A court probably won’t rewrite a noncompete provision in a partnership agreement that omits the required specified geographic area of non-competition, according to a recent unpublished ruling of the California Court of Appeal.
ing firm sues terminated partner for violating noncompete/nonsolicitation clauses
In Frazer, LLP v. Rendon, the court of appeal reviewed the enforceability of the noncompete and nonsolicitation provisions in Anaheim-based ing firm Frazer, LLP’s partnership agreement. Frazer served clients throughout California and elsewhere. Sometime after terminating Luis Rendon’s partnership status, Frazer sued Rendon for breach of contract for doing ing work for former Frazer clients and for hiring a Frazer employee.
Frazer’s partnership agreement prohibited a former partner from performing ing services for any Frazer client for five years after leaving the partnership unless the former partner paid Frazer 150 percent of what Frazer billed the client in the year before the partner departed.
The agreement also barred a former partner from soliciting or hiring any Frazer employee to leave the firm or work for anyone else for five years after the partner left the firm. The agreement required any former partner who breached this provision to pay Frazer 30% of the salary that employee had earned the year before leaving Frazer.
The trial court summarily ruled Frazer’s noncompete and nonsolicitation provisions were unenforceable. The court of appeal affirmed. Here’s why.
General rule and limited exception of unenforceability of noncompetes in California
Section 16600 of the California Business and Professions Code (B & P code) makes almost all contractual noncompete provisions in California unenforceable. A noncompete provision, however, may be enforceable in a partnership agreement, among other limited exceptions.
Under section 16602 of the B & P code, a partner may agree in advance that, if he or she leaves the partnership, the partner “will not carry on a similar business within a specified geographic area” where the partnership has done business while any other partner — or someone who takes over the partnership or its goodwill — continues to carry on the same business. The clause is enforceable only to the extent the time, activity, and territory it covers are reasonable and necessary.
Court declines to “blue pencil” noncompete that fails to identify specified geographic area
Frazer’s noncompete provision was ruled unenforceable because it failed to specify a geographic area. The court of appeal concluded the trial court was not required to revise, or “blue pencil,” the provision to insert a geographic restriction that would make the agreement enforceable. The role of a judge, said the court, is to determine the of a contract as written, not to insert the parties omitted.
Frazer argued the trial judge should have rewritten and enforced the noncompete provision to bar Rendon from servicing Frazer clients in Los Angeles and Orange Counties. The court of appeal rejected the argument, wondering “why Frazer did not simply specify the geographic limitation within its own partnership agreement, which Frazer had presumably drafted.”
Nonsolicitation clause also void
The court of appeal found Frazer’s nonsolicitation clause unenforceable because it prohibited a former partner from hiring a Frazer employee even where the former partner did not solicit, or seek out, the Frazer employee. “This plainly violates California’s long established public policy of open competition and mobility under section 16600 because the nonsolicitation clause seeks to restrain Frazer employees from being able to freely ‘leave the Partnership or work for any other Person.’”
The court of appeal distinguished Frazer’s nonsolicitation clause from a nonsolicitation clause upheld by the court of appeal in a 1985 ruling. The clause addressed in the earlier ruling, unlike Frazer’s, allowed the company’s employees to seek work from a former employee. The company’s employees only lost the option of being first ed by the former employee. Given that factual distinction, the court found it unnecessary to address Rendon’s “colorable argument” that more recent appellate rulings made nonsolicitation provisions categorically unenforceable
Takeaway
· A noncompete clause in a partnership agreement must include a specified geographic area and it must be reasonable in of time, activity, and territory.
· A nonsolicitation clause in a firm’s employment agreement must not bar a former employee from hiring a firm employee who seeks work from the former employee.
· A court may decline to rewrite, or “blue pencil”, a noncompete or nonsolicitation clause that violates these principles.
Eaton is a partner with the San Diego law firm of Seltzer Caplan McMahon Vitek where his practice focuses on defending and advising employers. [email protected]
Dan Eaton The Law at Work
