A business partnership in California is, of course, just that: a partnership in which two or more people come together to work towards a common business goal. It’s not uncommon to hear a business partnership compared to a marriage, and there is some truth to that, but working together as a business partnership brings with it a more legally enforceable duties towards one another than a marriage, which carries with it only a duty to financially support one another.
One of the duties that business partners have towards one another in California that is not quite analogous to a marriage is the duty of each partner not to compete with the partnership itself. While a spouse cannot sue the other spouse for cheating with a third party, a business partner can sue his or her partner for “cheating” on the partnership by competing against the business of the partnership or by usurping a business opportunity that should have properly been brought to the partnership.
The Duty of Loyalty in California
Both of these issues relate to the “duty of loyalty” which is set out by statute in California’s Corporate Code relating to business partnerships. Note that California does not require business formalities to create a general partnership such as filing articles of incorporation with the state or creating a partnership agreement, and so a general partnership can exist whenever two people are working together towards a common business purpose such that a potential lawsuit for breach of the duty of loyalty could be brought.
As with many issues of partnership law in California, the partners can work together to reach a formal agreement on what is and what is not considered a breach of the duty not to compete in the partnership agreement itself to avoid ambiguous situations and potential disputes.
Breaching the Duty of Loyalty By Competing and Usurping Business Opportunities
To explain more specifically what a breach of the duty of loyalty via competition with the partnership looks like, we start with the California Corporation Code itself, which states at Section 16404(b)(3) that a partner’s duty not to compete includes the obligation, “To refrain from competing with the partnership in the conduct of the partnership business before the dissolution of the partnership.”
This could include one partner running a sole proprietorship in the same geographical area. For example, if a partnership provides IT services to startups in downtown Los Angeles, and one partner begins her own business providing the same service to startups in DTLA, this could be a violation of the duty not to compete.
In addition, other violations of the duty not to compete occur where one partner usurps the business opportunities of the partnership by soliciting business which would have otherwise been the type of opportunity that the partnership would have been interested in OR where one partners receives an opportunity in his or her capacity as a partner and takes the job for themselves.
Thus, using the same example above of a partnership offering IT services, if one partner is approached by a party interested in having the IT partnership do a job, but takes it for himself, OR if that same partner solicits business for himself that the partnership would have taken, this could potentially lead to a breach of duty claim by the other partners.
Speak to a partnership dispute attorney to learn more about your specific situation.
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 and alleged breaches of the duty of loyalty and duty of care. Contact Wagenseller Law Firm today to schedule a consultation to discuss your partnership dispute.