No Surprises Here – California Court Won’t Enforce Non-Compete

by Allen Matkins

Employers like covenants not to compete; California doesn’t.  Anyone who doubts these two propositions should read the opinion issued last Friday by the Fourth District Court of Appeal in Fillpoint, LLC v. Maas, 2012 Cal. App. LEXIS 914 (Aug. 24, 2012).

The facts of the case are relatively straightforward.  When Michael Maas sold his stock in a corporation, he signed a three-year covenant not to compete.  However, he remained an employee of the corporation and signed an employment agreement that contained a one-year post-employment covenant not to compete.  Three years later, Mr. Maas quits and after a few month hiatus goes to work for a competitor.  He and his new employer are then sued for breaching the employment agreement’s one-year, post employment restriction on competition.

Business & Professions Code Section 16600 declares agreements not to compete void unless they fall within a statutory exception.  The legislature did make an exception when someone sells the goodwill of the business.  Bus. & Prof. Code § 16601. The idea is that this is permissible because the covenant protects what the buyer is acquiring.

In Fillpoint, the Court of Appeal agreed with the plaintiff that the employment agreement and the purchase agreement should be read togoether.  See Cal. Civ. Code § 1642 (“Several contracts relating to the same matters, between the same parties, and made as parts of substantially one transaction, are to be taken together.”).  Despite winning this point, the plaintiff didn’t win the appeal.

Justice Richard Fybel writing for the court found that the covenant contained in the purchase agreement had been satisfied and had protected the goodwill acquired by the buyer for three full years.  The covenant in the employment agreement was broader and “targeted an employee’s fundamental right to pursue his or her profession”.  Justice Fybel also found that the non-solicitation provisions of the covenant were too broad.

At a public policy level, one must ask whether California’s historic hostility to enforcement of covenants not to compete has been good or bad for the state’s economy.  Stanford Law School Professor Ronald J. Gilson cites Section 16600 as a reason for the success of California’s Silicon Valley.  The Legal Infrastructure of High Technology Industrial Districts: Silicon Valley, Route 128, and Covenants Not to Compete, 74 N.Y.U. L. Rev. 575 (1999).  He argues that widespread enforcement of covenants not to compete retards employee mobility and thus the knowledge spillover among companies that is fundamental to the long-term success of an economic district.

Great News!  There Are No Subversive Organizations In California

In Borrowing Money From A Foreign Government May Make You A Subversive Organization In California, I discussed the provisions of California’s Corporations Code requiring “subversive organizations” to register with the California Secretary of State.  I’ve now confirmed with the Secretary of State that no one has registered as a subversive organization.  While this is likely to be a surprise to no one, it is surprising when one reads the definition of “subversive organization” which includes anyone who accepts financial support or loans from a foreign government or agency of a foreign government.


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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