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Enforceability of non-competition agreements in California

On Behalf of | Aug 1, 2016 | Business Litigation

Non-competition agreements between employers and employees are common in business. For instance, non-compete agreements may put strict limitations on competition within the same geographic area or may restrict a former employee from using the company’s client lists. Such agreements are designed to safeguard the company from competition through, for example, the sharing of trade secrets and confidential data by former employees and the loss of other assets that are valuable to the business. The theft by an employee of trade secrets of his or her former employer could form the basis for a legal claim of violation of the non-compete agreement. Some states enforce trade secret protection. California does so only if the business is able to prove that these trade secrets are, in fact, proprietary. However, it is not uncommon for disputes to arise over whether the non-compete agreement is legally binding and enforceable. Indeed, the scope and legal applicability of non-compete agreements has become an increasingly contentious issue in recent years.

Agreements between a company and its former shareholders or former owners are typically enforceable in California. Non-compete clauses that stem from purchase and sale contracts are legally enforceable. However, California Business and Professions Code section 16600 does not, in general, recognize the validity of non-competition agreements that do not stem from the context of a business’s sale.

The following are situations in which non-competition agreements can be enforceable:

  • After a shareholder’s sale of a business’s goodwill. The term “business goodwill” refers to that which is owned by the business entity itself, which may include its customers, locations, particular operating systems and, especially, its reputation and record of success.
  • After a shareholder’s sale of a portion or all of his or her shares in a business
  • After a corporation’s sale of the majority of its operating assets along with the goodwill of the business

California law recognizes that non-competition agreements can be enforceable following the act of dissolving a limited liability company or when owners sell their interests in the company. Non-compete agreements can also be enforceable upon a partnership’s dissolution or when a partner sells his or her partnership interests. California law also allows the seller and buyer to enter into an agreement by which the buyer agrees not to start a similar business within a designated geographic area or a certain time frame.

If you are facing a legal dispute arising from a non-compete agreement that you are either seeking to enforce or that is being enforced against you, it is important that you seek advice from an experienced business trial lawyer. The Buffington Law Firm, PC, handles a wide range of business litigation cases, including many different types of Unfair Competition claims. We have handled cases which involve non-compete clauses stemming from purchase and sale contracts. Contact the Buffington Law Firm, PC, at 714-450-6568 or toll free at 800-835-2447 to speak with an experienced business litigation attorney to get advice about your case.

Sources: http://corporate.findlaw.com/business-operations/non-competition-agreements.html, http://corporate.findlaw.com/intellectual-property/an-introduction-to-california-trade-secrets-law.html