William B. Hanley
As someone who works in the California business industry, you’re probably already familiar with the term “non-compete agreement.” Depending on your role — business owner, operator, employee, or whatever your position may be — you’ve undoubtedly drafted, presented, or at the very least signed such a contract. Still, understanding what non-compete agreements do and using them correctly are two very different things.
Non-Competes Vary from State to State
Non-compete agreements were developed as a tool to protect businesses from unfair competition practices. In many states, they act as a safety net between employers and their employees, as well as sales representatives and other professionals the employer may partner with.
But here’s the problem for California business owners: California non-compete agreements are unenforceable — with very few exceptions.
When Are California Non-Competes Enforceable?
The California Business and Professions Code §16600 states that “except as provided in this chapter, every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.” In other words, if a non-compete agreement tries to keep an employee or business partner from engaging in “lawful” business practices, a California court will not enforce it, except in a few specific scenarios.
“So what are the exceptions?” you ask. To answer your question, let’s take a closer look at the next three sections of the California Business and Professions Code:
This section states that any business owner who sells their business (likewise, any person who sells the goodwill of a business or any shareholder who sells their shares in a business) “may agree with the buyer to refrain from carrying on a similar business within a specified geographic area.”
In the event that someone sells their business (or their investment in a business), they must abide by the terms of the non-compete drawn up between them and the buyer. If they don’t — for instance, if the seller turns around and offers competitive professional services within the contract’s “specified geographic area” — they will more than likely find themselves on the losing end of a non-compete dispute.
This next section of the California Business and Professions Code addresses the possibility of a partnership dissolving or one partner disassociating from their partnership. If either of those events occurs (or is anticipated), the separating partner may “agree that he or she will not carry on a similar business within a specified geographic area.”
As with Section §16601, Section §16602 mandates that the partner stepping away from the business must refrain from offering competitive services within an agreed-upon geographic area. Failure to do so could mean serious legal and financial consequences for the partner who breaches the contract.
Section §16602.5 is nearly identical to Section §16602, except that it refers not to partners in a business partnership, but to members of a limited liability company. If an LLC member leaves or loses interest in the LLC, they cannot offer competitive professional services in the LLC’s specified territory.
The Business Owner Can Protect The Business
A business owner is not without a solution if an employee leaves begins to compete or chooses to work for a competitor. The former employee cannot engage in unfair competition and cannot use the former employer’s trade secrets.
The test for trade secrets is whether the matter sought to be protected is information that is valuable because it is unknown to others and the business owner has attempted to keep secret. To qualify as a trade secret, the information must be secret and must not be of public knowledge or of general knowledge in the trade or business. For example, customer lists can be trade secrets if information about the customer (such as price concessions, discounts, rebate incentives, purchasing requirements ) are kept confidential. Anything that gives the business owner a competitive advantage that is kept confidential can potentially be a trade secret.
Whether you’ve been accused of breaching a non-compete agreement or using a trade secret or are on the other side of the dispute — that is, the employer looking to pursue justice on behalf of your company — the first thing you need to do is contact an experienced business litigation attorney, to walk you through the legal options available to you and offer cost-effective solutions that are catered to your unique professional matter.
As a commercial litigation attorney with nearly 45 years of experience, Bill Hanley is the legal professional to see if you live in Orange County, Los Angeles, San Diego, or a surrounding area in California. Reach out today to schedule an informative consultation.