California employers often find themselves frustrated by the limits that state law places on their ability to prevent former employees from targeting their customers because California's Business & Professions Code § 16600 voids any agreement that seeks to prevent an employee from competing with a former employer, except under very limited circumstances. One such exception, known as the "business sale exception," allows the buyer of a person's business to prohibit the seller from setting up or joining a competing business.
A recent case, Blue Mountain Enterprises, LLC. v. Owen, 74 Cal. App. 5th 537 (2022), as modified (Jan. 19, 2022), offers insight into how an employer may invoke the business sale exception to prohibit a seller who was hired in connection with the sale from unfairly soliciting the employer's customers after the employment ends.
In Blue Mountain, defendant Gregory Owen transferred his ownership interest in several businesses into a new company, Blue Mountain, to commence a joint venture of which he became CEO. Owen's employment agreement prohibited him from soliciting Blue Mountain's customers for three years post-employment.
Shortly after being terminated for cause, Owen started a competing company and reached out to his former clients to join him. Blue Mountain then sued to enforce the agreement.
Trial Court's Ruling Affirmed
Owen argued that the non-solicitation agreement was unenforceable under Business & Professions Code §16600 because he did not sell all or substantially all of his ownership interests when the Blue Mountain joint venture was created but, instead, sold only 50 percent of those interests to his joint venture.
The trial court disagreed, and the Court of Appeal affirmed, finding that Owen's statements were "contradicted by his own sworn statements and other undisputed evidence in the record," which confirmed the applicability of Section 16601 to the restrictive covenant in the employment agreement, even where the numerous agreements executed to create the joint venture did not cross-reference each other.
The Court of Appeal also found that Owen's post-termination communications to Blue Mountain's customers constituted solicitation as a matter of law. The court rejected Owen's argument that the communications were nonactionable "announcements" of his new business. Instead, the court found that the communications were solicitations in part because they were addressed to "past and potential future clients" and boasted that the new venture was superior to the old.
Based on the multiple attempts by the defendant to challenge, modify, and/or dissolve the temporary, preliminary, and eventually permanent injunctive relief entered against him, the Court of Appeal also affirmed the trial court's award of prevailing party attorney's fees in excess of $600,000.
Following Blue Mountain, employers should keep in mind the following:
Section 16601's Business Sale Exception Can Apply to Joint Ventures
Section 16601's business sale exception can apply to joint ventures, including joint ventures created through multiple distinct contracts undertaken for the purpose of accomplishing a joint business venture. Restrictive covenants contained in such agreements may be enforceable under Section 16601's business sale exception where there is a corresponding contribution or share sale agreement executed contemporaneously with agreements containing restrictive covenants, even where the contracts providing for the disposal of all assets and the restrictive covenants are separate and do not cross-reference each other.
Blue Mountain notwithstanding, as a best practice, employers looking to enforce non-solicitation agreements under Section 16601 should include the restrictive covenants in the agreement disposing of the goodwill of the business or the owner's ownership interest.
New Hires Must Take Care in Announcing New Employment When Subject to Non-Solicitation Restrictions
Communications to former and potential clients announcing a new business go beyond constituting mere "announcements" and may violate anti-solicitation provisions where the statements encourage doing business with the new company, encourage customers to leave the former employer, or otherwise compare the new company as preferable to the former.
Significant Attorneys' Fees May Be Reasonable Even Where the Prevailing Only Obtains Injunctive Relief
Where a former employer has successfully obtained a TRO, a preliminary injunction, and a permanent injunction to enforce a non-solicitation covenant permitted under Section 16601, an award of nearly $600,000 in attorney fees was not excessive, even where the former employer abandoned its damages claims and only obtained injunctive relief.