California Sale of Business Non-Compete
(2) Future agreements. In the future, companies should at least include all non-compete obligations in the terms of sales contracts with key sellers/employees. As seen in Gaddy, a non-compete agreement that contains a latent tail (i.e., an additional post-termination obligation triggered at an indefinite later date) may be enforceable if it is included in the terms of the purchase agreement. However, some legal commentators believe that latent tails that take effect many years after the sale may now be unenforceable. Companies should consider maximizing the duration of an eligible non-compete obligation in the sales contract with key vendors/employees. To the extent that undertakings include the non-compete obligation in employment contracts or other agreements, the non-compete obligation should be identical to the non-compete obligation in the sales contract and should contain clear language indicating that the purpose of the provision is to protect goodwill related to the sale of undertakings. Any solicitation prohibition related to the underlying transaction shall be limited to Seller`s customers and employees, in accordance with the Strategix decision. The buyer/new employer should also be able to prohibit the recruitment of employees with whom the key employee is in contact after joining the company under Loral v. Moyes (1985) 174 Cal.App.3d 268, up to one year after termination. For example, customer lists can be protected trade secrets. However, to be considered a trade secret, the customer list requires 1) information, 2) that has value because it is unknown to others, and 3) that the owner has tried to keep secret.
Article 3426 of the Civil Code; ABBA Rubber Co.c. Seaquist (1991) 235 Cal.App.3d 1, 18. Cases of trade secrets in the context of employment reflect the competing policies of the law: the right of a company to be protected from unfair competition resulting from the usurpation of its trade secret and the right of an individual to freely pursue the means of subsistence for which he is best suited. Futurecraft Corp.c. Clary Corp. (1962) 205 Cal.App.2d 279, 285-286. The exemption may also apply to the sale or repurchase of shares by a corporation from a minority shareholder or employee. Founding members of early-stage companies often sign buyback agreements that allow the company to buy back the shares if that member decides to leave the company. These agreements often contain non-compete obligations that may be enforceable under the exception in Section 16601. Many business owners may be surprised to learn that in California, agreements that prevent employees from joining a competitor or starting a competing business are generally illegal and unenforceable.
Sometimes referred to as “non-compete commitments” or non-competition clauses, non-competition clauses in employment or other contracts are generally unenforceable. Any discussion of California`s non-compete law begins with the general principle. As stated by the California Supreme Court in its landmark decision on the subject, Edwards v. Arthur Andersen LLP, 44 Cal.4th 937 (2008), held that California law embodies a fundamental pro-competition policy. In considering the second question, the Court recognised the arguments that Article 16600 was not applicable outside the employment context, but then concluded that Article 16600 also applies to contracts between undertakings. The court said that the commercial exceptions contained in the law, such as the non-competition exception for the sale of goodwill or the ownership of a company, would be useless if the law did not apply to businesses. The court, like the District Court, ruled that “a rule of common sense applies to determine the validity of a contractual provision that prevents a company from engaging in lawful trade or business with another company.” [3] The Tribunal expressly refused to find that the non-competition obligations between enterprises under Section 16600 were in themselves inapplicable (as in the case of employment non-compete obligations)[4]. . . .