California Court Of Appeal Refuses To Enforce Non-Compete Against Selling Shareholder

The California Court of Appeal for the Fourth District recently refused to enforce a covenant not to compete against the former employee and selling shareholder of a video game company. In Fillpoint, LLC, v. Maas et al., Case No. G045057, 2012 Cal. App. LEXIS 914 (Cal. Ct. App. Aug. 24, 2012), the Court of Appeal determined that half of a two-part noncompete agreement entered into in the context of the sale of a business was unenforceable, despite the exception for such covenants found in Business and Professions Code Section 16601 ("Section 16601"). This case answers what had previously been an open question under California law: Whether an acquiring company can obtain a non-compete that begins to run upon termination of employment (as opposed to or in addition to a non-compete that begins to run upon closing) from a shareholder who becomes an employee of the buyer. See Hilb, Rogal & Hamilton Ins. Servs. v. Robb, 33 Cal. App. 4th 1812 (1995) (enforcing a noncompete agreement against a selling shareholder that commenced at termination of employment, without any discussion or analysis of whether using termination of employment as the trigger for a noncompete violates Section 16601).

In Fillpoint, Michael Maas, an employee of Crave Entertainment Group, Inc. ("Crave"), executed a stock purchase agreement ("SPA") when he sold all of his stock in Crave to Handleman Company ("Handleman") as part of Handleman's acquisition of Crave. The SPA contained a three-year non-compete which was set to begin running at the SPA's closing date. At the same time and in connection with Handleman's acquisition of Crave, Maas also entered into an employment agreement with Crave containing one-year non-compete, customer non-solicit, and employee non-solicit covenants, all of which would begin to run upon the termination of his employment. Maas' employment agreement was contemplated by the SPA, which included an integration clause referencing the form employment agreement. Additionally, Maas' employment agreement referred back to the SPA and stated that the SPA would prevail in the event of any conflict between the agreements.

Maas eventually resigned his employment three years after the acquisition of Crave and, about six months later, began working for a competitor of Crave. Fillpoint, LLC ("Fillpoint"), which had acquired Crave from Handleman, brought suit against Maas for breach of his employment agreement. At trial, Maas moved for nonsuit after Fillpoint's...