A California Court of Appeal has ruled that a non-compete agreement executed as part of a business sale was unenforceable under California law because it was insufficiently related to the sale. Fillpoint, LLC v. Maas, No. G045057 (Cal. Ct. App. Aug 24, 2012). Non-compete agreements are generally unenforceable in California. A limited exception under Business and Professions Code section 16601 recognizes non-compete agreements in connection with the sale of a business. This allows buyers to protect the value of their purchases from the acts by the seller which could diminish that value after the sale.
In Fillpoint, the Court found that the non-compete provisions of an employment agreement were unenforceable even when executed in connection with a stock purchase agreement. Both agreements limited an ex-employee’s ability to compete with the purchaser. However, while the stock purchase agreement only limited some competitive activity and only for three years following the stock purchase, the employment agreement broadly restricted future employment following the employee’s separation from the buyer. The Court found the employment agreement unenforceable because it was too broad and not sufficiently related to the stock purchase. The Court contrasted this with the stock purchase agreement, which was held to be part of the purchaser’s attempt to protect the value of its purchase.
This is a reminder that California courts carefully scrutinize non-compete agreements under California law. For a more in-depth discussion of this case, please see our article, Non-Compete Related to Business Sale Not Enforceable, California Court of Appeal Rules