In a recent decision, the California Court of Appeal held that a non-solicitation covenant was enforceable based on an exemption under California Business & Professions Code section 16601. The court stated, “contractual provisions that prevent a person from engaging in a profession, trade or business are generally void.” However, in the underlying case, the court affirmed a statutory exception to the prohibition against such contractual provisions, i.e., when an individual is selling the goodwill of a business and/or disposing of all their ownership interest in a business entity. In such situations, the individual may agree with the buyer to refrain from carrying on a similar business.
In the underlying case, Gregory S. Owen transferred his ownership interest in several real estate and construction-related firms he had founded to a new entity, Blue Mountain Enterprises, LLC (Blue Mountain). Owen became the company’s chief executive officer as part of the transfer.
As part of his employment contract, Owen agreed to abide by certain restrictive covenants, including a covenant barring him from soliciting Blue Mountain’s customers for three years following the termination of his employment. In April 2016, Owen was terminated from Blue Mountain for cause.
Months later, Owen established a new construction services company to compete with Blue Mountain. He sent a letter to several companies within the building and construction trades describing this new venture, including existing customers of Blue Mountain.
Blue Mountain successfully obtained preliminary and permanent injunctive relief prohibiting Owen from soliciting Blue Mountain’s customers and prevailed on its motion for summary adjudication of its breach of contract claim.
On a consolidated appeal, Owen challenged the trial court’s order granting summary adjudication in favor of Blue Mountain and contended that the non-solicitation covenant was unenforceable because it did not meet the requirements for a statutory exemption under California Business & Professions Code section 166601. The Court of Appeal disagreed with Owen and upheld the motion for summary adjudication.
If you have questions on non-solicitation agreements or related issues, contact a Jackson Lewis attorney to discuss.