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Food fight

Dear Mary, I started a local restaurant with my friend and business partner a few months ago and we both agreed to sign non-compete agreements, prohibiting us from opening restaurants in Napa for the next two years. Now we’re fighting and I want to start a new restaurant on my own (serving the same kind of food). I’ve heard that non-competes are not legal in California . Can I go start my own restaurant?

Probably not. The truth is, you’re correct that non-competes are generally void in California, but there are a couple of exceptions to that rule and I think your situation may fall into one of them.

A non-compete contract is an agreement in which one party agrees not to engage in a similar profession or trade in competition with the other party. Employers often have employees sign non-competes when they are worried that the employee, upon termination, might start working for a competitor or start their own business in the same field, and use confidential information or trade secrets to gain a competitive advantage.

In California, non-competes are generally unenforceable under Section 16600 of the Business and Professions Code. There are two very narrow exceptions to this general rule:

1) A non-compete agreement may be enforceable if it’s made in connection with the sale of the goodwill of a business. An example would be when a person sells a business and agrees to refrain from carrying on a similar business in the same geographic area.

The thinking behind this is that it would be inherently unfair for someone to sell a company and then engage in competition that decreases the value of the asset they just sold.

2) Non-competes may be enforceable when it comes to dissolving a business (or dissociation of a partner from a business). A partner may be required to agree not to carry on a similar business within a geographic area where the partnership is located or has done business, so long as any other member of the partnership carries on a like business.

The reasoning behind this exclusion to the general rule against non-competes is that this kind of agreement gives all partners the opportunity to start anew in business on equal terms.

Non-competes are often used to protect trade secrets. A company can prevent the use of its trade secrets, but it may not prevent fair competition.

A good example is a customer list: a company can prevent a former employee from soliciting clients by using their customer list, but merely informing those customers that the former employee has a new job (without more) is OK.

An employer and an employee cannot agree that a non-compete is valid. If the contract is determined to be void by law and public policy, it cannot be made valid by agreement.

An employee or potential employee cannot legally be terminated (or not hired) for refusing to sign a non-compete. However, many employees agree to sign non-competes, knowing that the agreement is invalid, just to ensure they are hired (or not fired).

Mary Hudson is a business law attorney with Hudson & Luros, LLP, in Napa, and can be reached at mary@hudsonluros.com or 418-5118. The information provided here is not intended as legal advice, nor does it form an attorney-client relationship with the author. The author makes no representations as to the reliability or accuracy of the above information. In a perfect world we wouldn’t need disclaimers — or attorneys.