California Non-Compete Agreement Template

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Updated July 28, 2022

A California non-compete agreement prohibits a person from engaging in a similar business for a specific duration and geographic area. A non-compete is enforceable only to a seller of the goodwill of a business in its entirety. Employees, independent contractors, and remote workers are strictly forbidden from entering into a non-compete.

StatutesSections 16600-16607 (Business and Professions Code)

Legally Enforceable?

A California non-compete is not enforceable to:

  • Employees
  • Remote workers
  • Independent contractors

A California non-compete is enforceable to:

  • Seller of goodwill of a business
  • Partners involved in the dissolution of a partnership

Employees

A non-compete made with an employee is unenforceable. The statute specifically restricts, in any way, an individual’s ability to work in a specific industry.

“Every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.”

Source: BPC § 16600 & Edwards v. Arthur Andersen LLP (2008)

Remote Workers

A California company cannot make the governing law in a non-compete to be in another State to get around State law. If the company is located in California, the remote worker will have the same protections as a resident

Source: Application Group, Inc. v. Hunter Group, Inc. (1998)

Independent Contractors

Independent contractors are ineligible to enter into a non-compete and falls under the same category as employees under the statute.

Source: BPC § 16600

Sale of a Business

A non-compete is enforceable against a seller that sells the goodwill of a business (corporation, LLC, partnership, etc.) that agrees to sell to a buyer that carries on the business therein.

The seller must “refrain from carrying on a similar business within a specified geographic area in which the business is so sold.”

Required Language: The law states specifically that it is for the “goodwill” of a business. Therefore, it is required to use the term “goodwill” in a purchase agreement or non-compete.

Source: BPC § 16601

Dissolution of Partnership

The partners of a dissolving partnership can agree to sign a non-compete amongst themselves to prohibit one another from opening a similar business in the same area. The agreement should include a specific geographical area and duration.

Source: BPC § 16602

Penalties

If an employer includes a non-compete clause into an ineligible employee’s contract for employment, they will be penalized $100 for each pay period for the initial violation and $200 for each pay period thereafter.

Source: LAB § 2699(f)(2)

Maximum Term

5 years has been determined to be reasonable for a non-compete for the sale of a business covering the entire State of California.

Source: Alliant Ins. Services, Inc. v. Gaddy (2008)

Blue Penciling

California courts will not amend a non-compete agreement that is too broad or if the terms are unreasonable.

“Courts reform contracts only where the parties have made a mistake, and not for the purpose of saving an illegal contract.”

Source: Kolani v. Gluska (1998)