There are a few narrow exceptions to the above rule. Section 16601 permits a business owner selling hits interest in the company, under certain circumstances, to “agree with the buyer to refrain from carrying on a similar business within a specific geographic area.” Thus, if an owner of a neighborhood hair salon sells his business, the buyer will likely be able to have a valid agreement with the seller, prohibiting the seller from opening a new salon for a period of time within a certain area in that neighborhood. Likewise, section 16602 allows for an agreement among partners, upon disassociation or dissolution of a business partnership, “not to carry on a similar business within a specific geographic area”.
The California Supreme Court has explained long ago what constitutes a void contract under section 16600. In Chamberlain v Augustine (1916), the Court invalided a provision in a contract that required one of the parties to pay liquidated damages to the other party if he takes up employment within a certain geographic area. The court rejected the argument that the contract was valid because it didn’t “restrict” employment but rather imposed a sort of penalty. The Court concluded that imposing monetary liability is tantamount to restraint from engaging in lawful business and therefore makes the contract void. In Edwards v Arthur Anderson LLP (2008), the Cal. Supreme Court explained yet again that section 16600 evidences a settled legislative policy in favor of open competition and employee’s mobility. Most recent California decisions, including the recent 9th Circuit holding in Golden v Cal. Emergency Physicians (2015), make it clear that most non-compete agreements that not only prohibit employment but in any way limit it or discourage it with monetary penalties will be likely held unenforceable.