Before examining the reasonableness of a noncompetition agreement, courts first consider whether the agreement is ancillary, meaning connected and subordinate to another valid contract. If there is no such contract, the court will look to see if there was valid consideration to enforce such an agreement. If there is no adequate or independent consideration present, most courts will refuse to enforce such an agreement. This is to ensure that the noncompetition agreement is not an outright restraint on trade but, rather, the result of a bargained-for exchange that furthers legitimate commercial interests.
When a businessman sells his business, the purchaser may compete with him unless there is a valid restrictive covenant or covenant not to compete. The same is true when an employee leaves the employment of a company and begins soliciting customers of his former employer or competing with his employer in a similar way. When an ongoing business is sold, it is commonly stated in the sales contract that the seller shall not go into the same area or begin a similar business within a certain geographical area or for a certain period of time or both. Such an agreement can be valid and enforceable.
Restrictions to prevent competition by a former employee are held valid when they are reasonable and necessary to protect the interests of the employer. Courts will closely examine covenants not to compete signed by individuals in order to make sure that they are not unreasonable as to time or geographical area.
When a restriction of competition is invalid because it is too long or covers too great a geographical area, Courts will generally do one of two things. Some Courts will trim the restrictive covenant down to a period of time or geographical area that the Court deems reasonable. Other Courts will refuse to enforce the restrictive covenant at all and declare it void.
Caution: Statutory law in a few states completely prohibit covenants not to compete unless the covenant meets the state's statutory guidelines.
A California General Non-Competition Agreement, also known as a non-compete agreement or a covenant not to compete, is a legal contract between an employer and an employee that restricts the employee from engaging in activities that may directly compete with the employer's business interests in a specified period of time and within a specific geographic area. This agreement helps protect a company's trade secrets, confidential information, customer relationships, and goodwill by preventing departing employees from joining or starting a competing business immediately after leaving the company. It is commonly used as a precautionary measure to ensure that proprietary information remains confidential and not exploited to the detriment of the employer. In California, non-compete agreements are generally disfavored and viewed as a restraint on an individual's ability to seek employment and pursue their livelihood. California Business and Professions Code section 16600 states that any contract that restricts a person's right to engage in a lawful profession, trade, or business is void, except in limited circumstances. However, there are certain types of California General Non-Competition Agreements that are valid under specific conditions. These circumstances include: 1. Purchase or Sale of Business: When a non-compete agreement is part of the acquisition or sale of a business, it may still be enforceable in California, although restrictions on the seller's subsequent competing activities must be reasonable in scope and duration. 2. Dissolution of a Partnership: If partners in a business decide to dissolve their partnership, they may agree to non-compete provisions to protect their respective interests and prevent unfair competition. 3. Protection of Trade Secrets: California recognizes that employers have a legitimate interest in protecting their trade secrets. Therefore, non-compete agreements may be enforceable to the extent necessary to prevent the unauthorized use or disclosure of confidential information and trade secrets. It is important to note that even when a non-compete agreement falls within one of these exceptions, it must still be reasonable in its terms. This means that the restrictions imposed on the employee, such as the duration and geographic scope, should be narrowly tailored to protect the employer's legitimate business interests. In summary, while California generally disfavors non-compete agreements, there are certain limited circumstances in which they may be enforceable. Employers should consult with legal counsel to ensure their non-compete agreements comply with the specific requirements and exceptions outlined in California law.
