The five-year non-compete proposed by the buyer is <strong>not enforceable as drafted</strong>. California voids employment non-competes outright (Bus. & Prof. Code §16600), but the sale-of-business exception (§16601) will sustain a covenant if — and only if — it is tied to the goodwill being sold and limited to the geographic area where the acquired business operated. As written, the covenant exceeds that area and runs longer than the goodwill it protects. I recommend we negotiate the term to three years and confine the geography to the seller's existing service counties; that materially de-risks the deal without sacrificing the buyer's protection.
Whether the buyer may enforce a five-year, statewide covenant barring the selling principals from engaging in any competing business, given that the transaction is structured as an asset purchase of the seller's operating goodwill, and what modifications are required to bring the covenant within the §16601 sale-of-business exception.
No, not as drafted. Section 16600 renders the covenant void unless it fits a statutory exception. The §16601 exception applies because the principals are selling the goodwill of the business, but the exception is read narrowly: the restraint must be reasonable in scope, geography, and duration relative to the goodwill transferred.<sup>1</sup> A statewide, five-year bar is unlikely to survive scrutiny where the seller operated in only four counties. A covenant limited to those counties for three years stands on firm ground.
California's policy against restraints on trade is among the strongest in the country. <span class="cite">Edwards v. Arthur Andersen LLP</span>, 44 Cal. 4th 937 (2008), confirmed that §16600 voids non-competes even where narrowly drawn, rejecting any judicially crafted "reasonableness" gloss in the employment context.<sup>2</sup> The sole material exception relevant here is §16601, which permits a covenant given by one who sells the goodwill of a business, so the buyer may protect the value it paid for.
Courts apply §16601 only where the seller transfers a genuine ownership interest in goodwill, not a token equity sliver. Because this transaction conveys the seller's customer relationships, brand, and book of business, the goodwill prong is satisfied. The covenant's reach, however, must be commensurate with that goodwill: a restraint broader in territory or time than the business the buyer acquired is void to the extent of the excess.<sup>3</sup>
If the principals later compete and the buyer sues, a court could strike the covenant entirely or reform it down to the territory and term it deems reasonable — leaving the outcome to judicial discretion mid-litigation. Negotiating the limits now converts that uncertainty into a covenant the buyer can rely on and the seller can sign.
Revise the covenant to a three-year term, limited to the four counties of the seller's operations, and narrowed to the specific business line acquired. Retain the severability and reformation language. So modified, the covenant fits comfortably within §16601 and should be enforced as written, protecting the goodwill the buyer is paying for without exposing the deal to a §16600 challenge.