California doesn’t *always* prohibit non-compete provisions

California is well-known for refusing to enforce non-compete provisions, especially in the post-employment context (see Choice-of-Law and Non-Compete Provisions), so individuals will not be deprived of gainful employment. But provisions limiting competition aren’t always taboo.

Business and Professions Code Section 16601 says, to oversimplify a bit, that anyone who sells the goodwill of a business or his entire ownership interest in a partnership, limited liability company (LLC) or corporation may agree not to compete with the entity in the geographic area where it operates so long as the buyer, or a successor, continues to operate the business. Sections 16602 and 16602.5 provide similarly in the event that a partnership or LLC dissolves, or a partner disassociates from a partnership, or a member withdraws from an LLC.

The rationale: The buyer / new owner of an interest in a business should have an opportunity to make the business a success without being undermined by the seller / former owner.

Practical tip: When you buy a business, it’s OK – even prudent – to put restrictions on the seller’s ability to compete with you…even in California.

Related post: Non-compete Snares Conspiring Employer

Photo credit: stock.xchng

Dana H. Shultz, Attorney at Law  +1 510 547-0545  dana [at] danashultz [dot] com
This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact a lawyer directly.

One comment

  1. Quora says:

    If someone has a very minority stake in a company, sells their shares before leaving the company, and then leaves to work for a competitor (a California company), can a non-compete be enforced on the employee?…

    CA courts will not enforce employment-based non-compete provisions. (I assume that your reference to the CA company means you are working in CA.) CA courts will enforce non-compete provisions associated with the sale of a business (please see “Califor…