California is generally hostile toward post-termination restrictive covenants. Recently, the California Court of Appeal for the First District, in Blue Mountain Enters., LLC v. Owen, determined that a post-termination customer non-solicitation agreement was enforceable under California Business & Professions Code section 16601.

In California contractual provisions that prevent a person from engaging in a profession, trade, or business, including customer non-solicitation agreements, are void. California Business and Professions Code section 16601 contains a statutory exception for covenants by individuals selling all of their interest, including goodwill, in a business.

In Blue Mountain, 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 occurred through four interrelated agreements entered into over
the course of several days.

Following termination of Owen’s employment for cause, Owen established a competing construction services company and sent a letter to Blue Mountain customers stating, among other things, that 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 prevailed on its motion for summary judgment adjudication of its breach of contract claim.

Owen appealed, but his appeal was unsuccessful. Owen contended on appeal 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 non-solicitation covenant because it was found in his employment agreement, stating, “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.” Ultimately, the Court concluded that an explicit transfer of goodwill was not required to qualify for the exemption under section 16601; rather, the transfer of goodwill could be reasonably inferred.

The Court also decided 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 Mounter for better opportunities with Owen’s new company.

The appellate court agreed with the trial court and, thus, affirmed thereby indicating the exception to the prohibition of nonsolicitation agreements will not be enforced if it is part of the sale of a business.

If you are buying or selling an interest in a business you really need to consult with a business attorney as a wide variety of California laws intertwine to create a minefield for the unwary.

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.