NON-COMPETITION AGREEMENTS AND DIVORCE; WHERE BUSINESS AND DIVORCE COLLIDE

Under California law, spouses owe fiduciary duties to each other that mirror those owed between business partners. Those fiduciary duties, however, end upon the entry of a divorce judgment and distribution of the community’s assets.

Now, imagine that, in addition to being married to one another, Husband and Wife also are partners in a business started during the marriage. Each participates full-time in the business – Husband’s Organic Grocery – and, through those efforts, the business grows to be worth

$1 million. The success, however, comes at a price, as the relationship between the spouses sours and a divorce results. In resolving the divorce, Husband is awarded the business and is ordered to pay Wife $500,000 for her 50% interest. A week after that sum is paid, a sign goes up across the street: “Coming Soon – Wife’s Organic Grocery.” So did Husband just fund Wife’s opportunity to compete directly against the business that he just bought from her? Until recently, there was no clear answer as to whether opening the competing Organic Grocery was kosher.

In 2014, the California Court of Appeal addressed this issue in In re Marriage of Greaux and Mermin. Recognizing the inherent inequity of this situation, the Court approved the imposition of a non-competition order against the spouse being bought out of the family business. The purpose of the non-competition order is to preserve the value of the goodwill that was included in the amount necessary to equalize the business asset. So long as the court tailors the non-competition order reasonably and “not broader than necessary to protect the goodwill included in the valuation and transfer,” such an order does not violate the public policy or laws of this state or the rights of the spouse bought out of the business.

– Doug Goldwater

dgoldwater@www.dgddev.com

(805)-659-6800 ext. 243

 

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