What constitutes a reasonable duration of a non-compete restriction in your jurisdiction?
What constitutes a reasonable duration for a non-compete agreement in the employment context has not been decided because non-compete agreements are not enforceable in California and are void as against public policy (Cal. Bus. & Prof. Code § 16600 (2011)).
However, if a statutory exception applies, the seller of a business can be prohibited from carrying on a like business within a geographic area in which the business entity was sold or conducted, for as long as the business is carried on by:
- The buyer of the business interest.
- Other partners if the business entity is a partnership.
- Other members if the business entity is a limited liability company.
- Anyone deriving title to the goodwill or ownership interest of the business from a buyer, partner or member, as described above.
(Cal. Bus. & Prof. Code §§ 16601, 16602 and 16602.5 (2011).)
The duration contemplated by these provisions could be many years.
What constitutes a reasonable geographic non-compete restriction in your jurisdiction?
What constitutes a reasonable geographic restriction for a non-compete agreement in the employment context has not been decided because non-compete agreements are not enforceable in California and are void as against public policy (Cal. Bus. & Prof. Code § 16600 (2011)).
However, if a statutory exception applies, the seller of a business can be prohibited from carrying on a like business within a geographic area in which the business entity was sold or conducted (Cal. Bus. & Prof. Code §§ 16601, 16602 and 16602.5 (2011)).
The geographic restriction may encompass only the territory in which the business entity, partnership or limited liability company was:
- Sold.
- Transferred.
- Dissolved.
- Transacting business.
(Cal. Bus. & Prof. Code §§ 16601, 16602 and 16602.5 (2011).)
Courts have interpreted the geographic limitations in restrictive covenants in connection with the sale of a business literally. For example:
- A non-compete agreement signed by the seller of an insurance business, which covered the entire state of California, rather than just the four counties in which the business principally carried out its business, was held enforceable. The insurance company provided its products to clients located throughout the state. (Alliant Insurance Services, Inc. v. Gaddy, 159 Cal.App.4th 1292 (2008).)
- A non-solicit agreement signed by a seller of a business was nullified because it was overbroad. The agreement prohibited the seller from soliciting any of the buyer's employees or customers, rather than just the customers and employees connected to the sold business. (Strategix, Ltd. v. Infocrossing West, Inc., 142 Cal.App.4th 1068 (2006).)
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
