California disfavors post-termination restrictive covenants. However, the California Court of Appeal, in Blue Mountain Enters., LLC v. Owen, affirmed the enforceability under California Business & Professions Code § 16601 of a post-termination customer non-solicitation agreement.
Ordinarily, contractual provisions that prevent a person from engaging in a profession, trade, or business, including customer non-solicitation agreements, are void in California. Section 16601 of the California Business and Professions Code carves out a statutory exception to permit such agreements in contracts where individuals sell all of their interest, including goodwill, in a business.
In Blue Mountain v. Owen, Owen transferred his ownership interest in several real estate and construction-related firms to Blue Mountain Enterprises, LLC, as part of a joint venture with Acolyte Limited. Owen became Blue Mountain’s CEO as part of the transfer. The three-year post-termination non-solicitation provision was included only in Owen’s employment contract, but the joint venture, which included Owen’s transfer of his ownership interests, was carried out through four interrelated agreements entered into over the course of several days.
After Owen’s employment was terminated for cause, Owen established a competing construction services company and sent a letter to Blue Mountain customers that stated he was launching his new business with “greater perspective, more resources and a much stronger team.” Blue Mountain sought and obtained preliminary and permanent injunctive relief that prohibited Owen from soliciting its customers and then prevailed on its motion for summary judgment adjudication of its breach of contract claim.
On appeal, Owen unsuccessfully challenged the trial court’s orders. Owen contended that the non-solicitation covenant did not meet the requirements of section 16601 because the restrictive covenant was contained in his employment agreement and there was no explicit transfer of goodwill. The Court found that Owen’s transfer of his personal interest into Blue Mountain (a portion of which was later transferred to Acolyte) was sufficient to qualify for the exemption under section 16601. The Court also rejected Owen’s attempt to disavow the customer nonsolicitation covenant because it was found in his employment agreement. The Court stated:
Blue Mountain’s ability to enforce the non-solicitation covenant is not undone by the fact that this provision is found in one contract in a multi-contract joint venture rather than another.
The Court concluded that an explicit transfer of goodwill was not required to qualify for the exemption under section 16601 as the transfer of goodwill could be reasonably inferred.
The Court determined that Owen’s letter to Blue Mountain customers did more than simply announce his new business. It was deemed to “petition, importune and entreat” the customers to leave Blue Mountain for better opportunities with Owen’s new company.
By broadly construing the purpose and requirements of section 16601 the Court in Blue Mountain Enters., LLC v. Owen solidifies the exception in Section 16601 to the invalidity of customer non-solicitation covenants when a business owner
transfers or sells all of their interest in a business.
The information presented is not intended to be, and does not constitute, “legal advice.” Because each situation varies, and only brief summary information is provided here, you should not use this information as a basis for action unless you have independently verified with your own counsel that it applies to your particular situation.
