Key Decisions

September 2012 – Non-Competition Agreement In An Agreement To Sell A Business

(filed under: Key Decisions Archive | September 26, 2012)

When A Non-Competition Agreement In An Agreement To Sell A Business Was Different From One In An Employment Agreement, The Latter Was Unenforceable

Fillpoint, LLC v. Maas
(Cal. Ct. of App., 4th Dist.), filed August 24, 2012

KEY FACTS

Michael Maas was employed by Star Video Games, and owned stock in Star Video Games’s parent company, Crave. In 2005, Handleman acquired Crave. Maas and the other Crave stockholders, including Taghavi, sold their stock to Handleman. The purchase agreement included a covenant not to compete that prohibited Maas, as well as the other former Crave stockholders, from engaging in the business of distribution and publishing of video games for 36 months after the sale.

About a month after the purchase agreement was signed, Maas entered into an employment agreement with Crave, agreeing to work for Crave for three years. The employment agreement also included a covenant not to compete or solicit for one year after expiration of the employment agreement or after the earlier termination of Maas’s employment.

Taghavi resigned from Crave in December 2006. Maas resigned from Crave in November 2008, after satisfying the three-year covenant not to compete contained in the purchase agreement, and fulfilling the three-year term of the employment agreement.

In February 2009, Fillpoint acquired Crave’s assets. In April 2009, Crave assigned Maas’ employment agreement to Fillpoint.

In June 2009, Maas became the president and chief executive officer and a shareholder of Solutions 2 Go, a company owned by Taghavi. Solutions 2 Go is a competitor of Crave.

Fillpoint sued Maas for breach of the employment agreement, and sued Taghavi and Solutions 2 Go for tortious interference with the employment agreement.

The trial court granted a nonsuit in favor of Maas, Taghavi and Solutions 2 Go based on its conclusion that the non-competition agreement in Maas’ employment agreement was unenforceable as being contrary to public policy.

HOLDING & REASONING

The Court of Appeal affirmed.

Under the general rule in California, covenants not to compete are unenforceable. To protect an acquired business’s goodwill, an exception to this rule allows such covenants in connection with the sale of a business. This exception, however, is limited.

The court found that the three-year covenant not to compete in the stock purchase agreement was designed to protect the goodwill of the business being sold. Handleman and its successor in interest, Fillpoint, received the full benefit of that covenant for three years following Handleman’s acquisition of Maas’ Crave stock.

The covenant Fillpoint sought to enforce by way of its lawsuit was a separate non-competition and non-solicitation covenant in the employment agreement, which could only be triggered when Maas left Crave’s employ. It was designed to protect a different interest than the covenant in the stock purchase agreement, i.e. something other than the company’s goodwill. As such, it was void and unenforceable under California law.

ANALYSIS

This opinion offers a good summary of California law pertaining to non-compete agreements.