The High-touch Legal Services® Blog • For Startup/Early-stage Companies

California is well-known for refusing to enforce non-compete provisions, especially in the post-employment context (see Choice-of-Law and Non-Compete Provisions), so individuals will not be deprived of gainful employment. But provisions limiting competition aren’t always taboo.

Business and Professions Code Section 16601 says, to oversimplify a bit, that anyone who sells his entire ownership interest in a partnership, limited liability company (LLC) or corporation may agree not to compete with the entity in the geographic area where it operates so long as the buyer, or a successor, continues to operate the business. Sections 16602 and 16602.5 provide similarly in the event that a partnership or LLC dissolves, or a partner disassociates from a partnership, or a member withdraws from an LLC.

The rationale: The buyer / new owner of an interest in a business should have an opportunity to make the business a success without being undermined by the seller / former owner.

Practical tip: When you buy a business, it’s OK – even prudent – to put restrictions on the seller’s ability to compete with you…even in California.

Photo credit: stock.xchng

This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact an attorney directly.

Some companies force employees to sign proprietary rights agreements under which the employee automatically assigns to the company any patent applications that the employee files within one year of separation from the company. I have always considered these provisions unjustifiable. California law apparently has reached the same conclusion.

In Applied Materials, Inc. v. Advanced Micro-Fabrication Equipment (Shanghai) Co., et al., case number 07-cv-05248, the U.S. District Court for the Northern District of California held that such a provision is unlawful under California Business and Professions Code Sections 16600 (which pertains to restraints on engaging in a lawful profession, trade, or business) and 17200 (which pertains to unfair competition).

Prudent California employers now should make sure that any post-employment provisions in proprietary rights agreements:

• Do not include automatic assignment of any post-employment inventions
• Limit provisions concerning post-employment inventions to those inventions that were conceived during the employment period based on the employer’s confidential information

This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact an attorney directly.

A longtime client was delighted to receive an acquisition offer from a large, publicly-held company (“Acquirer”). Once the acquisition closed, the client’s founder (“Founder”) would become a management-level employee of Acquirer.

Although Acquirer’s proposed employment agreement generally was acceptable, Founder was concerned about its non-compete provision. That provision stated that for one year following termination of his employment, Founder would not “engage in any business activities that are competitive with the business activities of [Acquirer] or those of its subsidiary or parent companies”. The problem was that the business of Acquirer and its affiliates was so vast, and Founder’s expertise was so industry-specific, that the provision would have limited Founder’s ability to be employed elsewhere.

Acquirer’s General Counsel stated that the non-compete provision was non-negotiable - if founder did not accept that provision, the acquisition would not take place. In addition, the GC said that even though Founder lived in California and would be working at Acquirer’s offices in California, the provision stating that the agreement would be “governed by and construed in accordance with the laws of the State of New York” also was non-negotiable.

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