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California appellate court decides non-compete issue in divorce

California residents who own a family business may have complex issues to work out in a divorce. California family law allows for several options of how a family business may be handled. Liquidating the business is one option. Buying out a former spouse’s share of the business may be another option. Determining the value of the business may be necessary, as well as determining what assets of the business fall within the marital estate as community property. Each individual story may have its own unique circumstances.

A California appellate panel has ruled that a judge could include a non-compete provision in a family court order, provided the order is properly limited in scope. California law generally disfavors non-compete agreements.

The Business and Professions Code sets forth the state’s policy that generally favors open competition. The statute creates exceptions for the sale of a business and the dissolution of a business partnership, according to the First District, Division Four appellate court ruling.

In 2011, a family law judge found that the husband in the divorce was better qualified to run a business that was all community property in the proceeding. The judge ordered that the wife could not compete with the business for five years, without setting forth any geographic limit on the noncompetition order.

The woman challenged the non-compete provision on appeal, pointing to California’s statute concerning non-compete agreements. The First District Court of Appeal ruled that the order is not an agreement for the purposes of the business code. A court order essentially differs from a contract.

But, the appellate court says that a California family court has broad authority arriving at a division of community property. The court says that preserving the asset through a noncompetition order is consistent with a non-compete clause in the sale of a business under California law.

The court reversed the noncompetition order as being geographically too broad. The case was remanded to the family court for further proceedings, including the potential reconsideration of the geographical breadth of the order.

Source: Metropolitan News-Enterprise, “CA Throws Out Non-Compete Order in Divorce Proceeding,” Feb. 18, 2014; California Court of Appeal First District, Division Four, “In re Marriage of Greux and Termin, A134662,” Feb. 14, 2014

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