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What are Non-Compete Agreements?

 

If you’re wondering what non-compete agreements are, this article will provide information about what they are and how they are handled in the business world. In general, non-compete agreements prohibit one party to enter or start a similar profession or trade in competition with another party. Laws pertaining to such agreements differ in every state. We provide you information pursuant to California non-competion law below.

Generally, non-competition agreements are void in California given that the courts protect an individual’s right to engage in lawful employment or business. Pursuant to the Business and Professions Code, an agreement that limits the rights of a party to engage in lawful employment or business activities is an unreasonable restraint of trade and unenforceable as a matter of public policy. Thus, a contract restraining a person from engaging in a lawful profession, trade, or business is void.

However, there are exceptions to this rule. We describe two such exceptions below:

  1. Goodwill: Noncompete agreements related to the sale of goodwill in connection with the disposition of a business or of the ownership interest are permissible.
  2. Partnerships/LLC: Noncompete agreements related to partnerships and limited liability companies are permissible if they relate to (1) the dissolution of the partnership or company, (2) the sale of an interest in such entities, or (3) the disassociation of a partner from a partnership. If these requirements are met, then an agreement that requires a party to refrain from carrying on a similar business within a specified area where the original business was conducted may be permissible.

Geographical restraints prevent a person from conducting a specified activity within a certain area. The scope of a business includes the location of the offices or plants, and also the area in which the goodwill has been established through substantial sales. It can also include the locations where a business designs, creates, and produces its products, and the areas where its products or services are marketed. As such, the court can find that a non-compete agreement prohibiting a party from engaging in a competing business in the entire state of California to be permissible even if the business being protected only had offices in a few counties, if the business itself marketed and procured sales throughout the state.

Regarding employment agreements specifically, provisions that impose penalties on employees who work for a competitor of their former employer following completion of their employment are generally invalid. However, an injunction against former employees can be sought to prohibit misappropriation if there is evidence that the former employee is compromising the employer’s trade secrets, which is information not otherwise readily available from other sources.

Further, agreements that prohibit solicitation of customers or key employees may be found to be valid in certain circumstances to protect trade secrets. Solicitation of former employees may be found to be improper if a significant number of employees are solicited, causing the former employer to be unable to operate the business. However, anti-solicitation agreements cannot be used to bar a former employee from receiving or considering applications from employees of the former employer. Similarly, a former employee is not precluded from responding to inquiries initiated by former colleagues.

The law surrounding non-compete agreements is complicated and there are many intricacies that only an experienced attorney will be able to analyze. If you need assistance with drafting non-compete agreements, analysis regarding the enforceability of the non-compete agreement you have signed, or feedback regarding employment agreements, please contact the experienced Employment Law attorneys at Bremer, Whyte, Brown & O’Meara LLP for a consultation.