Contact Us:

Walsh Law Firm
250 Lafayette Circle,
Suite 200
Lafayette, CA 94549
Tel. 925-284-7400
Fax (866) 406-8863

Covenants Not to Compete: No Still Means No!

In Fillpoint, LLC v. Maas, 208 Cal.App.4th 1170 (2012), the Court of Appeals recently ruled that a covenant not to compete contained in an employment agreement is still unenforceable even if it was part of a transaction to sell the company. The owner and president the videogame company sold his company. As part of that transaction, the owner signed an acquisition agreement with a covenant not to compete for three years and an employment agreement with a covenant not to compete for one year following the termination of his employment. He worked for the new company for three years (thus satisfying that covenant not to compete), resigned his employment and went to work as an employee for a competitor. The new company sought to enforce the covenant not to compete in the employment agreement, arguing that it was part of the acquisition and thus within the exception to Business & Professions Code §16600. Following a long list of recent cases, the Court said that “no” means “no” in employment covenant not to compete cases.

The Court stated the general rule:


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. In this case, 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’s Crave stock. The covenant Fillpoint seeks to enforce in this litigation is a separate noncompetition and nonsolicitation covenant in the employment agreement, which could only be triggered when Maas left Crave’s employ.”

The Court recognized that the employment agreement and the acquisition agreement were part of a single transaction and had to be read in conjunction with each other but that did not alter the conclusion:

“We agree with Fillpoint that the stock purchase agreement and the employment agreement are part of a single transaction and must be read together. When a purchase agreement and an employment agreement are entered into at the same time or roughly the same time, as part of a single transaction, and the two different agreements contain different covenants not to compete, the agreements must be read together. In this case, when we read the two noncompetition covenants together, we hold that the noncompetition and nonsolicitation covenant contained in the employment agreement is void and unenforceable under California law. For the reasons we discuss, that covenant does not fit within the limited exception to California’s prohibition against covenants not to compete.


In contrast, the employment agreement’s covenant not to compete was much broader and prevented Maas, for one year after the termination of his employment, from (1) making sales contacts or making actual sales to anyone who was Crave’s customer or potential customer during the two years preceding the termination of Maas’s employment, or assisting others in doing so; (2) working for or owning an interest in any business that was in the same business as, or would compete with, Crave; or (3) employing or soliciting for employment any of Crave’s employees or consultants. The covenant in the employment agreement affected Maas’s rights to be employed in the future and, in this case, for a year after the end of the three-year period of the purchase agreement’s covenant. In a concession that highlights the restriction on a former employee’s rights, Fillpoint states, in its opening appellate brief, that the two covenants not to compete were intended “to deal with the different damage Maas might do wearing the separate hats of major shareholder and key employee.”

Thus, 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.

In addition, the nonsolicitation terms in the employment agreement are too broad and inconsistent with the purposes and terms of Business and Professions Code sections 16600 and 16601. The employment agreement even barred sales to or solicitation of potential customers. “[N]onsolicitation covenants barring the seller from soliciting all employees and customers of the buyer, even those who were not former employees or customers of the sold business, extend their anticompetitive reach beyond ‘the business so sold.’ [Citation.] They do more than ensure the buyer receives the full value of the business it bought, whose goodwill does not include ‘ “the patronage of the general public.” ’ [Citation.] The covenants would give the buyer broad protection against competition wherever it happens to have employees or customers, at the expense of the seller’s fundamental right to compete for employees and customers in the marketplace. [Citation.]” (Strategix, Ltd. v. Infocrossing West, Inc., supra, 142 Cal.App.4th at p. 1073, 48 Cal.Rptr.3d 614.)”

Maas satisfied his covenant not to compete for three years under the purchase agreement. The employment agreement’s covenant not to compete for an additional year, including its broad nonsolicitation agreement, cannot be reconciled with California’s strong public policy permitting employees the right to pursue a lawful occupation of their own choice. Accordingly, we hold the employment agreement’s covenant not to compete does not fit within the limited exception (contained in Business and Professions Code section 16601)”

Thus, the clear rule that 16600 prohibits covenants not to compete in employment contracts remains.