Despite California’s general hostility towards post-termination restrictive covenants, the California Court of Appeal, in a recently published opinion, Blue Mountain Enters., LLC v. Owen, 74 Cal.App.5th 537 (1st Dist. Jan. 10, 2022), affirmed that a post-termination customer non-solicitation agreement was enforceable under California Business & Professions Code § 16601.

Under most circumstances, contractual provisions that prevent a person from engaging in a profession, trade, or business, including customer non-solicitation agreements, are void in California. However, section 16601 of the California Business and Professions Code carves out a statutory exception to the rule for 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 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 stating, among other things, that he was launching his new business with “greater perspective, more resources and a much stronger team.” Blue Mountain obtained preliminary and permanent injunctive relief prohibiting Owen from soliciting its customers and prevailed on its motion for summary judgment adjudication of its breach of contract claim.

On appeal, Owen unsuccessfully challenged the trial court’s orders, contending 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 good will. 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.” Moreover, 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 further concluded 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.

By construing the purpose and requirements of section 16601 broadly, the opinion thus shores up one of the few existing bases in California to enforce a customer non-solicitation covenant.

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Photo of Sehreen Ladak Sehreen Ladak

Sehreen Ladak is an associate in the Labor & Employment Department. She represents clients in a wide range of employment matters, including state and federal litigation, arbitration, and class actions on wage and hour, discrimination, harassment, and retaliation claims. Sehreen has experience managing…

Sehreen Ladak is an associate in the Labor & Employment Department. She represents clients in a wide range of employment matters, including state and federal litigation, arbitration, and class actions on wage and hour, discrimination, harassment, and retaliation claims. Sehreen has experience managing every aspect of litigation, including taking and defending depositions, arguing discovery and dispositive motions, and leading trials and labor arbitrations.

Sehreen also advises clients on various employment issues, including wage and hour compliance, onboarding procedures, employment and separation agreements, handbooks, and workplace accommodations.

In addition, Sehreen has experience in evaluating labor and employment issues in connection with corporate transactions and partners with her colleagues in corporate and executive benefits departments to provide the highest level of service. She also regularly leads employee trainings on workplace conduct and has been published in trade journals on a variety of employment law topics.

Sehreen’s clients come from a broad spectrum of industries, such as transportation, entertainment, healthcare, financial services, and retail. She leverages her experience to provide highly efficient, yet thoughtfully bespoke solutions to address her clients’ unique needs.

During law school at USC, Sehreen was the Southern California Review of Law and Social Justice’sExecutive Submissions Editor and served as a judicial extern for an administrative judge at the E.E.O.C.

Sehreen was selected to be a Protégée for Proskauer’s Women Sponsorship Program, an initiative for high performing midlevel lawyers that champions emerging leaders. She also serves as a member of the Firm’s Associate Council and Asian Lawyer Affinity Group.