Tuesday, February 18, 2014
C.A. Throws Out Non-Compete Order in Divorce Proceeding
By a MetNews Staff Writer
California law does not preclude a judge from ordering one party not to compete with another in business, as part of a dissolution of marriage, but such orders must be reasonable in scope, the First District Court of Appeal ruled Friday.
The court rejected Jacqueline Greaux’s contention that the order by Marin Superior Court Judge Randolph E. Heubach violated Business and Professions Code §16600, which renders void any agreement that restrains an individual from engaging in a lawful occupation or enterprise except as otherwise provided by statute. A judge’s order is not an agreement, Justice Maria Rivera explained for Div. Four.
Rivera agreed with Greaux, however, that an order prohibiting her from working in the same business as Tristan Mermin, anywhere, for five years was overbroad.
Mermin and Greaux owned and operated Saint Bart’s Spirit Company, which was community property. The company markets rhum agricole, a type of rum distilled from sugar cane juice.
Greaux filed for divorce in 2009. The trial judge found that the parties’ interpersonal conflicts had long disrupted the business, and awarded it to the husband on the ground that he was “better qualified by experience” to run it.
Greaux was restrained from competing with the company, from consulting with its competitors during that time, and from working for any company in the rum business, for five years.
Rivera acknowledged that §16600, even if not strictly applicable, reflects California’s strong public policy favoring the right of workers to pursue lawful employment and against restraining competition in business. But that policy must be balanced against the trial court’s broad authority to effect an equal division of community property, she said.
“It is our view that California’s policy affirming that every person should have the right to pursue any lawful employment and enterprise of his or her choice is not undermined when a noncompetition order is imposed as part of a marital judgment, particularly as informed by the analogous statutory scheme governing noncompetition clauses,” she wrote.
Rivera noted that noncompetition clauses are permitted in connection with the sale or dissolution of a business, in order to protect the value of the business’ goodwill—the expectation that customers will continue to patronage it, rather than take their business to a new concern involving the seller.
“It therefore follows that, if an ongoing marital business is being awarded to one spouse, and if the value of that business includes goodwill, a family court should have the power, pursuant to Family Code section 2553, to issue a noncompetition order so that the value of that asset is preserved, just as a noncompetition clause in a business purchase and sale agreement is designed to protect the value of the asset purchased.”
This is, she said, the rule in the majority of states, although Texas and Oklahoma courts have ruled to the contrary.
Courts in other states, she went on to say, have—unlike the California courts—addressed the issue of how restrictive a non-compete clause can be.
Citing Cesar v. Sundelin (2012) 81 Mass.App.Ct. 721 [967 N.E.2d 171], she wrote:
“In keeping with our state’s policy of freedom to choose one’s trade or business, noncompetition orders must be ‘reasonable and not broader than necessary to protect the good will included in the valuation and transfer.’…Looking, again, at the statutes allowing noncompetition clauses in connection with certain commercial transactions, we observe that a transferor may agree to refrain from carrying on ‘a similar business within a specified geographic area’ where the prior business has been carried on, so long as the person receiving ownership of the business or the goodwill ‘carries on a like business therein.’”
On remand, she said, the trial court must reconsider the noncompetition order, limiting it to a geographic area in which the husband’s company would actually be injured by the competition.
The case is In re Marriage of Greux and Termin, A134662.
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