California Nonsolicitation Clause Held Enforceable Under Narrow Exception for Sale of a Business

California regulation typically prohibits the enforcement of nonsolicitation agreements, however the regulation contains a slim exception related to the sale of a enterprise. In Blue Mountain Enterprises, LLC v. Owen, a latest choice from the Court docket of Attraction of the State of California, First Appellate District, the appellate court docket upheld a ruling in favor of the customer of a enterprise underneath this exception.

California Business and Professions Code Part 16600

In California, contractual provisions that forestall a particular person from partaking in a occupation, commerce, or enterprise are typically void, based on Business and Professions Code section 16600. Because the Supreme Court docket of California has famous, “section 16600 evinces a settled legislative policy in favor of open competition and employee mobility.”

California courts have dominated that this statute prohibits the enforcement of noncompetition agreements, buyer nonsolicitation agreements, and even perhaps worker nonsolicitation agreements. Whereas employers might usually reach imposing these varieties of restrictive covenants in different states, enforcement shouldn’t be assured in California.

However there is a vital exception to this regulation. Part 16601 states: “Any person who sells the goodwill of a business, or any owner of a business entity selling or otherwise disposing of all of his or her ownership interest in the business entity … may agree with the buyer to refrain from carrying on a similar business within a specified geographic area in which the business so sold, or that of the business entity, division, or subsidiary has been carried on, so long as the buyer … carries on a like business therein.”

This exception turned the central problem within the Blue Mountain case, described under.

A Californian Sells His BusinessAgrees To not Solicit … however Then Will get Fired and Solicits

The dispute in Blue Mountain arose out of a transaction through which a enterprise proprietor, Gregory Owen, offered his heating, air flow, and air con (HVAC) enterprise to an funding group. The transaction concerned 4 contracts and passed off in a number of steps. First, Owen transferred his total possession curiosity to a newly fashioned restricted legal responsibility firm (LLC). Owen owned one hundred pc of the brand new LLC upon formation, however 4 days later, the funding group bought 50 % of that LLC, for which Owen obtained $3 million. Owen retained the opposite 50 %. In a contemporaneous employment settlement with the LLC, Owen agreed to function the brand new firm’s chief government officer. The employment contract contained a restriction: upon the termination of his employment, Owen couldn’t solicit the LLC’s prospects for a interval of three years.

About 4 years later, the corporate discharged Owen. Earlier than the three-year nonsolicitation clause expired, Owens fashioned a competing enterprise and despatched emails to a number of prospects of the LLC. He knowledgeable them that he had began a new enterprise “with greater perspective, more resources and a much stronger team.” The group included two former workers of the LLC. Owen concluded his letter with this notice: “I thank everyone who supports us in this transition and look forward to the remarkable opportunities we have ahead with our new company.”

Quickly after, one of the LLC’s prospects invited Owen to bid on a challenge. As well as, Owen submitted bids to a number of different prospects.

The LLC sued, alleging breach of contract, amongst different claims, and it requested injunctive aid to forestall Owen from soliciting prospects. The court docket granted the injunction, which in the end remained in place till the tip of the three-year restrictive interval. The court docket additionally awarded the LLC $596,114 in charges and $84,125 in prices.

Nonsolicitation Covenant Is Enforceable

The appellate court docket held that the three-year nonsolicitation clause present in Owen’s employment settlement was enforceable.

Owen argued that the vendor exception present in part 16601 mustn’t apply. He identified that when he transferred his curiosity to the brand new LLC, he owned one hundred pc of the LLC. 4 days later, the investor purchased 50 % of the brand new LLC. In his view, he merely “consolidated all of his businesses into one LLC through a Contribution Agreement,” and he “did not sell or dispose of any of his business or membership interests” to the buyers.

The court docket rejected this rivalry. Trying on the complete transaction, which had occurred although a number of agreements entered into over a number of days, the court docket discovered that Owen had “‘sold’ or ‘otherwise disposed of’” all of his pursuits in his enterprise to the newly fashioned LLC. The truth that he held an possession curiosity within the new LLC didn’t matter.

The court docket additionally rejected Owen’s argument that as a result of the nonsolicitation clause was present in his employment contract, somewhat than the company sale settlement, it couldn’t be enforced. The court docket decided that the employment contract was half of your entire transaction, which concerned a number of agreements that “must be read together.” The court docket said, “[The LLC’s] ability to enforce the nonsolicitation covenant is not undone by the fact that this provision is found in one contract in a multi-contract joint venture rather than another.”

Court docket Addresses the That means of “Solicitation”

The appellate court docket additionally decided that the communications Owen despatched to prospects counted as “solicitation” in violation of his settlement.

The court docket started with the premise that a solicitation doesn’t embrace a basic announcement or commercial informing the general public of a new enterprise. Quoting from a prior case, the court docket said that “‘[m]erely informing customers of one’s former employer of a change of employment, without more, is not solicitation. Neither does the willingness to discuss business upon invitation of another party constitute solicitation on the part of the invitee. Equity will not enjoin a former employee from receiving business from the customers of his former employer, even though the circumstances be such that he should be prohibited from soliciting such business.’”

Nonetheless, when the communication does greater than merely announce a new enterprise, but additionally entices prospects with a aggressive different and invitations prospects to debate it, the communication might represent a solicitation.

The court docket discovered that Owen’s letter included parts of solicitation. “The letter was specifically addressed to his ‘past and potential future clients,’” the court docket wrote. “He boasted that his new venture … was a superior alternative to [the LLC], having ‘greater perspective, more resources and a much stronger team,’ including two former [LLC] employees ‘who combined [brought] over 100 years of experience in the HVAC industry.’” The court docket said that “[t]he letter was a direct appeal for future work and was sent directly to select representatives of [the LLC’s] corporate customers. Thus, the letter constituted a solicitation as a matter of law.”

Accordingly, the appellate court docket upheld the trial court docket’s dedication. Moreover, the appellate court docket decided that the trial court docket had correctly awarded the consumers $596,114 in attorneys’ charges and $84,125 in prices.

Key Takeaways

Usually, noncompete and nonsolicitation agreements are unenforceable in California courts. Employers might need to assessment nondisclosure agreements, confidentiality agreements, and nonsolicitation agreements to find out their viability in California.

A slim exception applies to the vendor of a enterprise who sells all of his or her curiosity. Courts might look to everything of a transaction to find out if this exception applies. An employment settlement containing a restrictive covenant could be enforceable whether it is half of a world transaction involving the sale of a enterprise. Companies might need to take care to correctly construction enterprise acquisitions in such a means that nonsolicitation agreements could also be enforceable in California.

If the slim exception applies, basic bulletins or commercials probably don’t quantity to solicitation. Language that constitutes a direct attraction for future work in a communication despatched instantly to pick out prospects might violate a nonsolicitation settlement.

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