Where Noncompete Clauses Stop Working

Owners of Irvine companies reach for noncompete clauses when a key employee, partner, or buyer might walk away and compete. California treats those clauses harshly, and the rules tightened again in 2024. One exception remains, and it applies to people who sell a business.

Contracts That Restrain a Trade Are Void in California

Senate Bill 699 added section 16600.5 to the Business and Professions Code. It makes any contract that is void under the state’s restraint-of-trade chapter unenforceable regardless of where and when it was signed.

An employer also can’t enter into a contract with an employee or prospective employee that contains a void provision. Nor can it try to enforce one even if the contract was signed and the work was done outside California. Either act is a violation.

Under the same section, a current, former, or prospective employee may sue for an injunction, actual damages, or both. A prevailing employee can recover reasonable attorney’s fees and costs.

A Seller of a Business Can Still Agree Not to Compete

Section 16601 allows a person who sells the goodwill of a business to agree with the buyer not to carry on a similar business within a specified geographic area. An owner who sells all of an ownership interest in a business entity can make the same agreement.

The restriction lasts only while the buyer, or anyone who takes title from the buyer, carries on a like business in that area. That limit keeps the covenant tied to the market the buyer actually bought.

For owners weighing an agreement tied to a sale, an Irvine business lawyer can check the geographic area against where the company has actually operated. A mismatch between the two gives the other side something to dispute.

Entity Choices Affect a Future Sale

An operating agreement written years earlier may contain a restriction on departing owners that nobody has compared with section 16601. Owners who first read it during a dispute must weigh it against the sale terms under pressure.

Ownership structure shapes the form a future sale takes, so it pays to structure your business with that sale in mind. Choices about entity type, voting rights, and transfer rules are simpler to make before a buyer appears.

A buyer who finds the seller competing a few blocks away may need an Irvine business dispute lawyer to sort out what the sale agreement promised. The first question is the geographic area written into the document.

Departures Create Claims on Both Sides

A partner who leaves with customers and a copied customer list can prompt a claim by the remaining owners. The departing partner’s agreement is the first document anyone reads.

That kind of dispute is the work of an Irvine partnership dispute lawyer, and the written terms frame every argument. The same pattern appears when one owner buys out another, because the buyout terms and the original agreement can point in different directions.

When two owners part ways and one wants to bar the other from taking customers, business ownership disputes turn on the wording of the operating agreement. The circumstances of the exit then matter as much as the clause.

Written Terms Decide Disputes After a Sale

Disputes after a sale depend on three things:

• The exact geographic area written into the agreement.
• Whether the seller actually sold goodwill or an ownership interest.
• How long the buyer, or a later owner, kept running a like business there.

Owners who sign a restrictive covenant should read it as a limit on a specific area, not a promise to leave the industry. Buyers should check that area against the market they bought.

At Ghassemian Law Group, our founding attorney Mahyar Ghassemian has practiced since 1999, started her own firm in 2010, and now manages a practice with offices in Irvine, Mission Viejo, and Palm Desert. She is fluent in English, Persian, Turkish, and French.

Defense Matters When an Owner Is Sued

A claim over a sale agreement starts from the covenant itself. The signed sale documents show which business was sold, which area was named, and who bought it.

An owner facing that claim may need an Irvine contract lawsuit defense lawyer to test whether the clause fits within the statute’s limits. The same review applies to buyers defending their own position.

Section 16601 ties every covenant to a specified geographic area, so that term gets read first. Owners on either side of a sale can get in touch with an Irvine business lawyer when the geographic area and the covered business are still open to change.