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The Two Exceptions in California Law on Non-Compete Agreement

By Edited Aug 11, 2016 0 0

Non-compete agreement in employment and partnership contracts are enforceable and recognized in most states. This is usually used by a business owner to protect the interest of his business once a partner or an employee leaves the company. However, the California law voids any contract that prohibits a person from engaging in the same legal profession or trade as his former employer.

California non-compete agreements are often deemed illegal as written in the state's Business and Profession Code. Section 16600 indicates that "every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void."

However, employers and partners may still enforce the non-compete agreement provided that they cite any of the two exceptions under Section 16600.

Business Owner Exception

An employee who chooses to sell his stocks of the company cannot engage in the same business as the company that he was previously affiliated with.

For example, the owner of company A sells his shares to company D. To protect the interest of his newly acquired shares, the owner of company D may restrain the owner of company A from being involved in the same business.

To take advantage of this exception, some business owners forces or mandates their employees to purchase small shares of the company. When this happens, the exception in the non-compete agreement would not be followed as the owner must substantially sell the shares of the company so that it can be considered that the "goodwill" of the company is being transferred as well.

Partnership Exception

Partnership agreements usually involve a non-compete agreement wherein a withdrawing partner cannot be involved with a competing company. However, there are cases when the non-compete agreement is contested if the geographical scope where the withdrawing partner can work is too broad and the time period is too long.

Also, it is important to note the difference between unlawful competition and occasional competitive activity. Even if a person is bound by the non-compete agreement recognized by the state, he may still engage in occasional and isolated competitive activities.

In cases where either the company or the employee is not based in the state of California, then their case can be removed to the federal court or the Ninth Circuit. The Ninth Circuit usually sides with the employee, however, it also has misinterpreted California laws and so the non-compete agreement that sides with the company is usually honored as in other states.

So, when contesting these agreements, it is important for the withdrawing partner or the employee to seek the assistance of a business litigation attorney who can assist and advise them of the legal actions they can take.



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