California voids most agreements that stop a person from working in a profession, trade, or business, so an executive handed a non-compete clause may assume it can never be enforced. The Business and Professions Code does include narrow exceptions, however, and two of them apply to people who own part of the business they run. Whether an executive falls inside either one depends on the type of entity and the interest the executive holds.
Partners May Agree to Limited Restrictions
Under Business and Professions Code section 16602, a partner may agree not to carry on a similar business within a specified geographic area where the partnership operated. The agreement must be made upon, or in anticipation of, the partnership’s dissolution or the partner’s dissociation. It holds only while another partner, or a person who takes the business or its goodwill from that partner, carries on a like business in that area.
Executives who run a business as partners are the group this provision describes, so the first question is whether the executive is a partner at all. A close read of the agreement and the entity documents answers that, and a San Diego executive non compete lawyer can walk through both.
Founders can address these terms when the entity is formed. The events that trigger a restriction, such as dissolution or a partner’s exit, are written into the partnership agreement, and a San Diego founder partnership agreement lawyer reviews that wording.
LLC Members Follow a Parallel Rule
A similar rule for limited liability companies appears in Business and Professions Code section 16602.5. A member may agree not to carry on a similar business within a specified area where the company did business, upon or in anticipation of the company’s dissolution or the end of the member’s interest. As with partnerships, the agreement holds only while another member, or a person who receives the business or its goodwill from that member, continues a like business there.
The Conditions Narrow the Exception
Three limits appear in both provisions:
- A triggering event, which is dissolution, the end of the owner’s interest, or the anticipation of one.
- A specified geographic area where the business operated.
- A like business still running there under the remaining owners or a successor.
Because the area must be one where the business operated, a restriction that reaches territory the business never served does not match the statutory description. A disagreement over whether a triggering event has happened can become an equity dispute, and a San Diego equity dispute lawyer reads the restriction alongside the owner’s rights under the entity’s governing documents.
At Grey Ocean, PC, we handle founder disputes, shareholder disputes, ownership disagreements, and restrictive covenant review. Our clients in ownership disputes include founders, shareholders, and equity holders.
A Senior Title Is Not an Ownership Interest
Holding an executive title doesn’t make a person a partner or a member. Ownership is what counts. An executive who holds stock options or restricted shares in a corporation, for example, doesn’t appear within the text of these two provisions, which refer only to partners and members of limited liability companies. Beyond these two provisions, the general rule voiding non-compete agreements in California still applies to most executives.
An employer that cannot enforce a non-compete may rely on confidentiality agreements or trade secret claims, so a departing executive should also review those obligations. How those obligations apply is something a San Diego trade secret defense lawyer can explain.
Review the Agreement Before Signing
Before signing, an executive can check the following:
- Whether the executive will be a partner, a member, or neither.
- Whether the restriction is tied to a dissolution or to the end of the owner’s interest.
- Whether the area is limited to where the business operated.
- Whether other agreements, such as equity grants, repeat the restriction.
Startups that grant ownership to senior hires also take on employment obligations. Handling startup employment law compliance is a separate task from drafting the equity terms.
An ownership interest can change the analysis of a restriction, so the label on the agreement matters less than the entity and the role. Executives who are asked to sign a restriction tied to equity can reach out to a San Diego executive non compete lawyer to review the wording before it takes effect.
