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In Fillpoint, LLC v. Maas, the California Court of Appeal struck down a non-compete agreement signed by a former employee and shareholder as part of the sale of a video game business.  The Court found that the covenant not to compete and non-solicitation provisions were overbroad and did not fall within the limited exception under Business & Professions Code section 16601 permitting certain agreements restraining competition in connection with the sale of a business.
 
Michael Maas, an employee of Star Video Games, owned stock in its parent company, Crave Entertainment Group.  When Handleman Company acquired Crave, Maas entered into a stock purchase agreement with Handleman containing a three-year covenant not to compete and a separate employment agreement containing a one-year post-termination covenant not to compete.  Maas resigned from Crave more than three years after the acquisition and went to work for a competitor.  Fillpoint, LLC, which had acquired Crave from Handleman, then sued Maas for breach of his employment agreement, and also sued the competitor for interference with contract.   
 
The Court of Appeal found that the stock purchase and employment agreements are part of a single transaction and must be read together.  The purchase agreement’s covenant not to compete provisions prohibited Maas, for three-years after Handleman’s acquisition of Crave, from (i) competing with Crave; (ii) setting up a business to compete with Crave; or (iii) assisting a third party to set up or continue a business in competition with Crave.  The employment agreement’s non-compete provisions prohibited Maas, for one year after the termination of his employment, from (i) making sales contacts or actual sales to Crave’s customers or potential customers during the two years preceding Maas’s termination, or assisting others in doing so; (ii) working for or owning any interest in a competitor company; or (iii) employing or soliciting for employment any of Crave’s employees or consultants.  The Court found that the non-compete provisions in the purchase agreement served the purpose of the limited exception under Business and Professions Code section 16601 to protect the goodwill and value of Crave.  The Court held, however, that the employment agreement’s non-compete provisions were void and unenforceable in violation of California’s public policy promoting competition and an employee’s right to move between jobs.  The provisions did not meet the limited exception because they were not reasonably necessary to protect Crave’s goodwill.  In particular, the Court noted that the non-solicitation provisions prohibited sales to or solicitation of potential customers and thus, went beyond the need to protect the goodwill of the selling company.  The Court affirmed the trial court’s judgment dismissing Fillpoint’s claims for breach of contract and interference with contract.
 
This case serves as a reminder of California’s strong public policy in favor of employee mobility.  To help ensure enforceability of non-compete agreements executed in connection with the sale of a business, acquiring companies should expressly tie non-compete restrictions to preserving the goodwill of the acquired company and base non-compete time periods on the date of acquisition.

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