Monday, August 27, 2012
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C.A. Rejects Claim of Exception to Ban on Noncompete Clauses
By KENNETH OFGANG, Staff Writer
An arrangement by which a video game developer sold stock in the company he worked for to a successor company, and joined that company as an employee, did not entitle the new employer to take advantage of an exception to the rule against enforcement of noncompetition covenants, the Fourth District Court of Appeal said Friday.
Div. Three affirmed a judgment following nonsuit in favor of Michael Maas and others in a suit brought by FIllpoint, LLC. Maas is a former employee and shareholder of Crave Entertainment Group, Inc., the parent company of Star Video Games.
Fillpoint purchased Handleman Company in 2009. Fillpoint also acquired Handleman’s rights under two contracts that Maas signed in 2005.
Shareholder Agreements
One of those agreements provided for the purchase by Handleman of Maas’ stock in Crave. All of Crave’s shareholders signed similar agreements, which included a three-year covenant not to compete and provided for the execution of employment contracts between Crave and the employee/shareholders.
A month later, Maas signed a three-year employment contract, which included a clause barring him from competing with Crave or Handleman, or of soliciting others to do so, for one year after leaving the company’s employ.
Maas resigned from Crave when his employment contract expired. Six months later, he agreed to become president/chief executive officer of Solutions 2 Go, Inc., a competitor of his former employer. Solutions’ owner, Nima Taghavi, was a fellow employee/shareholder when Maas worked for Crave.
Fillpoint, as successor in interest to Handleman, sued Maas for breach of the noncompetition/nonsolicitation clause in the employment contract, and also sued Solutions and Taghavi for tortious interference with the contract.
Other claims and defendants were dismissed, either voluntarily or on motion, prior to trial.
Trial Court Ruling
At the close of Fillpoint’s opening statement, Orange Superior Court Judge Geoffrey T. Glass ruled that the stock purchase and employment agreements had to be read separately, and that the covenant not to compete in the employment agreement was unenforceable under Business and Professions Code Sec. 16600. The statute voids contracts in restraint of trade, unless an exception is applicable.
The judge granted nonsuit to Maas, and subsequently granted nonsuit to the other defendants on the ground that there could be no liability for interference with an unenforceable contract.
In his opinion Friday for the Court of Appeal, Justice Richard Fybel said the trial judge was wrong on one point. Because the stock purchase and employment agreements were part of the same transaction, the justice explained, they had to be read as a single agreement.
But the trial judge’s ultimate conclusion was correct, Fybel said: No exception to Sec. 16600 applies.
The jurist rejected Fillpoint’s argument that the clause is enforceable under Sec. 16601. That section provides that when a seller disposes of his entire interest in a business, or of the goodwill of the business, a covenant not to compete within a specified geographic area will be enforceable.
Statute’s Purpose
Fybel explained that the purpose of Sec. 16601 is to prevent the seller from diminishing the value of the asset that was just sold. But the burden is on the buyer to prove that the exception applies, the justice said.
Fillpoint’s predecessor, Handleman, received the full benefit of the three-year covenant not to compete, the justice noted. The one-year covenant, which didn’t begin to run until Maas left the company, was not designed to protect the goodwill Handleman acquired in the stock purchase, but to protect the company from competition from an ex-employee after the three-year covenant expired, Fybel said.
“The employment agreement’s covenant targeted an employee’s fundamental right to pursue his or her profession,” the justice wrote, and that “cannot be reconciled with California’s strong public policy permitting employees the right to pursue a lawful occupation of their own choice.”
The case is Fillpoint, LLC v. Maas, 12 S.O.S. 4331
Copyright 2012, Metropolitan News Company