The Exception to California’s Non-Competition Agreement Prohibition

There is always an exception to every rule. Non-compete clauses in employment agreements are specifically prohibited in California to prevent employees from being locked out of their chosen profession for an extended period of time, losing important revenue and risks becoming outdated within the stated term. A non-compete clause, on the other hand, is only authorised if the employee holds a stake in the company. A non-compete clause may be valid in the following circumstances:

When a person sells the company’s goodwill;

When the owner sells his or her whole stake in the company;

When the owner sells almost all of the company’s operational assets as well as its goodwill.
Alternatively, a partner or member may agree not to compete with the company or another member doing a comparable business in the region upon termination of participation in the business or dissolution of the company.

For our purposes, goodwill refers to a company’s reputation and name recognition among customers. Employees who receive shares as part of an equity incentive plan are not considered owners of the firm for the purposes of a non-compete clause.

Three Important Factors to Consider When Choosing a Non-Competition Provision in California

Even though California law specifically allows a non-compete clause, certain conditions must be met. Unfortunately, each criterion might be interpreted differently depending on the circumstances of the case.

Adequate Consideration

It is critical to ensure that enough consideration (usually monetary money) is provided for the ownership interest, assets, or other rights being sold or given up; otherwise, the provision may be null and invalid. In the employment environment, however, what constitutes an adequate or fair factor will be determined on a case-by-case basis.

Reasonable Timeframe

In California, it has similarly not been determined what constitutes appropriate duration. The enforceable time period might be many years, including up to the lifetime of the firm, or as long as someone benefits from the business’s goodwill. The length is the least inspected of the three standards and is often judged acceptable as negotiated by the parties.

Geographic Area That Is Reasonable

The geographical limitation must be restricted to a certain region. This area might include:

where the company was sold;

where the firm was relocated;

where commerce was done; or

where the company was dissolved

What constitutes a suitable geographic location, as with the first condition, is assessed on a case-by-case basis. Here are two instances of how the geographic location criterion might be complicated.
A corporation offers life insurance and does most of its business in four counties where it has offices; nonetheless, the company insures customers across California. The seller executes a non-compete agreement in which the geographic limitation includes the whole state of California. The geographic location was deemed to be enforceable by the court.

A buyer of a company, on the other hand, requires the sale to sign a non-compete agreement prohibiting the seller from contacting any of the buyer’s employees or customers, even workers and customers unrelated to the firm. The clause was deemed unenforceable by the court because it was overly broad.

Last Thoughts

Any business organisation, whether a partnership, limited liability company, or corporation, may take advantage of this restricted exemption when selling, transferring, or terminating an ownership stake in the firm. The key to an enforceable non-compete provision against the person selling the interest will be that the consideration paid is sufficient in relation to what is being sold, and that both the duration and geographic restrictions are reasonable in relation to the interest being sold and the scope of the business.