Non-Compete Agreements in California: What Business Owners and Acquirers Need to Know
California has one of the most restrictive non-compete regimes in the country — and recent legislation has made it stricter still. For business owners and M&A practitioners, understanding both the firm limits and the narrow exceptions to California’s non-compete rules is essential, whether you are structuring the sale of a business, evaluating post-acquisition workforce retention, or reviewing agreements inherited from a target company.
This post addresses non-compete law from a corporate and transactional perspective. The focus is on how California’s rules affect deal structuring, post-acquisition workforce management, and the enforceability of seller restrictions — not employment litigation.
The General Rule: Non-Competes Are Void
California Business and Professions Code Section 16600 provides that every contract by which anyone is restrained from engaging in a lawful profession, trade, or business is void. California courts have consistently interpreted this provision broadly, striking down virtually all employment non-compete agreements regardless of the reasonableness of their scope or duration.
Recent legislation — effective in 2024 — reinforced this position in three ways: (1) voiding non-compete agreements that purport to apply California law even if executed outside California; (2) requiring employers to notify current and former employees of void non-compete clauses; and (3) creating a private right of action for employees to enforce their rights.
The practical implication for acquirers: non-compete and non-solicitation agreements with California-based employees of a target company are likely unenforceable, regardless of where those agreements were signed or what law they purport to apply. Plan your post-close retention strategy accordingly.
The Business Sale Exception
California recognizes a statutory exception for restrictions on sellers in connection with the sale of a business. Under Business and Professions Code Section 16601, a seller may agree not to compete with the buyer within a geographic area and for a period of time that are both reasonable given the circumstances — when selling the goodwill of a business entity, all of the seller’s ownership interest, or substantially all of the entity’s assets.
The theory is that a seller who has received value for the goodwill of a business should be able to covenant not to immediately re-enter the market and undermine that goodwill. A well-drafted non-compete tied to a business sale is enforceable in California. But it must be: (1) directly connected to the sale transaction, (2) reasonable in scope, geography, and duration, and (3) embedded in the definitive purchase agreement rather than a side letter or employment agreement.
Implications for Buyers in M&A Transactions
Diligence on employee agreements. When evaluating a target, assume that non-compete and non-solicitation agreements with California employees are unenforceable. Post-close retention of key personnel depends on compensation structure, equity participation, and culture — not restrictive covenants. Structure your retention plan accordingly before closing. Sellers who are preparing to sell their business should review existing employee agreements with the same lens before going to market.
Seller restrictions. If you want to restrict the seller from competing post-close, ensure the restriction is properly structured within the sale-connected exception — tied to the purchase of goodwill and drafted into the definitive agreement, not a separate employment arrangement. How this plays out also depends on whether the transaction is structured as an asset purchase or a stock purchase.
Trade secret protection. While non-competes are largely unavailable in California, trade secrets receive robust protection under the California Uniform Trade Secrets Act. Properly documenting and protecting trade secrets — through confidentiality agreements, access controls, and documented trade secret policies — is the most effective post-close protection mechanism and should be a priority in any California acquisition. Companies should also revisit their LLC operating agreement’s confidentiality and transfer provisions as part of the same exercise.
Non-Solicitation Provisions
California courts have historically treated non-solicitation agreements directed at customers or employees as distinct from non-competes. Recent case law has moved toward treating broad non-solicitation provisions as similarly unenforceable. Narrow, carefully drafted non-solicitation provisions tied to specific protectable interests may have more durability — but they require California-specific review before being relied upon in deal structuring.
