California NonCompete Divorce Issues

Quick Summary

There is no exception in California law for non-compete agreements created in a divorce.

Any noncompete terms must comply with the restrictions against noncompetition in California law, or are void and unenforceable.

Law Review

Most non-compete issues arise in the employer - employee context. Typically, an employer is requesting that an employee refrain from competing against the business for a period of time after their employment ends.

In California, this type of noncompete is unlawful and not enforceable.

However, noncompete issues are not confined to the employment context.

You may be surprised to lean there is no labor law in California relating to noncompete issues.

Instead, the prohibition is found in the Business and Professions Code, which states in section 16600:

Except as provided in this chapter, every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.

Key points in that statute:

First, "except as provided in this chapter." There is no exception provided for divorce agreements.

Second, "every contract." This should be clear. Every contract means every contract. A divorce agreement is simply a contract.

Divorce and family law situations are often emotional and tense. They can be made very complex when businesses are involved. This is either a business the husband and wife own together, or just one spouse.

If the business is a significant producer of income then dividing up the business or allocating profits can be extremely difficult.

If both spouses are involved in the business, competition between the spouses in future businesses could create future problems and litigation. Dividing customers and assets may be a virtually unresolvable problem that must be resolved.

The starting point in analyzing the situation and possible agreements is understanding the starting point of California law: "except as provided" any noncompete term is void.

The only exception generally involves the sale of a business. There are several statutes dealing with business entities and then more specifically partnerships and limited liability companies. The crux of the statutes is one owner of the business is exiting and the business needs to protect itself from the former owner.

Business and Professions Code Section 16601 in part states the exception:

any owner of a business entity selling or otherwise disposing of all of his or her ownership interest in the business entity ... may agree with the buyer to refrain from carrying on a similar business within a specified geographic area in which the business so sold, or that of the business entity, division, or subsidiary has been carried on....

Key points in this exception:

First, a noncompete can only run against an owner of the business. If a spouse is not an owner no noncompete will be enforceable against them. They may need to become an owner before a divorce agreement is finalized.

Second, the owner must dispose of his or her ownership interest.

Third, a noncompete can be of unlimited time, but only so long as the business continues operating.

Fourth, a noncompete needs a geographic limitation restricted to the area where the business has been conducted.

These points raise numerous issues for a divorce, such as:

- The nature of any new business that can be started.

- Where the business can conduct business.

- How long a restriction is in place.

- What payments are being made for the restriction.

- What penalties may be imposed for a violation.

- What if the spouse keeping the existing business sells it. Are there any restrictions on a sale. Does the other spouse get first purchase rights?

Attorney Brian Kindsvater specializes in noncompete issues. He does not, however, practice family law.

If you or your divorce attorney need assistance with noncompete issues, contact Mr. Kindsvater right away:

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