Restraints on California Covenants Not to Compete
California law generally does not tolerate covenants not to compete, perhaps more so than any other state. Covenants not to compete typically arise either from the sale or transfer of a business or from an employer/employee relationship. The basic rule in California is that, in the absence of a statutory exception, “every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.” (Bus & P C §16600.) This general rule is subject to certain statutory exceptions that permit noncompetition agreements in connection with one of the following:
- The sale of goodwill of a business by the person who agrees not to compete;
- The sale or other disposition of all the covenantor’s ownership interest in a business entity or its subsidiary;
- The sale of all or substantially all the operating assets, together with the goodwill of a business entity or its subsidiary or division;
- The disassociation of a partner from a partnership, or the disposition of a partner’s interest in a partnership;
- The dissolution of a partnership; and
- The dissolution of a limited liability company or the termination of an individual’s interest in a limited liability company.
In these situations, a covenant not to compete in all or part of a specified geographical area in which the business has been carried on, during the time the seller continues to do business there, is permitted. (Bus & P C §§16601-16602.5.)
Still, there are several documented instances of one party requiring another party to agree to a covenant not to compete. In the employer/employee context, this is especially dangerous for employers. An employer may be held liable for wrongful termination in violation of public policy when it fires an employee for refusing to sign an agreement containing unenforceable noncompete, nonsolicitation, or other provisions violating Bus & P C §16600. Moreover, the signing of an employment agreement containing an unenforceable covenant not to compete cannot be made a condition of continued employment for an employee.
Parties “bound” to unenforceable covenants should take a close look at California’s Unfair Competition Law (UCL) under Bus & P C §§17200-17210. The UCL provides remedies for a wide range of unfair business practices, enforceable by a similarly wide range of potential plaintiffs. The statutory remedies consist of injunctive relief, civil penalties, and civil penalties for violating an injunction.