California Court Of Appeal Enforces Non-Solicitation Of Customers Provision In Joint Venture Transaction Involving Key Employee

• Published date: 23 June 2022
• Subject Matter: Corporate/Commercial Law, Employment and HR, Litigation, Mediation & Arbitration, Corporate and Company Law, Contracts and Commercial Law, Contract of Employment, Trials & Appeals & Compensation
• Law Firm: Seyfarth Shaw LLP
• Author: Mr Robert Milligan and Dogan Ervin

There are limited exceptions to California's general prohibition of post-termination non-competition agreements. One such exception is the sale of business exception found in California Business & Professions Code ' 16601. This exception allows a buyer to enforce non-compete agreements against a seller if the seller is an "owner of a business entity selling or otherwise disposing of all of his or her ownership interests in the business entity."

In Blue Mountain Enterprises, LLC v. Owen, 74 Cal. App. 5th 537 (2022), the Court of Appeal found that section 16601 applied to a three year post-termination non-solicitation of customer provision in an employment agreement and upheld the trial court's decision to enforce the provision against the executive/seller who entered into a joint venture. The court found that section 16601 applied as a matter of law because the defendant "dispos[ed] of all of his ... ownership interest" in one transaction agreement while concurrently agreeing under an employment agreement and that both contracts, along with other contracts the parties executed, were drafted to accomplish the parties' joint venture. Id. at 553. The court also found that the trial court correctly found that the defendant's letter for his new business constituted a solicitation as a matter of law because the letter went well beyond an announcement by actively encouraging customers to leave and do business with his new company. Id. at 556.

Lastly, the court affirmed the trial court's award of $600,000 in attorney fees to the plaintiff as the prevailing party on the grounds that plaintiff secured a temporary restraining order, a preliminary injunction, and a permanent injunction against defendant based on the breach of the customer non-solicitation provision. Id. at 560. The court found that the trial court was diligent in arriving at its attorney fee determination and that there was no basis on which to conclude that the trial court's attorney fee award was "clearly wrong" or that the trial court otherwise abused its discretion in determining the amount of the attorney fee award. Id.

Background facts

In 1982, Defendant Owen began founding a series of real estate development and construction firms. Id. at 542. After years of developing these firms, Owen entered into a joint venture with Meyer Corporation in 2011, whereby Meyer would provide capital and business expertise to Owen's firms. Id. At the same time, Owen would continue overseeing and managing the firms. Id. The parties agreed to form a new entity named "Blue Mountain Enterprises, LLC." Id. Over the course of several months, Owen and Meyer negotiated four contracts to formalize the joint venture: a "Contribution Agreement" by which Owen transferred his ownership interest in all of his businesses, described in the agreements as the "Blue Mountain Entities," into a newly formed limited liability company (Blue Mountain); a "Membership Interest Purchase Agreement" by which Acolyte, a Meyer subsidiary, acquired a 50 percent ownership interest in Blue Mountain; an "Operating Agreement" for the new company; and an "Employment Agreement" that defined Owen's future management role in Blue Mountain. Id. at 543.

The joint venture was formalized over a five-day period in April 2011. Id. On April 22, 2011, Blue Mountain was registered as a limited liability company with the Secretary of State. Id. That same day, Owen transferred his ownership interest of the Blue Mountain Entities to Blue Mountain under the Contribution Agreement, receiving a 100 percent membership interest in Blue Mountain in exchange. Id.

On April 26, 2011, Acolyte acquired a 50 percent membership interest in Blue Mountain pursuant to the Membership Interest Purchase Agreement. Id. Acolyte paid $16.5 million in exchange for its interest, $3 million of which went directly to Owen. Id. The residual $13.5 million was retained...