Non-Compete Associated with Partial Sale of Business Must Be “Reasonable” To Be Enforced

Samuelian v. Life Generations Healthcare, LLC, 104 Cal. App. 5th 331 (2024)

Robert and Stephen Samuelian co-founded Life Generations Healthcare, LLC. When they sold a portion of the business, the company adopted a new operating agreement that restrained its members (including the Samuelians) from competing with the company. The Samuelians later filed a dispute in arbitration challenging the enforceability of the non-compete, contending that it was per se unenforceable pursuant to Cal. Bus. & Prof. Code § 16600; in response, the company contended that the “reasonableness standard” (as set forth in Ixchel Pharma, LLC v. Biogen, Inc., 9 Cal. 5th 1130 (2020)) should be applied to determine the enforceability of the non-compete.

The arbitrator and the trial court agreed with the Samuelians and held that the agreement was per se unenforceable pursuant to Section 16600. In this opinion, the Court of Appeal reversed, holding that Section 16600 only applies if the restrained party sells its entire business interest and that the statute does not apply “to partial sales after which an individual retains a significant interest in the business.” In the case of a partial sale, the Ixchel reasonableness standard applies to determine the enforceability of the noncompete. The court also held that the “sale of the business” exception to Section 16600 (Sections 16601, et seq.) only applies if there has been: (1) a sale of the entire business interest; and (2) a transfer of “some goodwill” as part of the transaction. The opinion also contains a detailed discussion of members’ fiduciary duties in a manager-managed company under the Revised Uniform Limited Liability Company Act (RULLCA) and holds that an operating agreement can impose reasonable non-compete restrictions on members of a manager-managed company.