Despite what most high-tech
employers think, California courts are extremely reluctant to
enforce a non-compete agreement that an employee signs as a
condition of his/her employment.
California Business and
Professions Code Section 16600 provides that subject to certain
limited exceptions “every contract by which anyone is restrained
from engaging in a lawful profession, trade or business of any kind
is to that extent void.” Thus, the general rule is that a
non-compete agreement is void as a matter of law and California
courts will not enforce it. The reason is a public policy against
contracts preventing people from earning a living.
A non-compete agreement IS
enforceable under certain, limited conditions
In determining whether an
exception to non-compete agreements being void the California courts
apply a balancing test with the courts being willing to uphold
reasonable limited restrictions.
California law provides for
certain limited exceptions to the rule that non-compete agreements
are void. California Business and Professions Code Section 16601
provides that a person who sells substantially all of his/her
interest in a company or all the assets thereof may have a
valid non-compete agreement that will be enforced by California
courts. The statute does not permit a non-compete agreement where
the shareholder sells less than substantially all of his shares.
Thus, where an employee signs an agreement not to compete against
his/her employer after the employment has ceased, there is no sale
of his/her ownership interest in the company and a non-compete
agreement will not be enforceable.
scope in order for the non-compete agreement to be valid.
Despite the fact that Business
and Professions Code Section 16601 permits non-compete agreements,
there are still other requirements in order for such a non-compete
agreement to be valid. In order to be valid, the non-compete
agreement must, in addition to being part of a sale of substantially
all of the person’s interest in the company, be limited in terms of
both time and geography.
Since there is a general policy
against preventing a person from earning a living, the Courts are
reluctant to uphold these agreements in general. Where a
non-compete agreement fits within the exception of the sale of
substantially all of a person’s interest in the company, there still
must be a limitation on the length of time that the non-compete
agreement is valid. If the non-compete agreement provides that the
seller will not compete with the purchaser for 50 years it is almost
certain that California courts will void such an agreement as being
too great a limitation on the seller’s ability to earn a living.
California courts generally
permit non-compete agreements for only relatively short-term
duration, usually not to exceed two to three years. A non-compete
agreement with a two to three year limitation on competition is
likely to be enforceable. Any longer period of time and the courts
will look with a skeptical eye towards enforcement. Here too,
however, there may be circumstances that justify a longer term.
Consultation with an attorney in this area is essential to drafting
an enforceable non-compete agreement.
The limitation on competition
must also be restricted by geographical area.
Whether a geographical
limitation is reasonable will depend upon the particular facts
involved. There are some basic guidelines to determining whether a
non-compete agreement will be enforceable. However, an attorney
should be contacted to review and properly research your particular
Let’s look at an example: If I
sell an Italian Restaurant in Moorpark and sign an agreement not to
compete with the Restaurant, the non-compete agreement must have a
reasonable limitation in the geographic area in which I am agreeing
not to compete.
In other words, if the agreement
provides that I cannot set up an Italian restaurant in Ventura
County, California courts are likely to enforce this non-compete
agreement since it has a reasonable geographic limitation on
competition. If, on the other hand, the agreement provides that I
cannot compete against my Moorpark restaurant anywhere in the United
States, the courts are unlikely enforce such a non-compete agreement
as being overbroad and an unreasonable restraint on trade.
However, if I sold a chain of
Italian restaurants that operated throughout most of the major
cities in the United States, it is much more likely that the courts
would uphold such a non-compete agreement. The idea being that a
person that purchases a business will only do so if the person that
they are buying from cannot open up a new competing business across
The Internet and the New Economy
The rise of popularity of the
internet and b2b (business-to-business) commerce have contributed to
a world-wide economy. Businesses now sell products and services
exclusively over the internet. Thus, when a person sells their
business the question of geographical limitations on non-compete
agreements is a more open question.
The courts can now enforce
non-compete agreements on a much larger geographical basis since
sales and income can be generated over the internet world-wide.
Thus, non-compete agreements relating to internet commerce and large
geographical areas are increasingly likely to be enforced by the
Non-compete agreements while employed are valid
It is important to note that
while only post-employment non-compete agreements are void,
non-compete agreements during employment are quite
enforceable. This is true for several reasons. Business and
Professions Code 16600 applies only to post-employment non-compete
Additionally, every employee
owes to his/her employer a duty of loyalty. If an employee goes
into competition with the employer while continuing to be employed
by that employer is likely to be in violation of his/her duty of
loyalty. Further, if the employee is using any information obtain
from his employer for the employer’s competitor, both the employee
AND the competitor may have liability for unfair competition/unfair
There are too many legal
pitfalls for the unwary. Therefore, it is vitally important that a
business consult with an attorney when hiring and when purchasing or
selling a business.
The DONNER &
DONNER Legal Warriors®
team's primary practice specializes in all of the California Law
area and are certified by the California State Bar, the United
States District Court, Southern District, United States Court of
Appeal, 9th Circuit, and United States Tax. Our attorneys are primary California Law Practice
lawyers and our live help system provides no guarantee of outcome of any case or
of every question to be answered in a chat session without further investigation
of Law regarding different jurisdictions of law that we might not be familiar
with or need time to evaluate. Some questions, we may not be able to answer as
we are limited to practicing law in California only at this time. There is no
guarantee of winning any case if we represent you.
Our Live help attorney
service can help you get answers to questions primarily for California Law.
California state legal questions are and answers are for opinion purposes
only and do not constitute an exact outcome of/or of law in California
area of practice only. In most case's , we can assure you that we still may be
able to help you instantly and answer most legal question or will suggest an
alternative way for our users to get advise out of our reach or control (due to
our practice areas or location of practicing law) . Our Live help attorney
service can possibly help you get most answers to questions you have (due to our
limited area to practice law in CA. only) outside of California for states in
the U.S.A. United States of America will have different laws that may not be
equivalent to California Law, in we practice in that field and specialize. Our
Practice area regions include: Los
Angeles County, Orange County, San Bernardino County, San Diego County, Santa
Barbara County, San Francisco bay area County, California, Riverside, Ventura
County, other California cities include we will represent in local court:
Irvine, Ontario, West Covina, Northern California, Costa Mesa, Cerritos, El
Monte, Palm Springs, Pasadena, San Dimas, Pomona, Alhambra, Bakersfield,
Victorville, Santa Ana, Tustin, Mission Viejo, Universal city, Redlands, Newport
beach, Hollywood, Claremont, Inland Empire, Arcadia, Anaheim, Indio, Fontana,
Upland, Westminster, Bellflower, Hemet, San Jose, Escondido, Palmdale,
Lancaster, Barstow, Temecula, Montclair, Santa Monica, Culver city, Diamond bar,
El Cajon, Glendora, Loma Linda , Long Beach, Moreno Valley, Van Nuys, Valencia,
Indio, Hemet, Palm Desert, Temecula, Chino, Claremont, Escondido, Carson,
Hollywood, Universal city, Lancaster, Banning, Loma Linda, Glendale, Hermosa
beach, Puente Hills, City of Industry, Sacramento, Northridge. We give no
guarantee of accuracy of legal advise outside California and will give only
opinions in those states outside California.
Our California legal
attorney's practice law also include the following areas in Orange
County, Los Angeles County, Agoura Hills, Alhambra, Arcadia, Artesia, Azusa, Bel
Air, Bell Canyon Bellflower, Belmont Shore - Long Beach, Beverly Glen, Beverly
Hills, Bradbury, Burbank, Calabasas, Century City, Westwood Cerritos. Cheviot
Hills, Rancho Park, Culver City, Downey, El Monte El Segundo, Encino Flintridge,
La Canada, Granada Hills, Hermosa, Beach, Hidden Hills, Hollywood La Canada
Flintridge, La Crescenta, Glendale , Ladera Heights, Lakewood, La Mirada
Lancaster Lomita Long Beach, Los Angeles Los Alamitos, Los Feliz , Malibu,
Malibu, Canyon, Manhattan Beach, Marina Del Rey, North Hollywood Northridge,
Norwalk Pacific Palisades, Palmdale, Pasadena Playa Del Rey, Pico Rivera,
Redondo Beach, Rolling Hills Rolling Hills Estates Rosemead Rossmoor, San
Gabriel, San Pedro Santa Clarita Santa Monica Sherman Oaks Sierra Madre. Signal
Hill, South Pasadena, Stevenson Ranch Studio City Tarzana Torrance Universal
City, Valencia, Valley Village, Venice, Walnut, Westchester West Hills, West
Hollywood, Westlake, Village. West Los Angeles, Westwood, Century City Whittier,
Corona, Woodland Hills, Thosand Oaks.
Donner & Donner or the web designer are not responsible for errors or misprints
that may arise on this site.
Questions regarding this site: email us -