In California, Some Covenants Not To Compete Are Okay; Some Are Not.

Defendant sold his stock in Crave Entertainment Group to Handleman Company. As part of the stock purchase agreement, defendant signed a three-year covenant not to compete.  At the same time, he signed an employment contract with Crave, by then owned by Handleman. The employment agreement contained a one-year covenant not to compete which would become operative when defendant’s employment ceased. Somewhere within the next few years, Handleman sold Crave to Fillpoint, LLC. At the end of three years after the sale of Crave to Handleman, defendant resigned. About six months later, he went to work for a competitor. Fillpoint brought an action against defendant for breach of his employment agreement. The trial court granted defendant’s nonsuit, and the appellate court affirmed, stating that under California law covenants not to compete are unenforceable, but to protect an acquired business’s goodwill, an exception to this rule allows such covenants in connection with the sale of a business. The court concluded the covenant not to compete in the employment agreement was not enforceable. Fillpoint, LLC v. Michael Maas (Cal. App. Fourth Dist., Div. 3; August 24, 2012) 208 Cal.App.4th 1170.