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Ask a Lawyer -- Contract Law
Contract Law Question 30
Question:
Is a non-compete provision in an employment separation agreement enforceable in California, if drafted such that the only consequence of a breach is the loss of future earn-out payments?
Response: California Business and Professions Code Section 16600 states, in pertinent part, "every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void." Link. The issue is whether the clause you describe in an employment separation agreement indirectly "restrains" the former employee from engaging in certain business?
"The California Supreme Court has held that that '[t]his section invalidates provisions in employment contracts prohibiting an employee from working for a competitor after completion of his employment or imposing a penalty if he does so [citations] * * *.'" Muggill v. Reuben H. Donnelley Corp., 62 Cal.2d 239, 242 (1965). Link. In Beneficial Life Insurance v. Knobelauch, 653 F.2d 393 (9th Cir. 1981), the court was faced with an employment agreement by Beneficial with it's employee Knobelauch which required the repayment of a loan from Beneficial to the employee if (and only if) the employee went to work for another company. The court found the agreement void for violation of California Business and Professions Code Section 16600. I think the separation agreement you describe is close enough to the agreement set forth in Beneficial that it is likely to be held void by the California courts should the matter later be litigated.
Submitted: 05/21/2008; Catherine, NY
Response: 05/21/2008; JJR
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