As if there was any doubt on this issue, the California state Supreme Court recently unanimously ruled that non-compete clauses are forbidden and unenforceable in California in all but a few situations. California Business and Professions Code Section 16600 provides as follows: “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 the case of Edwards vs. Arthur Andersen the Court confirmed that Californians have the right to move from one company to another or start their own business and can’t be prohibited by their employer from working for a competitor in their next job.
In the ruling, Justice Ming Chin said, “An employer cannot by contract restrain a former employee from engaging in his or her profession, trade or business.” The Court noted that that this principle, which has been state law since 1872, only recognizes a few limited exceptions to the prohibition against non-compete agreements, such as where they are part of the sale of a business or part of the breakup of a corporation or partnership.
Under what scenarios would a non-compete provision be enforceable in California? California Business and Professions Code section 16601 provides in pertinent part:
Any person who sells the goodwill of a business, or any owner of a business entity selling or otherwise disposing of all of his or her ownership interest in the business entity, or any owner of a business entity that sells (a) all or substantially all of its operating assets together with the goodwill of the business entity, (b) all or substantially all of the operating assets of a division or a subsidiary of the business entity together with the goodwill of that division or subsidiary, or (c) all of the ownership interest of any subsidiary, may agree with the buyer to refrain from carrying on a similar business within a specified geographic area in which the business so sold, or that of the business entity, division, or subsidiary has been carried on, so long as the buyer, or any person deriving title to the goodwill or ownership interest from the buyer, carries on a like business therein.
Thus, under section 16601 the buyer of a business may bind the seller to a non-competition agreement and that prohibition will be enforceable, with some limitations, by the courts in the state of California.
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