In Kelton v. Stravinsky (2006 WL 1044163, Cal.App. 5 Dist., Apr. 20, 2006), a California Court of Appeal reviewed a case in which the plaintiff alleged that his business partner had violated an agreement between them that neither would compete with the other in their specific business field.
The Court ruled that such covenants not to compete are unenforceable under California law, except in very narrow exceptions, which did not apply to this case.
Facts
In 1992, Michael Kelton (“Kelton”) and Peter Stravinsky (“Stravinsky”) formed a partnership for developing industrial warehouses. When they became partners, they also entered into a covenant not to compete, in which Kelton agreed not to operate warehouses, and Stravinsky agreed not to design or build warehouses.
In 2002, Kelton sued Stravinsky, claiming a half-interest in various projects completed by Stravinsky on the ground that he violated the 1992 covenant not to compete. Stravinsky moved for summary judgment, invoking Business and Professions Code Section 16600, which prohibits the enforcement of contracts that restrain anyone’s right to engage in any lawful trade or business. The trial court agreed and granted summary judgment to Stravinsky. Kelton appealed.
Decision
California has a settled public policy in favor of open competition, pursuant to which covenants not to compete are void. Section 16600 specifically declares any contract “by which anyone is restrained from engaging in a lawful profession, trade or business of any kind is to that extent void.”
The narrow exceptions in the law apply to cases in which a person sells the goodwill of a business, and where a partner agrees not to compete during the dissolution of a partnership. Neither of those exceptions applied to this case. The Court ruled, “the covenant not to compete violates California’s public policy of open competition and therefore is unenforceable.”
The Court rejected Kelton’s argument that Dayton Time Lock Service, Inc. v. Silent Watchman Corp. (Cal.App. 2 Dist., Oct. 8, 1975), in which the court allowed exceptions for franchisors to retain some control over the business activities of franchisees, applied to the ongoing business relationship between Kelton and Stravinsky. The Court determined the relationship between Kelton and Stravinsky, as equal partners, was not similar to the relationship between a franchisor and franchisee.
Finally, the Court found no compelling reason to carve an exception to the state’s open competition policy in this case. Stravinsky committed no great moral offense by pursing projects without Kelton, while Kelton suffered no disproportionately harsh penalty, the court said. Therefore, the trial court’s judgment was affirmed.
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