Legal Question in Business Law in California

Re: Questionable Business Practices

was there a non competition clause in sale agreement?

Re: Questionable Business Practices

"Illegal"? No. Whether it would subject you to a lawsuit for unfair competition would be determined by the terms of the sales contract you signed.

Re: Questionable Business Practices

As a general proposition, California law encourages competition, including allowing the former owners of just-sold businesses to go into competition with their former business.

However, California law also allows business buyers to protect the value of the goodwill they're buying from the seller by inserting a covenant not to compete in the sale agreement. Such covenants are, if reasonably limited in scope and duration, legal and enforceable. So, you need to be sure there is no non-compete clause in your agreement. If there is, don't breach it!

If there is no non-compete clause, there are still a couple of things to worry about. First, the buyer may allege that you orally agreed, outside the written contract, not to compete with him. If there would be any truth to such an allegation, you probably should not compete; even if it were difficult to prove, it would be unethical and in bad faith to go ahead and compete after orally promising that you wouldn't.

The other potential problem is the matter of trade secrets. Maybe the buyer can allege and prove that you sold him recipes and other secrets that aren't generally known in the restaurant trade, and therefore you gave up your right to use those secrets and transferred your rights to him. Whether this theory holds water is very fact-dependent. If your sale agreement says anything about secret recipes, beware.