Covenants not to Compete are Generally Not Enforceable in California

Covenants not to Compete

Generally, a covenant not to compete (“CNC”) is a provision in a contract which prohibits the parties to the contract from competing with each other if and when the contract terminates.  Normally, this is seen in contracts between an employer and an employee where the employer provides the employ with special training and knowledge during the term of the employment, but wants to make sure the employee does not later leave the employer and opens up his own business which would be in competition with the employer.

Enforceability in California

In California, CNC’s are generally not enforceable.  See Bus. and Prof. Code §16600.  That being said, California does allow for CNC’s in very specific circumstances.  These are limited to the following:

  • The sale of essentially the entire business and goodwill, where the buyer of the business continued the activities of the business (B&P §16601);
  • The dissolution of a partnership, or the dissociation of a partner from a partnership, where the retaining partner continues running the business of the partnership (B&P §16602); or
  • Similarly, the dissolution of an LLC or the termination of membership of a member of the LLC where the business of the LLC continues operating (B&P §16602.5).

Many contracts in California contain CNC’s, either because the parties (or their attorneys) are unaware of these provisions in the Business and Professions Code, or because they believe that the party on the other side will not know these provisions and will abide by the CNC fearing a lawsuit.

Whether you are a business hiring personnel, or a potential employee, you know your rights.  Do not sign any contract or agreement until you have it reviewed by an experienced business attorney.  Better yet, have the attorney draft the agreement, as there are many pitfalls in negotiating such contracts.  Netzah & Shem-Tov, Inc. has the experience and know how to represent you in these and other complex business and corporate matters.  It is far less costly to do things right the first time than to fix them later through litigation.