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being locked out of their chosen profession for an extended period of time, losing important revenue and risks becoming outdated within the stated term.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;

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.

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.

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.

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.

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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

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.

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.