Noncompete Signed in Connection with California Business Sale Was Enforceable

Takeaway: A noncompete agreement that a veterinarian signed in conjunction with the sale of her veterinary practice to another practice was enforceable, even though, after the sale, the veterinarian continued to work for several years at the purchasing business.

A noncompete agreement that a veterinarian in El Cajon, Calif., signed in conjunction with the sale of her veterinary practice to another practice was enforceable, a California appeals court recently ruled.

Although contractual provisions that prevent a person from engaging in a profession, trade or business are generally void in California, there is an exception to this general rule when a noncompete agreement is connected to the sale of a business, the court said. The exception applied in this case even though the veterinarian continued to work at the business for several years after the sale, the court concluded.

When the veterinarian sold her practice, she executed a noncompete agreement as required by the purchase agreement. She agreed that she would not work with an animal hospital within a 20-mile radius of her former practice. She also agreed not to solicit employees or customers to leave the practice. The agreement specified that it would last for five years following the last date on which the veterinarian worked for the practice.

After the larger practice bought her individual practice, the veterinarian continued to work at the larger practice for several years until she announced that she was retiring. However, instead of retiring, she opened another animal hospital next door. The purchasing practice sent a cease-and-desist letter to the veterinarian, advising her that she was violating the noncompete agreement by opening a competing veterinary practice.

The parties met informally and engaged in two mediations over several months, but they were unable to resolve the dispute. The purchasing practice sued the veterinarian for breach of contract, among other claims, and sought a preliminary injunction to prevent her from opening her new practice. The trial court granted the order, concluding that the veterinarian entered into the covenant not to compete in connection with the sale of her business interest and, therefore, the covenant was enforceable under California law. The veterinarian appealed.

California Law

The veterinarian agreed that she signed the noncompete agreement in connection with the sale of her business, but she contended that it should not validly restrict her efforts arising out of her subsequent employment with the purchasing practice. The appellate court rejected this claim, concluding that the noncompete agreement was enforceable.

In California, contractual provisions that prevent a person from engaging in a profession, trade or business are generally void, the appeals court first noted. This policy “affirms a person’s right to pursue the lawful occupation of his or her choice,” the court said.

However, there is an exception to this general rule when a noncompete agreement is connected to the sale of a business, the court continued. The exception provides that any person selling all of their ownership interest in a business entity may agree with the buyer to refrain from carrying on a similar business within a specified geographic area.

A noncompete clause connected to the sale of a business is meant to prevent the seller from unfairly depriving the buyer of the full value of its acquisition, including its goodwill, the court said. Goodwill is an intangible asset recognized when a business is purchased. It reflects the premium that the buyer pays in addition to the net value of its other assets. Goodwill is often understood to represent the firm's intrinsic ability to acquire and retain business, and customers are an essential part of a company’s goodwill.

In this case, there was no dispute that the purchasing practice bought the intangible asset of goodwill along with the veterinarian’s business. The record contained a financial statement listing the value of goodwill as over $8 million at the time of the sale, based on generally accepted accounting principles.

The appeals court said that it was not persuaded by the veterinarian’s arguments that any value of goodwill that existed when the purchasing company bought her interest halted at the sale and that she separately built goodwill while employed by the larger practice. As she continued her employment, her client relationships continued and so did the goodwill the purchasing company bought, the court said.

The purchasing practice would not get the full value of the goodwill it purchased if the individual veterinarian could maintain her client relationships while she continued to work at the larger practice and then capitalize on those relationships by drawing them to a competing practice next door after terminating her employment, the court said.

VCA Animal Hospitals v. Hampel, Calif. Ct. App., No. D081424 (Dec. 22, 2023).

Joanne Deschenaux, J.D., is a freelance writer in Annapolis, Md.