Non-compete agreements are generally void and unenforceable in California unless they qualify for a statutory exception. Note that an employer cannot make the signing of an employment agreement, which contains an unenforceable covenant not to compete, a condition of continued employment. An employer’s termination of an employee who refuses to sign such an agreement constitutes a wrongful termination in violation of public policy.
Statutory Exceptions to Prohibitions on Non-compete Agreements
The statutory exceptions to the prohibition of non-compete agreements are:
- Non-competes entered in connection with (1) the sale of the business’s goodwill, (2) an owner’s sale or disposal of all ownership interest in the business, or (3) an owner’s sale of (i) all or substantially all of the business’s operating assets and goodwill, (ii) all or substantially all the operating assets of a division or subsidiary of the business plus the goodwill of that division or subsidiary, or (iii) all of the ownership interest in a subsidiary. This first exception allows a seller to agree with the buyer to refrain from carrying on a similar business within a specified geographic area in which the business so sold if the buyer carries on a like business in that area
- Non-competes entered in connection with the dissolution of a partnership or limited liability company (LLC) a partner or member disassociating from a partnership or LLC. This exception allows a partner or member, in anticipation of the dissolution of the partnership or LLC to agree that he or she will not carry on a similar business within a specified geographic area where the partnership or LLC business has been transacted, so long as any other member of the partnership or LLC carries on a like business in that area.
Non-compete Agreements Permitted during Employment
California courts have held that an employer may restrict employees from competing with the employer during their employment. While California law does allow an employee to seek other employment and to make some preparations to compete before resigning, an employee may not transfer his loyalty to a competitor. During the term of employment, an employer is entitled to its employees’ undivided loyalty.
Geographic Scope for Non-Compete Agreements
The statutory exceptions require employers to limit the geographic scope of a non-compete agreement.
For non-competes entered into in connection to the sale of a business, the geographic limitation must be “within a specified geographic area in which the business so sold, or that of the business entity, division, or subsidiary has been carried on”. The geographic restriction can cover the entire United States if the business operates in all 50 states.
For non-competes entered into in connection to a partnership or LLC dissolutions, the geographic scope must be “within a specified geographic area where the partnership / limited liability company business has been transacted.”
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