A topic that often arises in the context of a business is non-compete agreements. As the name should hopefully suggest, a non-compete agreement is a contract in which a party agrees not to engage in a lawful profession, trade, or business. A non-compete agreement might arise with two potential competitors agreeing to divide a particular market between them. Collusion like this is generally illegal on, among other things, federal antitrust grounds which are waaaaaay beyond the scope of this blog post.
The more common scenario I encounter involving non-compete agreements is where the restriction is not voluntary. A common scenario would be where an employee works for an employer who, deep in the legalese of the papers the employee signed when they hired on, forbids the employee from either going to work for a competitor or opening up a competing business. In other words, if the employee is fired or quits, they can’t go continue in the same line of work. The vast majority of people have experience, training, etc in only one line of work so the employer’s restriction effectively means that they cannot make a living if they upset their employer.
Can an employer impose restrictions like this on an employee?
In California, the answer – in general – is no and it is because of Section 16600 of the California Business and Professions Code. Section 16600 states:
Except as provided in this chapter, every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.
As with everything in the law, of course, there are exceptions to this. Those are contained in Sections 16601 and 16602 of the Business and Professions Code. In a nutshell, those exceptions are:
- If someone is selling a business including goodwill in the business, then a contract forbidding the seller from opening a competing business in the same geographic area as the original business may be enforced. As you can hopefully imagine, this is to protect the buyer of the business from losing all of their customers to the new business that the seller opens. This same logic applies to sales of subsidiaries also. Business and Professions Code section 16601.
- If a shareholder in a corporation is disposing or selling all of their shares in the corporation, then a non-compete agreement may be enforced. I personally have not seen a case with these facts before. Business and Professions Code section 16601.
- If a partnership is dissolving or a specific partner is being removed from a partnership, a non-compete agreement may be enforced along the same logic as the “sale of business and associated goodwill” scenario above. Business and Professions Code section 16602.
As always, this blog post is only meant to provide a short and sweet summary of the answer to this question. The information contained herein is not, by any stretch of the imagination, meant to be comprehensive. As always, if you have a situation involving any of the topics discussed in this post, please consult your own legal counsel as the facts of your situation will likely influence the outcome.
Andy Chen
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