May A Joint Venturer Withdraw From A Joint Venture In Order To Pursue A Joint Venture Opportunity?
Thursday, November 2, 2023

California's Uniform Partnership Act of 1994 provides that a partner has a duty to refrain from competing with the partnership in the conduct of the partnership business "before the dissolution of the partnership".  Cal. Corp. Code § 16404(b)(3).   California's statute is based on Section 409(b)(3) of the Uniform Partnership Act.  The comment to that act flatly declares: "This duty ends when the partnership dissolves."  Does this mean that a partner may withdraw from a partnership in order to pursue an opportunity of the partnership?

In Leff v. Gunter, 33 Cal.3d 508 (1983), the California Supreme Court held that the jury instructions correctly stated California law, under which “a partner's duty not to compete with his partnership with respect to a partnership opportunity which is actively being pursued by the partnership survives his withdrawal therefrom.”  This case is seemingly at odds with the later enactment of Section 16404(b)(3).  

In Ecohub, LLC v. Recology, Inc., 2023 WL 6725632, the plaintiff alleged, among other things, that the defendant had breached its fiduciary duty by withdrawing from a joint venture formed to submit a bid on a project in order to submit its own bid.   In ruling on the defendant's motion to dismiss, U.S. Magistrate Judge Thomas S. Hixon acknowledged the possible tension between the Supreme Court's holding in Leff and the statute but did not feel the need to resolve it because  the plaintiff had alleged that the defendant withdrew from the joint venture in bad faith and misused information exchanged as part of the joint venture.

 

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