Legal Question in Business Law in California

The law making non-compete clauses illegal in general is Business & Professions Code section 16600. The law creating the exception is B&P16601;. The principles involved are (16600) than no one should be restricted by contract from engaging in any lawful business, trade or occupation, but (16601) whenever the sale of a business includes a purchase of the goodwill of the business, the seller(s) may subject themselves to reasonable restrictions on their ability to impair the value of the goodwill by engaging in competition. Goodwill is defined as the reasonable expectation of continued patronage, or the value thereof.

I'm inclined to think the terms of this particular non-compete are not unlawful per se under 16600 because they would fall under the 16601 exception, but that they may be unenforceable as over-broad. One factor a court would look at is the price paid for the company and how that was allocated (or should have been allocated) between cash and equivalents, various tangible and intangible property, and goodwill. If the goodwill wasn't very much of a factor, the restrictions are more likely to be held excessive and unenforceable.

Sometimes the issue isn't so much the enforceability as the amount of damages likely to be awarded. If the allocation of the purchase price to goodwill was very small, so might be the buyers' potential damages for breach, especially if a large part of the five years has elapsed.

Yes, non-competes can be enforceable, but only if they are reasonable as to time, geography, restrictions imposed, and the price paid for the agreement. Without reviewing the documents, no one can give you a proper answer, but yours is probably marginally if at all enforceable now. If serious about getting proper review and opinion, feel free to contact me.