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Carl Kanowsky: The cut of non-competition agreements

It's the Law

Posted: February 4, 2011 1:55 a.m.
Updated: February 4, 2011 1:55 a.m.
 

When The Signal asked me to write this column, they also suggested that I paste a vision of my smiling countenance alongside it. So I knew that I had to give in to The Signal’s suggestion.

The one you see here was the best my wife, Terry, and I could come up with. Let’s be honest — there’s not a lot of material to work with here. Fortunately, the photo is so small that you cannot see that I’m follicly challenged — that is, I’m balding.

But I vowed that I was going to do something about this deficiency. So I started looking at hair-loss treatment centers. A name came up from the past — Bosley, the hair treatment medical group. Being an attorney, I did what I often do before I go to a professional; I checked Bosley’s litigation background.

Surprisingly, I found a decision handed down from the Court of Appeals concerning the operation of Bosley’s business.

This is the citation: 161 Cal.App.3d 284. It proved to be a fascinating case and very instructive to all of my business clients.

Dr. Norton Abramson went to work for Bosley essentially to do hair transplants after leaving a teaching position at Stanford. According to Abramson, Bosley promised to triple his income. Abramson did the math and signed up.

He learned shortly after that that Bosley required that all of his doctor employees/independent contractors agree to buy a small percentage of the Bosley corporation for $10,000 (Bosley himself retained a vast majority of the shares). Along with the shares came a stock purchase agreement, part of which provided that Abramson had to sell the stock back to Bosley if Abramson ever left.

What Abramson apparently did not appreciate was that this agreement was actually velvet handcuffs disguised as a legal document.

You see, hidden in the verbiage was an agreement by Abramson that if he ever left the Bosley corporation he could not work for or own a competing business for 18 months post-termination. Of course as you’ve already guessed, Abramson, after about two years with Bosley, went and did exactly that.

And as expected, Bosley sued him, saying that the stock purchase agreement precluded Abramson from doing what he had done. Bosley’s attorneys knew that California law and public policy strictly prohibited non-compete agreements, per California Business and Professions Code section 16600. But they (being clever guys) figured a way around that (or at least so they thought). 

There’s an exception to the non-competition ban that applies when a business is sold. The theory is that if Peter paid Sally $250,000 for an ongoing business, Peter didn’t want Sally to take that quarter of a million dollars and open a competing business across the street from Peter.

Part of what the buyer is paying for is peace of mind, that he’s essentially eliminated one of his competitors. 

So Bosley’s attorneys made the argument that since Bosley paid Abramson for his (Abramson’s) shares in the Bosley corporation, Bosley was now entitled to know that Abramson would not be competing with him.

As the Court of Appeals said, “In short, the stock purchase agreement was devised to permit (Bosley) to accomplish that which the law otherwise prohibited: an agreement to prevent (Abramson) from leaving (Bosley) medical group and opening a competitive practice.” 

To Bosley’s dismay, the Court of Appeals refused to approve this scheme. It said that Bosley’s argument “leads to a mischievous and absurd result.” The court refused to approve a plan to make employees buy stock as an end-around the non-competition ban. The court said that the rule should only apply in situations where someone is selling “a substantial interest” in the corporation.

The message to employers: You mess with the non-competition ban at your peril. As for me, I got so involved in analyzing the case that I lost interest in doing anything about my hair.

Carl Kanowsky of Kanowsky & Associates is an attorney in the Santa Clarita Valley. He may be reached by e-mail at cjk@kanowskylaw.com. His column represents his own views, and not necessarily those of The Signal. Nothing contained herein shall be or is intended to be construed as providing legal advice.

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