Distinguishing the Duty Not to Compete and Non-Compete Agreements in Your California Partnership

At the very heart of the concept of a business partnership is the idea that you and another party (or multiple parties) are working together, on the same side, in the pursuit of a common goal, and therefore not working adverse to one another. At the same time, however, entrepreneurs and investors often have multiple business interests beyond a single partnership, and often in similar spaces in the marketplace, thus the question of whether one partner is unfairly competing against another partner with a different venture can lead to disputes and even partnership litigation.

 

What can make this process confusing is the presence of two related but distinct concepts in California law: 1) the duty partners have not to compete with one another; and 2) non-compete agreements. To be clear, the first of these – the duty not to compete – is codified in California law, and applies to all partnerships. The second relates to a specific agreement that partners might reach outside of a partnership agreement, and these are often (but not always) deemed invalid and unenforceable by California courts.

The California Partnership Duty Not to Compete

Anytime two or more persons work together towards a common business goal in which they share profits, they can potentially be considered a partnership under California law, even if they have not formally drafted a partnership agreement. The important effect of this is that California partnership law will apply to their business dealings, giving each partner rights and obligations/duties with regard to one another.

 

One of these duties is spelled out in California Corporations Code section 16404(b)(3), which states that partners have a duty to “refrain from competing with the partnership in the conduct of the partnership business before the dissolution of the partnership.” A key aspect of determining whether a breach of this duty has occurred is determining whether the alleged competitive conductive actually competes with the partnership business as the description of that business is spelled out in the partnership agreement.

Why Non-Compete Agreements Often Fail in California Courts

Thus, partners automatically have a duty not to compete with another based on California law, but issues and confusion can arise when partners additionally create a non-compete agreement outside of the partnership agreement further restricting their ability to compete with one another.

 

While such non-compete agreements may be common nationwide, California has long had a very hostile approach to non-compete agreements, often finding them unenforceable. Indeed, California Corporations Code section 16600 states that, Except as provided in this chapter, every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.

 

What this means is that, outside of certain exceptions, a California court may be unlikely to enforce a non-compete agreement between partners, although the court may be willing to provide equitable relief (e.g. an award for unjust enrichment) where there is egregious behavior by one partner or an otherwise compelling reason.

 

The moral of this story, thus, is that partners who wish to prevent other partners from competing against the partnership itself should take care to make sure the partnership agreement itself reflects this and not to rely on additional non-compete agreement which may run into problems of enforceability in at least some cases

Work With an Experienced Los Angeles Partnership Dispute Attorney

At Wagenseller Law Firm in downtown Los Angeles, our attorneys have extensive experience in resolving all types of partnership litigation matters, including those related to fraud, contractual disputes, and alleged breaches of fiduciary duties. Contact Wagenseller Law Firm today to schedule a consultation to discuss your partnership dispute.