Judge: Blaine K. Bowman, Case: 37-2024-00000135-CU-MC-CTL, Date: 2024-05-24 Tentative Ruling

SUPERIOR COURT OF CALIFORNIA,

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HALL OF JUSTICE

TENTATIVE RULINGS - May 23, 2024

05/24/2024  08:30:00 AM  C-74 COUNTY OF SAN DIEGO

JUDICIAL OFFICER:Blaine K. Bowman

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Civil - Unlimited  Misc Complaints - Other Motion Hearing (Civil) 37-2024-00000135-CU-MC-CTL AXIA MEDICAL SOLUTIONS LLC VS PRODIGY HEALTH LLC [IMAGED] CAUSAL DOCUMENT/DATE FILED:

The court addresses the evidentiary issues. Plaintiffs' supplemental request for judicial notice [ROA 90] is GRANTED.

The court then rules as follows. Plaintiffs' motion for preliminary injunction is DENIED.

In deciding whether to issue a preliminary injunction, a court must weigh two 'interrelated' factors: (1) the likelihood that the moving party will ultimately prevail on the merits and (2) the relative interim harm to the parties from issuance or nonissuance of the injunction. (Common Cause v. Board of Supervisors (1989) 49 Cal.3d 432, 441-442 [261 Cal.Rptr. 574, 777 P.2d 610].) . . . .

The trial court's determination must be guided by a 'mix' of the potential-merit and interim-harm factors; the greater the plaintiff's showing on one, the less must be shown on the other to support an injunction.

(King v. Meese (1987) 43 Cal.3d 1217, 1227-1228 [240 Cal.Rptr. 829, 743 P.2d 889].) Of course, '[t]he scope of available preliminary relief is necessarily limited by the scope of the relief likely to be obtained at trial on the merits.' (Common Cause, supra, 49 Cal.3d at p. 442.) A trial court may not grant a preliminary injunction, regardless of the balance of interim harm, unless there is some possibility that the plaintiff would ultimately prevail on the merits of the claim. (Id., at pp. 442-443.) Butt v. State of California (1992) 4 Cal.4th 668, 677–678. See also, Whyte v. Schlage Lock Co. (2002) 101 Cal.App.4th 1443, 1449.

Likelihood of Prevailing The court finds Plaintiffs fail to establish a likelihood of prevailing. As pled, Plaintiffs' claims arise out of the Employment Agreement entered into between Defendant Prodigy Health LLC and Plaintiff Coney, and Defendant Prodigy's December 19, 2022, cease and desist letter to Plaintiff Coney [Cplt. ¶ 18-20].

The Employment Agreement contains a noncompete provision. Plaintiffs seek a declaration that such provision is unenforceable under California law.

The complaint alleges one cause of action for declaratory relief. The complaint prays: 1. For declaratory relief, including a declaration that: a. no noncompetition restriction is enforceable against any employee or prospective employee of Axia, Calendar No.: Event ID:  TENTATIVE RULINGS

3118327  1 CASE NUMBER: CASE TITLE:  AXIA MEDICAL SOLUTIONS LLC VS PRODIGY HEALTH LLC [IMAGED]  37-2024-00000135-CU-MC-CTL except to the extent such provision is permissible under California law; and b. the purported noncompetition and forum selection clauses in the Employment Agreement are void and unenforceable.

. . . .

On this motion, Plaintiffs seek a preliminary injunction, that Defendants and their Affiliates may not enforce, or attempt to enforce, the purported noncompetition clause in Coney's Employment Agreement with Prodigy against Coney or Axia to prohibit Coney from performing work for Axia in the State of California.

In opposition Defendants first raise the issue of the forum selection clause in the Employment Agreement. The enforceability of the forum selection clause is also the subject of Defendants' pending motion to dismiss, set for hearing on August 2, 2024. Defendants rely, in part, on the arguments set forth in their motion to dismiss to support their opposition to the motion now before this court.

Defendants also rely, in part, on their April 17, 2024, opposition to Plaintiffs' ex parte request for injunctive relief. None of the authorities Defendants rely on allow the court to rule on Defendants' potentially dispositive motion to dismiss in the context of Plaintiffs' motion for a preliminary injunction.

Absent such authority, the court does not address this issue at this time.

Defendants next argue that the motion now before this court is an improper motion for reconsideration.

To the extent Plaintiffs' motion is a motion for reconsideration, the court finds the February 21, 2024, order in the matter titled Prodigy Health, LLC v. Andrew Coney, Mitchell Walker, Brett Udland, Capital City Drug, LLC, and Axia Medical Solutions, LLC, Civ. No. D-1-GN-24-000218 (126th District Court, Travis County, Texas) sufficient to establish new or different facts circumstances or law so as to comply with the requirements of CCP § 1008(b). The court also finds such motion timely under CCP § 1008(b).

Although Defendants argue Plaintiffs' motion for reconsideration is subject to the 10-day requirement of CCP § 1008(a), because Plaintiffs were the original moving party on Plaintiffs' prior requests for injunctive relief, CCP § 1008(b) applies. There is no 10-day requirement in CCP § 1008(b).

The next argument Defendants raise is that Plaintiffs improperly seek to enjoin activity in a sister state proceeding. The February 21, 2024, order granting Defendant Prodigy's request for a temporary restraining order in the Texas case includes the following: a. Defendant Coney is enjoined from working with or for Axia in any capacity, including as a consultant, and Coney is prohibited and enjoined from working for or with Axia, Capital City, or any other direct competitor of Prodigy for one year from the date of this Court's order in the geographic areas in and within a 30-mile radius of the 1,643 zip codes attached to this Order.

. . . .

g. Defendants (except Udland), and anyone in concert with them, are enjoined from all work for Capital City, Axia and any related companies involved in Coney's competing enterprise, including any consulting work or work as an independent contractor or employee.

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Although Plaintiffs argue that Plaintiffs do not seek to enjoin the Texas court, the relief Plaintiffs seek – prohibiting Defendants from enforcing the noncompetition clause in the Employment Agreement against Plaintiffs – would prohibit Defendants from enforcing the order of the Texas court and from pursuing Defendants' claims against Plaintiffs in the Texas case. Such a result is contrary to the principles of judicial restraint and comity set forth in Advanced Bionics Corp. v. Medtronic, Inc. (2002) 29 Cal.4th 697.

Advanced Bionics explains, Calendar No.: Event ID:  TENTATIVE RULINGS

3118327  1 CASE NUMBER: CASE TITLE:  AXIA MEDICAL SOLUTIONS LLC VS PRODIGY HEALTH LLC [IMAGED]  37-2024-00000135-CU-MC-CTL [w]hen the cases involve different states, as in the matter before us, judicial restraint takes on a more fundamental importance. The possibility that one action may lead to a judgment first and then be applied as res judicata in another action 'is a natural consequence of parallel proceedings in courts with concurrent jurisdiction, and not reason for an injunction.' (Auerbach v. Frank (D.C. 1996) 685 A.2d 404, 407.) '[T]he possibility of an 'embarrassing race to judgment' or potentially inconsistent adjudications does not outweigh the respect and deference owed to independent foreign proceedings.' (Ibid.) Advanced Bionics Corp., 29 Cal.4th at 706.

Advanced Bionics goes on to analyze application of the principles of both judicial restraint and comity specifically in the context of California law regarding noncompetition agreements.

Stultz and Advanced Bionics also contend that although we should pay deference to foreign state proceedings, California's strong public policy against noncompetition agreements under section 16600 weighs against allowing the action to proceed in Minnesota and provides the exceptional circumstance that warrants our upholding the California court's TRO. As they observe, the law protects Californians, and ensures 'that every citizen shall retain the right to pursue any lawful employment and enterprise of their choice.' (Metro Traffic Control, Inc. v. Shadow Traffic Network (1994) 22 Cal.App.4th 853, 859 [27 Cal.Rptr.2d 573].) It protects 'the important legal right of persons to engage in businesses and occupations of their choosing.' (Morlife, Inc. v. Perry (1997) 56 Cal.App.4th 1514, 1520 [66 Cal.Rptr.2d 731].) We have even called noncompetition agreements illegal. (See, e.g., Armendariz v. Foundation Health Psychcare Services, Inc. (2000) 24 Cal.4th 83, 123, fn. 12 [99 Cal.Rptr.2d 745, 6 P.3d 669].) Therefore, according to Stultz and Advanced Bionics, because the noncompetition provision in the Agreement is broad in application and forbids Stultz from working for any competitor on a competitive product for two years after employment termination, it is likely that a California court would conclude the provision is void under section 16600.

We agree that California has a strong interest in protecting its employees from noncompetition agreements under section 16600. But even assuming a California court might reasonably conclude that the contractual provision at issue here is void in this state, this policy interest does not, under these facts, justify issuance of a TRO against the parties in the Minnesota court proceedings. A parallel action in a different state presents sovereignty concerns that compel California courts to use judicial restraint when determining whether they may properly issue a TRO against parties pursuing an action in a foreign jurisdiction.

The comity principle also supports our conclusion. Comity is based on the belief ' ' 'that the laws of a state have no force, proprio vigore, beyond its territorial limits, but the laws of one state are frequently permitted by the courtesy of another to operate in the latter for the promotion of justice, where neither that state nor its citizens will suffer any inconvenience from the application of the foreign law. This courtesy, or comity, is established, not only from motives of respect for the laws and institutions of the foreign countries, but from considerations of mutual utility and advantage.' ' ... 'The mere fact that state action may have repercussions beyond state lines is of no judicial significance so long as the action is not within that domain which the Constitution forbids.' ' (Estate of Lund (1945) 26 Cal.2d 472, 489 [159 P.2d 643, 162 A.L.R. 606]; see also Gannon v. Payne, supra, 706 S.W.2d at p. 308 [involving parallel actions in Canada and Texas].) The comity principle requires that we exercise our power to enjoin parties in a foreign court sparingly, in line with the policy of judicial restraint discussed above.

. . . .

We conclude, therefore, that the Court of Appeal erred in upholding the TRO issued against the parties in the Minnesota proceedings. California courts have the same power as other courts to issue orders that assist in protecting their jurisdiction. However, enjoining proceedings in another state requires an exceptional circumstance that outweighs the threat to judicial restraint and comity principles. As explained, the circumstances of this case do not provide sufficient justification to warrant our court's Calendar No.: Event ID:  TENTATIVE RULINGS

3118327  1 CASE NUMBER: CASE TITLE:  AXIA MEDICAL SOLUTIONS LLC VS PRODIGY HEALTH LLC [IMAGED]  37-2024-00000135-CU-MC-CTL issuing injunctive orders against parties pursuing the Minnesota litigation.

Advanced Bionics Corp., 29 Cal.4th at 706–708.

The court finds the same analysis applies in this case. As with the improper TRO issued against the parties in the Minnesota proceedings, under principles of judicial restraint and comity, the court finds issuance of the injunction Plaintiffs seek in this case is also improper.

Even if Plaintiffs are able to overcome the procedural issues Defendants raise, Plaintiffs' motion would still be denied.

Defendants raise the exception set forth in B&P Code § 16601. Pursuant to this section: Any person who sells the goodwill of a business, or any owner of a business entity selling or otherwise disposing of all of his or her ownership interest in the business entity, or any owner of a business entity that sells (a) all or substantially all of its operating assets together with the goodwill of the business entity, (b) all or substantially all of the operating assets of a division or a subsidiary of the business entity together with the goodwill of that division or subsidiary, or (c) all of the ownership interest of any subsidiary, may agree with the buyer to refrain from carrying on a similar business within a specified geographic area in which the business so sold, or that of the business entity, division, or subsidiary has been carried on, so long as the buyer, or any person deriving title to the goodwill or ownership interest from the buyer, carries on a like business therein.

. . . .

Strategix, Ltd. v. Infocrossing West, Inc. (2006) 142 Cal.App.4th 1068, explains, Section 16601's exception serves an important commercial purpose by protecting the value of the business acquired by the buyer. 'In the case of the sale of the goodwill of a business it is 'unfair' for the seller to engage in competition which diminishes the value of the asset he sold.' (Monogram Industries, Inc. v. Sar Industries, Inc. (1976) 64 Cal.App.3d 692, 698, 134 Cal.Rptr. 714 (Monogram ).) Thus, '[t]he thrust of ... section 16601 is to permit the purchaser of a business to protect himself or itself against competition from the seller which competition would have the effect of reducing the value of the property right that was acquired.' (Id. at p. 701, 134 Cal.Rptr. 714.) 'One of the primary goals of section 16601 is to protect the buyer's interest in preserving the goodwill of the acquired corporation.' (Hilb, Rogal and Hamilton Ins. Services v. Robb (1995) 33 Cal.App.4th 1812, 1825, 39 Cal.Rptr.2d 887 (Hilb ).) Strategix, 142 Cal.App.4th at 1072–1073.

Defendants submit evidence that the Employment Agreement was part of a series of agreements governing a transaction whereby all of Coney's ownership interest in TCFII RX LLC was transferred to Prodigy. The series of agreements included the Employment Agreement as well as a 'CONTRIBUTION AND EXCHANGE AGREEMENT' a 'REDEMPTION AGREEMENT' and a 'MUTUAL RELEASE.' The contribution of the 'Company' ('TCFII RX LLC') is referenced in the Employment Agreement in the recitals.

WHEREAS, the Parties are working collectively to accomplish a transaction involving Employee's continued employment by the Company as a Director of products through the execution of this Agreement and the contribution of the Company into Prodigy Health, LLC (the 'Combination') . . . .

The 'Combination' is also referenced in Paragraph 1(a) of the Employment Agreement (a) Effective Date and Term. This Agreement shall be effective as of the date upon which the Combination closes (the 'Effective Date') . . . .

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3118327  1 CASE NUMBER: CASE TITLE:  AXIA MEDICAL SOLUTIONS LLC VS PRODIGY HEALTH LLC [IMAGED]  37-2024-00000135-CU-MC-CTL Based on the evidence Defendants submit, including evidence regarding the series of agreements, the court finds Defendants' evidence demonstrates grounds for application of the B&P Code § 16601 exception. In this circumstance, the court finds Plaintiffs fail to establish a likelihood of prevailing on the issue of the enforceability of the noncompete provision. The court is not persuaded by the arguments Plaintiffs raise in opposition as to B&P Code § 16601. That the Employment Agreement and the Redemption Agreement are separate agreements is not dispositive. Hilb, Rogal & Hamilton Ins.

Services v. Robb (1995) 33 Cal.App.4th 1812 rejects a similar argument.

Business and Professions Code section 16601 provides that a shareholder of a corporation who sells or otherwise disposes of all of his shares 'may agree with the buyer to refrain from carrying on a similar business.' Robb argues that the agreement allowed by section 16601-the covenant not to compete-is void here because it is contained in the employment contract and not in the merger agreement. We refuse to read such a requirement into the statute.

As permitted by Business and Professions Code section 16601, Robb agreed that after the merger, he would refrain from carrying on a business similar to the Agency. The validity of that covenant is not affected by its location in the employment contract rather than the merger agreement. Nothing in section 16601 requires that the covenant be contained in a particular type of document. The purpose of the statute is served as long as the covenant is executed in connection with the sale or disposition of all of the shareholder's stock in the acquired corporation. Section 16601 does not prescribe a format for a covenant not to compete, and we can find no reason to impose one.

In this case, the merger proposal described how HRH would acquire the Agency and stated that Robb would have to 'enter [an] employment agreement[] with appropriate non-compete/non-piracy clauses.' Further, the merger agreement and the employment contract cross-referenced each other. Moreover, the merger proposal described the noncompetition covenant as a 'key requirement' of the transaction, leaving no doubt that the covenant was a necessary condition of the merger. Finally, as part of the merger process, Robb was paid $52,500 solely for the noncompetition covenant. In light of these facts, the merger agreement and the employment contract should be construed together to effectuate the purpose of the covenant. (See Civ. Code, § 1642 ['Several contracts relating to the same matters, between the same parties, and made as parts of substantially one transaction, are to be taken together'].) Hilb, Rogal & Hamilton, 33 Cal.App.4th at 1825–1826.

The same analysis applies in this case. Defendants submit evidence that the Employment Agreement and the Redemption Agreement were negotiated together. The evidence also shows that the Employment Agreement references the 'Combination'/'Contribution' and the Mutual Release references both the Employment Agreement and the 'Combination.' The court is not persuaded by Plaintiffs' arguments as to consideration and duress. Defendants submit evidence that, as part of the sale transaction, Plaintiff Coney negotiated and received a written release of a $2,000,000.00 promissory note claim and thereby retained $2,000,000.00 in note proceeds allegedly improperly retained. On the issue of duress, Defendants submit evidence that Plaintiff Coney was represented by counsel during the negotiations; Plaintiff Coney knew of the claims at issue (including claims related to the $2,000,000.00 promissory note); Plaintiff Coney encouraged other sellers to sign identical noncompete agreements; and during the negotiations Plaintiff Coney specifically approved the noncompete language. Such circumstances support a finding that this was an arms-length sale of a business subject to the B&P Code § 16601 exception. Plaintiffs dispute Defendants' characterizations of these events. There is a significant conflict in the evidence with respect to the sale transaction. The court finds such circumstances weigh against a finding that Plaintiffs establish a likelihood of prevailing.

Balance of Harms Calendar No.: Event ID:  TENTATIVE RULINGS

3118327  1 CASE NUMBER: CASE TITLE:  AXIA MEDICAL SOLUTIONS LLC VS PRODIGY HEALTH LLC [IMAGED]  37-2024-00000135-CU-MC-CTL The court finds the balance of harms weighs in favor of Defendants. For the reasons set forth above, the court finds Plaintiffs fail to establish a likelihood of prevailing. The evidence Plaintiffs submit on this issue is sparse and consists solely of a declaration from Plaintiff Coney expressing his personal concerns if he is prevented from working for Axia and declarations from various Axia employees who generally state that Coney's absence 'puts the entire business at risk.' In opposition Defendants submit evidence that Plaintiff Coney was operating Axia, a direct competitor of Defendants, while Plaintiff Coney was still employed with Prodigy, and that such conduct has caused millions of dollars of damage to Prodigy per month. The court finds evidence of the harm to Defendants should the injunction issue outweighs the evidence of the harm to Plaintiffs should the injunction not issue.

Based on the foregoing, the court exercises its discretion against imposition of a preliminary injunction.

If this tentative ruling is confirmed the Minute Order will be the final order of the court and the parties shall not submit any further order on this motion.

Unless the ruling(s) above indicate that an appearance is necessary, parties who wish to submit, who are satisfied with the above tentative ruling(s), and/or who do not otherwise wish to argue the motion(s) are encouraged to give notice to the Court and each other of their intention not to appear.

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