Non-Competes are Illegal in California, or are they?
- Marina
- Jan 7, 2020
- 2 min read
Yes, generally speaking non-competes are unenforceable in California.
However, there are a couple scenarios where courts have upheld non-compete agreements.
During the Sale of a Business
Per California's Business and Professions Code Section 16601, certain circumstances wherein a person who sells:
(i) goodwill of a business
(ii) all of his/her ownership in the business entity, or
(iii) all or substantially all of the operating assets of a business, together with the goodwill of the business
...may agree to refrain from carrying on a similar business ( ie: agree not to compete).
The reasoning behind this exception is that it would be unfair to sell the goodwill of a business, then turn around and compete with said sold goodwill, thereby diminishing the value of the assets and goodwill sold.
If you want to be able to enforce a noncompete, both parties should :
(i) clearly indicate the goodwill of the business is valued and considered in determining the sale price;
(ii)make sure that the owner of the business sells all of his/her ownership interest in the business entity.
All the above considered, in order for a California Court to uphold the noncompete, it must determine it to be reasonable and necessary in terms of scope, time, and geography so as to protect the buyer's interests. Generally speaking , the geography should be limited to the area where the business exists ( including promotional and marketing activities). The longest upheld noncompete in California has been five years.
If you want to find out whether a non-compete is likely to be upheld in court, reach out to your local business attorney.
Employment
Non-competes covenants are generally unenforceable once an employee has been terminated or left the company.
However some California courts have held that post-termination restrictive covenants may be enforceable if they are necessary to prevent a former employee from revealing trade secrets to competitors. The more narrowly tailored to protest trade secrets, the more likely the court will uphold the covenant. For example, a court will likely uphold a noncompete clause that prohibits a former employee from competing ( for a specific period of time) to win the business of specific customers that the employee only learned about because he was an employee of the former company.
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