the user experience on our Website and Services;
  2. Store the authorization token that users receive when they login to the private areas of our Website. This token is specific to a user's login session and requires a valid username and password to obtain. It is required to access the user's profile information, subscriptions, and analytics;
  3. Track anonymous site usage; and
  4. Permit connectivity with social media networks to permit content sharing.

There are different types of cookies and other technologies used our Website, notably:

  • "Session cookies" - These cookies only last as long as your online session, and disappear from your computer or device when you close your browser (like Internet Explorer, Google Chrome or Safari).
  • "Persistent cookies" - These cookies stay on your computer or device after your browser has been closed and last for a time specified in the cookie. We use persistent cookies when we need to know who you are for more than one browsing session. For example, we use them to remember your preferences for the next time you visit.
  • "Web Beacons/Pixels" - Some of our web pages and emails may also contain small electronic images known as web beacons, clear GIFs or single-pixel GIFs. These images are placed on a web page or email and typically work in conjunction with cookies to collect data. We use these images to identify our users and user behavior, such as counting the number of users who have visited a web page or acted upon one of our email digests.

JD Supra Cookies. We place our own cookies on your computer to track certain information about you while you are using our Website and Services. For example, we place a session cookie on your computer each time you visit our Website. We use these cookies to allow you to log-in to your subscriber account. In addition, through these cookies we are able to collect information about how you use the Website, including what browser you may be using, your IP address, and the URL address you came from upon visiting our Website and the URL you next visit (even if those URLs are not on our Website). We also utilize email web beacons to monitor whether our emails are being delivered and read. We also use these tools to help deliver reader analytics to our authors to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

Analytics/Performance Cookies. JD Supra also uses the following analytic tools to help us analyze the performance of our Website and Services as well as how visitors use our Website and Services:

  • HubSpot - For more information about HubSpot cookies, please visit
  • New Relic - For more information on New Relic cookies, please visit
  • Google Analytics - For more information on Google Analytics cookies, visit To opt-out of being tracked by Google Analytics across all websites visit This will allow you to download and install a Google Analytics cookie-free web browser.

Facebook, Twitter and other Social Network Cookies. Our content pages allow you to share content appearing on our Website and Services to your social media accounts through the "Like," "Tweet," or similar buttons displayed on such pages. To accomplish this Service, we embed code that such third party social networks provide and that we do not control. These buttons know that you are logged in to your social network account and therefore such social networks could also know that you are viewing the JD Supra Website.

Controlling and Deleting Cookies

If you would like to change how a browser uses cookies, including blocking or deleting cookies from the JD Supra Website and Services you can do so by changing the settings in your web browser. To control cookies, most browsers allow you to either accept or reject all cookies, only accept certain types of cookies, or prompt you every time a site wishes to save a cookie. It's also easy to delete cookies that are already saved on your device by a browser.

The processes for controlling and deleting cookies vary depending on which browser you use. To find out how to do so with a particular browser, you can use your browser's "Help" function or alternatively, you can visit which explains, step-by-step, how to control and delete cookies in most browsers.

Updates to This Policy

We may update this cookie policy and our Privacy Policy from time-to-time, particularly as technology changes. You can always check this page for the latest version. We may also notify you of changes to our privacy policy by email.

Contacting JD Supra

If you have any questions about how we use cookies and other tracking technologies, please contact us at:

- hide

This website uses cookies to improve user experience, track anonymous site usage, store authorization tokens and permit sharing on social media networks. By continuing to browse this website you accept the use of cookies. Click here to read more about how we use cookies.