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The Party Of The Second Part Didn't Buy The Party Of The First Part's Non-competition Agreement

Listen up buyers and sellers of businesses:  be careful what you sell and what you buy.  A recent case decided by the court of appeals here in Orange County warns us that contracts that sell more than can be sold are void.  In Strategix, Ltd. v. Infocrossing West, Inc. the parties sought to interpret a contract between the two.  Let me explain.

Strategix sold its business to Infocrossing's predecessor, SMS, and in that agreement, the parties made two agreements.  First, Strategix agreed it would not compete with SMS or solicit its own employees and customers away from SMS.  Second, it  agreed it would also not solicit SMS' (and by succession, Infocrossing's) employees or customers. 

There's just one problem.  It's the party of the second part, to quote an old lawyer's phrase. 

In California, there's a law that encourages competition between parties and disallows agreements that prevent competition between companies for either employees or customers.  It's Business & Professions Code section 16601.

In other words, a company can't stifle this kind of competition as part of a sale of one business to another.  It can, however, prevent the company that is selling its assets, customers and employees to the buying company from stealing those customers and employees back.

The other direction, however, is a no go.  Because the selling company has virtually no way of knowing who works for the buying company or the customers of the buying company.  In this case, Infocrossing had convinced the trial court to issue an injunction preventing Strategix from soliciting Infocrossing's employees or customers.  The appellate court reversed, invalidating the injunction. 

Strategix is free to compete with Infocrossing, and the court likewise refused to "blue pencil" the agreement between the two companies to save it. 

Like I said before, be careful what you think you're buying.

Posted by J. Craig Williams on Tuesday, September 12, 2006

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