Legal Advisor – Non-Compete Agreements & Actor Loan Outs

Actors and Loan Outs, Non CompleteDear Liat:

I own a car dealership and I train my employees and teach them how to sell cars. Recently two of my employees left to work for a competitor.

Before they left my employment I offered and they accepted $5,000.00 in exchange for an agreement that they would not compete with my business for the next 5 years. How do I enforce this agreement?

Frustrated Dealer

Dear Frustrated:

Your situation is common. Many employers spend time training workers only to have employees leave to work for a competing business. Unfortunately, in California this is not against the law.

The California Business and Professions Code
Section 16600 holds that:
“…every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.”

Therefore, non-compete agreements, like the one you describe, are generally unenforceable.

Such an agreement may be enforced when the following criteria are met: (1) it is necessary to protect the employer; (2) provides a reasonable time limit; (3) provides a reasonable territorial limit;
(4) is not harsh or oppressive to the employee; and (5) is not contrary to public policy.

If these criteria are met, the way to enforce the agreement is with a cease and desist letter to the employee. And if that does not work, a lawsuit may be filed.

Case Study:
Actors and Loan Out Companies

Recently I had a client, an Actor, who had his own Limited Liability Company which loaned out his services when he was acting. This is common in the entertainment industry. stripes-trenchcoat.jpg

The entertainment professionals form a LLC or corporation in order to protect themselves from liability and the entity “loans out” the actor’s services to productions. The actor can then take tax deductions which they may not be able to do as individuals.

My client was asked to sign an indemnification agreement by one of his employers to ensure proper tax payments would be made. This type of request is standard.

My client was not well versed in this area. Once we reviewed and modified some of the language he was comfortable with signing the agreement. Then he got paid.

As an attorney and not a talent agent, manager, financial advisor, or accountant, I urge people working in the entertainment industry to consult with the proper professionals before setting up any type of business entity, to make sure they understand the ramifications and that the company they create meets their financial, business, and tax needs.

Liat Cohen, Esq.
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Liat Cohen has been practicing law in the Los Angeles Area for over 25 years.  If you have experienced a similar issue, feel free to contact her for a free initial consultation to discuss how she can help you solve your legal problems.

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    2019-09-27T10:10:26-07:00February 27th, 2014|