Covenants not to compete have been in legislative disfavor in California since 1872. This animus is currently codified at Section 16600 of the Business and Professions Code which provides that with certain statutory exceptions ”every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void”. Thus, I was very surprised yesterday to read an opinion by Justice Maria P. Rivera that seemed to sanction court ordered non-competes.
As the case name suggests, In re Marriage of Greaux & Mermin, 2014 Cal. App. LEXIS 149 (Cal. App. 1st Dist. Feb. 14, 2014) involved a marital dissolution. Although both spouses had worked to establish and grow the business, the family court judge awarded the corporation to the husband and ordered the wife to ”refrain from further conduct intended or likely to damage either business in any way”. The judge further directed that the wife be subject to a five-year non-competition order.
On appeal, the wife argued that the non-competition order violated California’s strong public policy favoring competition and that the legislature had not authorized judicial non-competition orders. Justice Rivera framed the issue as “whether the public policy affirming an individual’s right to engage in a trade or business of his or her choosing trumps the family court’s authority to issue any orders—and specifically a noncompetition order—to achieve an equal division of marital property.” She concluded that as a general proposition, a party to a marital dissolution may be ordered not to compete when it is necessary to protect the value of a marital asset (i.e., the goodwill of the business). The Court of Appeal nonetheless vacated the family court’s order because it failed to restrict the non-competition order to the geographic area in which the business was carried on.