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California Strikes Down Overly Restrictive Non-Competition Provision Related to Sale of Business

October 08, 2012

By CARL R. SANCHEZ & KEVIN C. REYES

Californias deeply rooted public policy has long favored free competition and generally weighed against the enforceability of non-competition agreements. There are, however, a number of limited statutory exceptions to the general rule. One such exceptionfound in Business and Professions Code §16601provides that limited covenants not to compete are enforceable in connection with the sale of a business. The California Court of Appeal, in Fillpoint, LLC v. Maas (August 24, 2012), considered the validity of certain covenants not to compete that were entered into in connection with the sale of a business: first, a three-year restriction on a selling shareholders ability to compete following the closing of the transaction contained in the purchase agreement for the business, and second, a one-year restriction on the same selling shareholders ability to compete following termination of the shareholders employment with the purchaser, which covenant was contained in an employment agreement. The Court determined that the one-year post-termination restriction was overly burdensome and, as such, void and unenforceable.

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Image: Carl R Sanchez
Carl R Sanchez
Partner, Corporate Department