In Samuelian v. Life Generations Healthcare, LLC, — Cal. App. fifth —, 2024 WL 3878448 (Cal. App. Aug. 20, 2024), the California Court docket of Attraction answered two lengthy excellent questions of California legislation regarding the enforceability of noncompetition agreements within the context of the sale of a enterprise:
- Sure, a partial sale of an possession curiosity in a enterprise might help a noncompete underneath the rule of purpose (despite the fact that the sale of enterprise exception underneath Enterprise & Professions Code Part 16601 allowing non-competes requires the sale of an complete possession curiosity and related goodwill, in any other case it’s “void per se”); and
- Sure, standing as a member of an restricted legal responsibility firm (“LLC”) can probably help a noncompete through the interval of membership if there may be contract language imposing fiduciary obligations on the member.
In Samuelian, two members of the defendant LLC offered a part of their curiosity within the firm, however retained a minority membership curiosity with voting and data rights. The working settlement imposed fiduciary duties on the entire firm’s members, together with specifying that they might to not compete with the corporate throughout their membership. The corporate alleged that the 2 partially-selling members breached the noncompetition provision, which triggered the corporate’s proper to buy their remaining possession curiosity. The members argued that the noncompetition provision was per se void underneath California legislation whereas the corporate argued that the noncompetition provision needed to be evaluated underneath a “rule of purpose.” Till Sameulian, no case had addressed the problems raised by this case.
In Ixchel Pharma, LLC v. Biogen, Inc., 9 Cal. fifth 1130 (2020), the California Supreme Court docket clarified that the “void per se” commonplace applies within the context of employment agreements and the sale of a enterprise, whereas a “reasonableness commonplace” applies to enterprise to enterprise agreements, i.e., “agreements limiting industrial dealings and enterprise operations.” Beforehand, in Edwards v. Arthur Andersen LLP, 44 Cal. 4th 937 (2008), the California Supreme Court docket had rejected the frequent legislation “rule of reasonableness” for employment noncompete agreements, and as a substitute held that Enterprise & Professions Code Part 16600 rendered noncompete agreements per se void until the settlement fell inside one of many statutory exceptions (typically, the sale of a complete enterprise curiosity and related goodwill).
It was unclear following Ixchel how courts would apply the brand new rule of purpose commonplace for enterprise to enterprise transactions exterior the three way partnership context of that case and whether or not courts would broaden the scope of the enterprise to enterprise exceptions past the three statutory exceptions set forth in Sections 16601, 16602 and 16602.5. In Samuelian, the California Court docket of Attraction held that the reasonableness commonplace additionally applies to partial gross sales of a enterprise underneath sure circumstances. In reaching this holding, the Court docket started by trying to the aim behind Part 16600: “a settled legislative coverage in favor of open competitors and worker mobility.” The Court docket reasoned that within the partial sale of a enterprise, “the vendor stays an proprietor of a enterprise . . . and will maintain a point of management over its operations” and that “[d]ue to that ongoing connection, noncompetition agreements arising from a partial sale should be evaluated underneath the reasonableness commonplace to find out whether or not they have procompetitive advantages.” Below Samuelian, whether or not a noncompetition restriction can be upheld in reference to a partial sale of a enterprise requires an analysis of whether or not the restriction is extra dangerous or useful to competitors and is “affordable in mild of the vendor’s ongoing reference to the corporate” when contemplating “the details peculiar to the enterprise through which the restraint is utilized, the character of the restraint and its results, and the historical past of the restraint and the explanations for its adoption.”
The Court docket defined that after a partial sale, promoting homeowners might owe the corporate an obligation of loyalty that prohibits them from competing with it, and that adopting a “void per se” rule would “unnecessarily intrude with these fiduciary duties.” The Court docket additionally held that whereas the California Revised Uniform Restricted Legal responsibility Act doesn’t embody a de facto imposition of fiduciary duties on members in a manager-managed firm, these duties may be imposed contractually within the firm’s working settlement. In reaching this holding, the courtroom confirmed the persevering with validity of in-term restrictive covenants within the employment context.
The Samuelian resolution fills an vital hole in California legislation pertaining to the partial sale of a enterprise curiosity and a reminder that firms ought to seek the advice of with counsel to fastidiously take into account whether or not to impose contractual fiduciary duties on members in working agreements, in addition to learn how to construction any noncompetition provisions and different restrictive covenants in order that they’re affordable or in any other case fall inside one of many statutory exceptions underneath Part 16600 et seq.