California’s statutory ban on non-competes contains an exception for covenants given in connection with the sale of a business and its goodwill. The exception in California Business and Professions Code section 16601 (the “16601 exception”) was created to protect a buyer’s interest in enjoying the goodwill it purchased free from competition by the seller. With limited case law interpreting the exception, buyers often struggle with the question of how to best protect themselves against later competition from a seller who initially accepts post-closing employment with the buyer – must the restriction be tied to the closing date and the products and customers in place on that date or can it be tied to the employee’s later departure from the new entity and include post-closing products and customers? A recent decision from the California Court of Appeal, Fourth District, provides some guidance for those trying to draft enforceable covenants.
Articles Discussing Restrictive Covenants And Unfair Competition In California.
Affirming the dismissal of an employer’s claim for breach of a non-competition agreement, the California Court of Appeal has held that the agreement was void and unenforceable under California law although the parties entered into the agreement in connection with a business sale. Fillpoint, LLC v. Maas, No. G045057 (Cal. Ct. App. Aug. 24, 2012). Significantly, the Court found the agreement overbroad and not limited to protecting the buyer’s interest in the goodwill of the business.
Executive Summary: The California Court of Appeal recently affirmed an award of over $400,000 in attorneys’ fees in favor of a group of ex-employees in a trade secret misappropriation lawsuit filed by their former employer, finding that the lawsuit was filed in bad faith. This decision highlights the importance of considering carefully whether to bring a misappropriation claim where there is little or no evidence of actual misappropriation. See SASCO v. Rosendin Electric, Inc.
While the Bratz case continues to dazzle onlookers, an interesting thing happened in a more low profile case. In Richmond Technologies, Inc. v. Aumtech Business Solutions, et al. [pdf], the Northern District of California issued an order granting in part the plaintiffâ€™s motion for temporary restraining order. The court recognized that â€œthe non-solicitation and non-interference provisions in the Non-Disclosure Agreement are likely to be found unenforceable under California law [Business and Professions Code section 16600],â€ because they are more broadly drafted than necessary to protect trade secrets.