A Non-Competition Order May be Used to Protect a Spouse’s Value in a Business

In Gréaux, Husband and Wife started and jointly ran a rum manufacturing company. In the divorce proceeding, Wife’s divorce attorney sought to have the company awarded to her at zero value, arguing that Husband had run the company to the ground. The divorce court awarded the company to Husband, finding that, while Wife had an “exceptional aptitude for marketing and sales, Husband was “better qualified by experience to run the business.”

Along with the award of the business to Husband, the divorce court issued orders restraining Wife from working in any other rum product business, or any other business that “could be in competition with the company’s rum product” anywhere for five years. Wife’s divorce lawyer appealed.

On appeal, Husband’s divorce lawyer argued that the divorce court’s ruling was supported by Business and Professional code section 16600 which renders void any agreement that restrains someone from engaging in a lawful occupation or enterprise except as otherwise provided by statute because the section only applies to noncompetition agreements, not judicial orders.  In the divorce proceedings, Wife’s divorce lawyer argued that the language of the code section should be read more broadly and was intended to protect a person’s right to engage in a lawful profession or enterprise.

The Second District Court of Appeal concluded that both parties were partially correct and remanded the non-compete provision back to the divorce court so that it could be more narrowly tailored to a specific geographic region.

The Court stated, “California’s policy affirming that every person should have the right to pursue any lawful employment and enterprise of his or her choice is not undermined when a noncompetition order is imposed as part of a marital judgment, particularly as informed by the analogous statutory scheme governing noncompetition clauses.”  As a general rule, the value being protected by a noncompetition clause is the goodwill of the business.  “Because the future effects of a noncompetition clause imposed in connection with the sale or assignment of a community asset are part of the equation for determining the value of the community asset upon dissolution, it does not constitute a division of future earning capacity.  In sum, neither section 16600 nor California’s public policy in favor of free and open competition prohibit the issuance of a noncompetition order by a family court.”

The Court concluded that “if a family court’s noncompetition order is not restricted to the geographic area where the parties carried on the marital business, there must be evidence to support the need for a broader order.  And, just as a court’s valuation of property must be based on findings supported by substantial evidence, so, too, must the terms of a noncompetition order — i.e., the scope of prohibited activities and the length of the prohibition — be based on findings supported by substantial evidence that they are reasonably necessary to protect the value of the asset awarded in the dissolution.”

In re Marriage of Gréaux and Mermin (2014) 223 Cal. App. 4th 1242