Ongoing business relationship is not sufficient to validate a non-compete agreement under California law

Case: Kelton v. Stravinski, Case No. F047031 (Cal. App. 4/20/06)

The One Sentence Summary: An ongoing business relationship is not sufficient to validate a non-compete agreement that is void under Business and Professions Code section 16600.

What They Were Fighting About: Partners in a venture formed for the purpose of developing industrial warehouses agreed not to compete. When the defendant partner later entered into deals to develop warehouses, the plaintiff claimed one-half interests in each of those deals. The defendant was awarded summary judgment because all of plaintiffs claims arose from the parties’ non-compete agreement, which was void as a matter of law. Plaintiff appealed, asserting that the parties’ on-going business relationship validated the non-compete agreement.

Federal Circuit Holdings:

• The parties’ non-compete agreement did not concern the sale of goodwill in a company or the dissolution of a partnership, and so was void under Business and Professions Code section 16600.
• The plaintiff’s reliance on franchisee cases to argue that an on-going business relationship could validate a non-compete agreement was misplaced because the parties’ agreement exhibited none of the elements of control seen in a franchise agreement.
• There were no grounds for equitable enforcement of the non-compete agreement, because the defendant’s acts were not particularly morally reprehensible and the plaintiff had suffered no great loss.
• In an unpublished section of the decision, the court also rejected the plaintiff’s amended claims arising from what boiled down to asserted oral promises not to compete that were void for the same reasons the written non-compete agreement was void.