Judge: H. Jay Ford, III, Case: 22SMCV01740, Date: 2025-02-07 Tentative Ruling


Case Number: 22SMCV01740    Hearing Date: February 7, 2025    Dept: O

Case Name:               Fulp, et al. v. Newmark of Southern California, et al.

Case No.:                    22SMCV01740

Complaint Filed:                   10-5-22

Hearing Date:            2/6/2025

Discovery C/O:                     None

Calendar No.:           

Discover Motion C/O:          None

POS:                           OK

Trial Date:                             None

SUBJECT:                (1) MOTION FOR SUMMARY ADJUDICATION

                                    (2) MOTION FOR SUMMARY ADJUDICATION

MOVING PARTY:   (1) Plaintiffs Sean Fulp, Fulp, Inc., Datum, Inc. and Colliers International Greater Los Angeles

                                    (2) Defendant Newmark of Southern California, Inc.

RESP. PARTY:         (1) Defendant Newmark of Southern California, Inc.

                                    (2) Plaintiffs Sean Fulp, Fulp, Inc., Datum, Inc. and Colliers International Greater Los Angeles

 

TENTATIVE RULING

           

            On July 26, 2024, Parties entered into a stipulation for adjudication of certain legal issues pursuant to CCP §437c(t).   The two legal issues and the Court’s tentative ruling on them are as follows:

 

(1) Does Labor Code section 2855 prohibit enforcement of all, or any portion of the Tri-Party Agreement and/or the Amended Tri Party Agreement?

 

The Court finds Labor Code section 2855 does not apply to either agreement, because it is undisputed that Plaintiffs were working as independent contractors and there is no authority to apply Labor Code section 2855 to independent contractors.

 

(2) Does California Business & Professions Code section 16600 prohibit enforcement of the following provisions of the Tri-Party and Amended Tri-Party Agreements:  Tri-Party Agreement Sections 1, 3, 4-7 or 9; Tri-Party Agreement, Exhibit A, Sections 2 and 8-10; and Amended Tri-Party Agreement Sections A.1 and B?

 

The Court finds Sections 4-7 of the Tri-Party Agreement violate section 16600 and are illegal, void and unenforceable.  The Court finds Sections 1, 3 and of the Tri-Party Agreement; Sections 2 and 8-10 of the Tri-Party Agreement and Sections A.1 and B of the Amended Tri-Party Agreement do not violate Business and Professions Code §16600 and are not illegal, void or unenforceable under that section.  The Court finds Sections 4-7 severable from the remainder of the Tri-Party Agreement and that the remaining portions of the Tri-Party Agreement are not unenforceable due to the illegality of Sections 4-7. 

 

I.  Labor Code §2855 does not apply to the Tri-Party Agreements or the Amended Tri-Party Agreements, because Plaintiffs rendered services to Newmark as independent contractors

 

            “Except as otherwise provided in subdivision (b), a contract to render personal service, other than a contract of apprenticeship as provided in Chapter 4 (commencing with Section 3070), may not be enforced against the employee beyond seven years from the commencement of service under it. Any contract, otherwise valid, to perform or render service of a special, unique, unusual, extraordinary, or intellectual character, which gives it peculiar value and the loss of which cannot be reasonably or adequately compensated in damages in an action at law, may nevertheless be enforced against the person contracting to render the service, for a term not to exceed seven years from the commencement of service under it. If the employee voluntarily continues to serve under it beyond that time, the contract may be referred to as affording a presumptive measure of the compensation.”  (Labor Code §2855(a).) 

 

            A worker does not obtain any of the protections or benefits of applicable labor laws and regulations if properly classified as an independent contractor, rather than employee.  (Dynamex Operations W. V. Supr. Ct. (2018) 4 Cal.5th 908, 913; Whitlach v. Premier Valley, Inc. (2022) 86 Cal.App.5th 673, 684.)  “Whether a person is an employee or an independent contractor is ordinarily a question of fact but if from all the facts only one inference may be drawn it is a question of law.”  (Jackson v. AEG Live, LLC (2015) 233 Cal.App.4th 1156, 1179.)  The question of what legal standard or test applies in determining whether a worker is an employee or an independent contractor is a question of law.  (Dynamex, supra, 4 Cal.5th at 942, fn. 6 (wage orders); Whitlach, supra,

 

            In Plaintiffs’ Motion for Summary Adjudication, Plaintiffs do not argue or make any evidentiary showing that he is an employee of Newmark.  In response to Newmark’s Motion for Summary Adjudication, Plaintiffs expressly concede they are independent contractors for purposes of these motions.  (Plaintiffs’ Response to Newmark’s SSUMF No. 3 (dispute over independent contractor status “immaterial to the issues presented before the Court since Plaintiffs do not dispute, for purposes of the instant cross motions, whether Fulp and/or Fulp, Inc. were independent contractors of Newmark.”)  Instead, Plaintiff argues that Labor Code §2855 applies to any persons who have entered into a contract to render personal service, including persons who would be otherwise be classified as independent contractors. 

 

            Plaintiff relies on Foxx v. Williams (1966) 244 Cal.App.2d 223, which applied Labor Code §2855 to a comedian who the hirer maintained was an independent contract.  (Foxx, supra, 244 Cal.App.2d at 239-240.)  The hirer relied upon the definitions of “employee” set forth under the workers’ compensation cases and cases involving imposition of tort liability on a hirer.  (Id. at 240.)  The court found the definitions inapplicable given that the public policy underlying respondeat superior and worker’s compensation are distinct from the legislative policy express in section 2855.  (Id.) 

 

            The court instead focused on the definition of “contract of employment” under Labor Code §2750, which defines “contract of employment” as “a contract by which one, who is called the employer, engages another, who is called the employee, to do something for the benefit of the employer or third person.”  (Id. at 240.)  The court contrasted that definition with the definition of “servant” in the former Workers’ Compensation Act, Labor Code §3000, which stated “[a] servant is one who is employed to render personal service to his employer, other than in the pursuit of an independent calling, and who in such service remains entirely under the control and direction of the employer, who is called his master.”   

 

            The contract of employment in Foxx referred to the plaintiff as the “vocalist,” the hirer as the “employer” and it stated that the hirer was “employ[ing]” plaintiff as a vocalist.  (Id. at 240-241.)  The court also evaluated the level of control and involvement the hirer had in plaintiff’s creation of the product and on that basis, found plaintiff’s situation was distinguishable from that of the independent contractor who unsuccessfully sought the protections of Labor Code §2855.  (Id. at 241-242.)  “Ketcham, by himself, produced an article which he shipped across the country to the Hall Syndicate.  Foxx, by himself, produced nothing.”  (Id. at 242)  The defendant hirer “made all arrangements for recording sessions, selected place of recording, selected and operated (or arranged for) the recording equipment, determined whether persons should be present for background, selected and invited all of the other persons who were to participate, and paid the costs of all of this…Williams edited the tape, selecting the best material which would give a recording of the desired length.”  (Id. at 241.)

 

            Foxx did not hold that Labor Code §2855 applies to independent contractors.  Foxx evaluated the specific circumstances of the plaintiff’s services, including the level of control the hirer defendant exerted over his performance, and concluded that plaintiff was a part-time employee of the hirer defendant.  Foxx therefore does not support Plaintiff’s position that Labor Code §2855 applies to him even if he is an independent contractor. 

 

            The Senate Rules Committee Analysis cited by Plaintiff also fails to establish that section 2855 applies to independent contractors.  Plaintiff highlights the following excerpt:  “Existing law defines a contract of employment for purposes of personal services as a contract where an employer ‘engages another, who is called the employee to do something for the benefit of the employer or third person.’  The courts have interpreted this definition rather broadly by determining employment relationships in personal service contracts that would constitute independent relationships for other purposes such as workers’ compensation.”  (Plaintiff’s RJN, Ex. O.)  The Senate Committee Analysis does not state that the Legislative intent is for Labor Code §2855 to apply to independent contractors.  The second sentence of the excerpt appears to be an incomplete sentence and makes no specific reference to any case. 

 

            Plaintiffs also cite several federal district court cases applying Labor Code §2855 to agreements arising outside of the traditional employer-employee relationship where a contract for personal services is at issue.  These federal cases are not binding on this Court, nor do they support Plaintiffs’ position that section 2855 applies to independent contractors.  The cases do not hold that Labor Code §2855 applies to independent contractors.  The issue of the plaintiff’s status as an employee or an independent contractor was not raised in de la Hoya v. Top Rank, Inc. (2001) 2001 WL 34624886.  In Toto Recording Inc. v. Frontiers Records SRL (2012) 2012 WL 12888664, at *2, the court denied the motion to strike the plaintiff’s affirmative defense based on Labor Code §2855 because it could not resolve at the pleadings stage whether plaintiff was an employee for purposes of Labor Code §2855, affirming Newmark’s position that only employees are protected under section 2855.  The issue in Morris v. Atchity (2009) 2009 WL 463971, at *7 was whether Michigan law or California law applied.  The court did not address whether independent contractors were protected under section 2855. 

 

            “It is elementary that the construction of a statute and its applicability is solely a question of law.”  (Lewis v City of Los Angeles (1982) 137 Cal.App.3d 518, 521.)  “When faced with a question of statutory interpretation, we look first to the language of the statute.  In interpreting that language, we strive to give effect and significance to every word and phrase.”  (Copley Press, Inc. v. Superior Court (2006) 39 Cal.4th 1272, 1284.) 

 

            The plain language of Labor Code §2855 limits its application to employees.  Plaintiffs’ position that Labor Code §2855 applies to independent contractors is unsupported by any authority.  The language of the relevant statutes, Labor Code §§2750 and 2855 specifically use the word “employee.”  Likewise, Foxx, de la Hoya, Toto, Morris and the Senate Committee Analysis cited by Plaintiffs do support the position that Labor Code §2855 applies to independent contractors.  Plaintiffs fail to offer any other legal argument for application of Labor Code §2855. 

 

            Newmark moves for summary adjudication of Issue 1 on grounds that Plaintiffs are independent contractors and Labor Code §2855 does not apply to independent contractors.  In response, Plaintiffs raise the same arguments in their MSA that section 2855 applies to independent contractors.  Newmark establishes that Labor Code §2855 does not apply to independent contractors as an issue of law based on the language of Labor Code §2855, and based on Dynamex and Whitlock, which acknowledged the longstanding rule that the Labor Code’s protections do not apply to independent contractors.  Plaintiffs fail to cite to any contrary authority. 

 

             For this reason, Plaintiffs’ Motion for Summary Adjudication of Issue No. 1 is DENIED.  Defendant’s Motion for Summary Adjudication of Issue No. 1 is GRANTED.  Labor Code §2855 does not apply to invalidate either the Tri-Party Agreement or the Amended Tri-Party Agreement. 

 

II.  Enforceability of selected terms of the Tri-Party and Amended Tri-Party Agreement under Business & Professions Code.

 

            Parties stipulated to adjudicate the question of whether the following sections of their Tri-Party and Amended Tri-Party Agreements were unenforceable under Business and Professions Code §16600:  (1) Sections 1, 3-7 and 9 of the Tri-Party Agreement; (2) Sections 2 and 8-10 of Exhibit A of the Tri-Party Agreement; and (3) Amended Tri-Party Agreement, Sections A.1 and B.

 

            “Except as provided in this chapter, every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.”  (Bus. & Prof. C. §16600(a).)  “The language of section 16600 is broad on its face…. Read in isolation, the text suggests that any part of an agreement restraining a party from engaging in a trade, profession, or business is per se invalid unless certain exceptions apply…. In context, section 16600 is best read not to render void per se all contractual restraints on business dealings, but rather to subject such restraints to a rule of reason.”  (Ixcehl Pharma, LLC v. Biogen, Inc. (2020) 9 Cal.5th 1130, 1150.) 

 

            “[T]his court has interpreted section 16600 and its Civil Code predecessor on numerous occasions, and we have declined to categorically invalidate all agreements limiting the freedom to engage in trade. Over time, our case law has generally invalidated agreements not to compete upon the termination of employment or upon the sale of interest in a business without inquiring into their reasonableness, while invalidating other contractual restraints on businesses operations and commercial dealings only if such restraints were unreasonable.”  (Id. at 1151.) 

 

            A.  Section 1 of the Tri-Party Agreement and Section A.1 of the Amended Tri-Party Agreement

 

            Section 1 of the Tri-Party Agreement establishes that Fulp, Inc. will serve as an independent contractor with Newmark.  (Defendant’s Compendium of Exhibit, Ex. 3, Section 1.)  Section 1 establishes a Term of Service of five years beginning on January 13, 2014.  (Id.) 

 

            Section A.1 of the Amended Tri-Party Agreement reiterates Fulp, Inc.’s status as an independent contractor.  (Id. at Ex. 4, Section A.1.)  Section A.1 amends the Term of Service from five years to 13 years from January 13, 2014 to January 13, 2027.  (Id.)

 

            Plaintiff’s MSA fails to address Section 1 of the Tri-Party Agreement and why it violates Business and Professions Code §16600.  Plaintiff therefore fails to establish that Section 1 of the Tri-Party Agreement is unenforceable, void or illegal based on Business and Professions Code §16600 as moving party. 

           

            Defendant’s MSA maintains Section 1 of the Tri-Party Agreement does not violate Business and Professions Code §16600, because contracts for a term of service and independent contracting are legal and not a restraint on trade.  As noted by Defendant, the FAC does not allege how or why Section 1 of the Tri-Party Agreement violates Business and Professions Code §16600.  In response, Plaintiff argues Section 1 and Section A.1 violate Business and Professions Code §16600 because they set forth a term of 13 years, bind Fulp on a full time, exclusive basis and does not guarantee payment due to his status as a commission-only worker. 

 

            Plaintiff fails to cite to any authority holding that fixed-term, exclusive, independent contractor agreements are an illegal restraint on trade under Business and Professions Code §16600.  The mere fact that Plaintiff would be a commission-only worker also does not establish illegality. 

 

            Plaintiffs argue Ixcehl Pharma, LLC is distinguishable because it involved an agreement between two business entities.  Plaintiffs ignore the fact that under the Tri-Party Agreement and Amended Tri-Party Agreement, Plaintiff Fulp is technically Fulp, Inc.’s employee and any agreement as to Fulp’s compensation, term of service and obligations were imposed on him as an employee of Fulp, Inc. pursuant to the Employment Agreement attached as Exhibit A to the Tri-Party Agreement and the Amended Tri-Party Agreement.  The Tri-Party Agreement and Amended Tri-Party Agreement only imposed obligations directly on Newmark and Fulp, Inc. and were agreements between two business entities. 

 

            Defendants establish that Section 1 and A.1 do not unreasonably restrain Plaintiffs from engaging in a lawful profession, trade or business.  Plaintiffs fail to establish that Section 1 or Section A.1 of the Tri-Party Agreement or the Amended Tri-Party Agreement are an unreasonable restraint on either Fulp, Inc. or Fulp’s engagement in a lawful profession, trade, or business.  Certainly, those provisions are not akin to a post-termination, covenant not to compete.  (See e.g. Edwards v. Arthur Andersen LLP (2008) 44 Cal.4th 937, 948 (clauses (1) prohibiting plaintiff from performing professional services of the type provided during employ with defendant, for any client on whose account he worked on 18 months prior to his termination and (2) prohibiting plaintiff from providing professional services to any client of defendant’s Los Angeles office for a year after termination.)

 

            Plaintiffs’ Motion for Summary Adjudication is DENIED as to Issue No. 2 pertaining to Section 1 or Section A.1 of the Tri-Party Agreement or the Amended Tri-Party Agreement.  Defendants’ Motion for Summary Adjudication is GRANTED as to Issue No. 2 pertaining to Section 1 or Section A.1 of the Tri-Party Agreement or the Amended Tri-Party Agreement.  Section 1 and Section A.1 of the Tri-Party Agreement or the Amended Tri-Party Agreement do not violate Business and Profession Code §16600 and are not unenforceable under that section.

 

            B.  Section 3 of the Tri-Party Agreement

 

            Section 3 of the Tri Party Agreement provides Newmark with the right to terminate Fulp, Inc. with or without cause.  As with Section 1, Plaintiffs do not address Section 3 of the Tri-Party Agreement in their Motion for Summary Adjudication.  Plaintiffs fail to establish that Section 3 of the Tri-Party Agreement violates Business and Professions Code §16600. 

 

            Defendants argue in their Motion for Summary Adjudication that Section 3 is not related to any claim or defense in the action and outside the scope of the complaint.  Plaintiffs’ Third Cause of Action for violation of Business and Professions Code §§16600 and 16600.5 does not identify Section 3 of the Tri-Party Agreement.  On that basis and the reasoning set forth in connection with Section 1 of the Tri-Party Agreement and Section A.1 of the Amended Tri-Party Agreement, Defendants establish Section 3 does not violate Business and Professions Code §16600.  Plaintiffs’ opposition is silent on Section 3.

 

            Plaintiffs’ Motion for Summary Adjudication of Issue No. 2 as to Section 3 of the Tri-Party Agreement is DENIED.  Defendants’ Motion for Summary Adjudication of Issue No. 2 as to Section 3 of the Tri-Party Agreement is GRANTED.  Section 3 of the Tri-Party Agreement or does not violate Business and Profession Code §16600 and is not unenforceable under that section.

 

            C.  Section 4 of the Tri-Party Agreement

 

            “Through the later of the expiration of the Term of Agreement or the Termination Date, Service Provider will not, and will not permit Key Employee to, alone or with others, directly or indirectly, participate, engage, render services to or become interested in (as owner, stockholder, partner, lender or other investor, director, officer, employee, consultant or otherwise) any business activity, person or entity that is in competition with, or otherwise related to or arises from, any then current, or contemplated real-estate related, business of the Company or any Affiliate (“Competitive Activity”).  If Service Provider invests Service Provider’s or Key Employee’s own personal funds (including personal funds of Service Provider’s duties and obligations under this Agreement and must be disclosed in writing to the Company; and (ii) if any service and management fees are generated in connection with such real estate investments and the Company then provides such services, then Service Provider and Key Employee must (y) provide the fees to the Company has a controlling interest in them; or (z) use reasonable efforts to provide the fees to the Company if Service Provider and/or Key Employee does not have a controlling interest in them (the “Permitted Activities”).  Because the business activities of the Company and Affiliates are worldwide, no geographical limitation on the scope of Competitive Activity exists.”  (Defendant’s Compendium of Evidence, Ex. 3, Section 4.) 

 

            “Term of Agreement” is defined as “[t]he Initial Term, together with any extensions.”  (Defendant’s Compendium of Evidence, Ex. 3, Section 1.)  “Initial Term” is defined as “”a term beginning effective as of January 13, 2014…and ending on, unless otherwise terminated as specified in Section 3 below, the five year anniversary of the Start Date.”  (Id.)  “Termination Date” is defined as “the date that Service Provider permanently ceases to provide services to the Company, other than for purposes of completing Pending Transactions on the Pending List.”  (Id.) 

 

            Section 1 of the Tri-Party Agreement was amended by the Amended Tri-Party Agreement.  Section 1 of the Tri-Party Agreement A.1 of the Amended Tri-Party Agreement, “Initial Term” was amended to be “a term beginning effective as of January 13, 2014…and ending on, unless otherwise terminated as specified in Section 8 below, January 13, 2027.” (Defendants’ Compendium of Evidence, Ex. 4, Section A.1.)  Section 8 of the Tri-Party Agreement does not provide for termination of the agreement and only imposes an obligation on Fulp and Fulp, Inc. to keep the agreement terms confidential.  (Id. at Ex. 3, Section 1.)

 

            Plaintiffs argue Section 4 violates Business and Professions Code §16600, because it imposes a post-termination non-compete on Plaintiffs.  Plaintiffs argue that, because Section 4 applies through the “later” of the full Term of Agreement, ending on January 13, 2027, or the Termination Date, Section 4 would apply until January 13, 2027, even if Plaintiffs were to terminate their services prior to the January 13, 2027. 

 

            Defendant argues Section 4 does not impose any restrictions on Plaintiffs post-termination.  Defendant argues Section 4 only applies to Plaintiffs while they are working for Defendant.  Defendant argues “Term of Agreement” is defined as the term between January 13, 2014 and January 17, 2027, unless the Tri-Party Agreement is otherwise terminated pursuant to the agreement.  (Defendants’ Compendium of Evidence, Ex. 4, Amended Tri-Party Agreement, Section A.1.)

 

            The Court agrees with Plaintiffs’ interpretation of Section 4.  Interpretation of contract is a question of law for the court.  (Pacific Gas & E. Co. v. G.W. Thomas Drayage etc. Co. (1968) 69 Cal.2d 33, 37.)  The interpretation of a contract must give effect to the ‘mutual intent’ of the parties at the time the contract was formed.  (MacKinnon v. Truck Ins. Exch. (2003) 31 Cal.4th 635, 647-648. (citing Cal. Civ.Code § 1636).)  Such intent is to be inferred, if possible, from the written provisions of the contract based on their “ordinary and popular sense,” unless a “technical sense or special meaning is given to them by their usage.”  (Id. at 648 (citing Cal. Civ.Code §§ 1639, 1644, 1638).)  If the contractual language is clear and explicit, it governs. (Id.)

 

            “Whether a contract is ambiguous is a question of law to be determined by the court from the contract itself (citations); and it is elemental that when a trial court finds from the very writing relied upon for recovery that there is no ambiguity, then nothing on that score remains for the jury's determination.  In other words, the lower court having found there to be no ambiguity in the contract, there is no room for an interpretation by way of proof of intent of the parties or custom or usage. (citations)  It is the rule that usage and custom will not be employed to vary the clear terms of an agreement or change their meaning when there is a specific contractual provision governing them.”  (Edgar Rice Burroughs, Inc. v. Metro-Goldwyn-Mayer, Inc. (1962) 205 Cal.App.2d 441, 448-449.)  “Courts will not adopt a strained or absurd interpretation in order to create an ambiguity where none exists.”  (Mercury Ins. Co. v. Pearson (2008) 169 Cal.App.4th 1064, 1070.)

           

            Here, the plain and unambiguous language of Section A.1 states that the “Term of Agreement” is the Initial Term, plus extensions.  No extensions were ever adopted.  The Initial Term therefore ends on one of two possible dates—January 13, 2027 or the date on which the agreement is terminated pursuant to Section 8 of the Tri-Party Agreement.  If the agreement is not terminated pursuant to Section 8 (or Section 3, if Section 8 is a typographical error), then the Initial Term would end on January 13, 2027, as argued by Plaintiff.  Under those circumstances, Plaintiffs would still be subject to the noncompete provisions under Section 4 of the Tri-Party Agreement until January 13, 2027, even if they terminated their services before that date. 

 

            Those are precisely the circumstances presented here.  Plaintiffs terminated their work for Defendant Newmark on September 12, 2022.  The Tri-Party Agreement was not terminated by Defendant pursuant to Section 8 or Section 3.  Thus, Section 4 is binding on Plaintiffs until January 13, 2027, long after Plaintiffs have ceased working for Defendant. 

 

            Defendant claims “if the TPA is terminated early, the Term of Agreement ends, the noncompete covenant expires, and Mr. Fulp if free to work anywhere else he desires.”  (Defendant’s Opposition to Plaintiff’s MSA, 10:3-5.)  This is simply not the case based on the language of Section 4.  Section 4 applies “[t]hrough the later of the expiration of the Term of Agreement or the Termination Date.”  Defendant argues the Term of Agreement ended when that agreement was “terminated earlier in accordance with the terms of the agreement.”  Section A.1 of the Amended Tri-Party Agreement does not define the Term of Agreement in this way. The Term of Agreement is from January 13, 2014 through (1) January 13, 2027 “unless otherwise terminated as specified in Section 8 below.”  (Defendants’ Compendium of Evidence, Ex. 4, Section A.1).  There is no provision stating that the Term of Agreement ends when the agreement is “terminated earlier in accordance with the terms of the agreement.” The quoted language is part of the provision governing continuation of the Term of Agreement following expiration of the initial term:  “The Term of Agreement shall, unless terminated earlier in accordance with the terms of the Agreement, continue following the expiration of the Initial Term on the same terms and conditions set forth in this Agreement…”

 

            Plaintiffs establish that Section 4 is an illegal post-termination covenant not to compete under Business and Professions Code §16600.  (Edwards, supra, 44 Cal.4th at 945.)  “Noncompetition agreements are invalid under section 16600 in California, even if narrowly drawn, unless they fall within the applicable statutory exceptions of section 16601, 16602, or 16602.5.” (Edwards, supra, 44 Cal.4th at p. 955.)  Defendants fail to establish that Section 4 is an acceptable prohibition on competition during Plaintiffs’ period of employment.  (Techno Lite, Inc. v. Emcod, LLC (2020) 44 Cal.App.5th 462, 473.)  “Any attempt to construe the noncompete and nonsolicitation clauses in such a manner as to make them lawful would not be reforming the contract to correct a mistake of the parties but rather to save a statutorily proscribed and void provision.”  (Dowell v. Biosense Webster, Inc. (2009) 179 Cal.App.4th 564, 579.)

 

            D. Sections 5 and 7 of the Tri-Party Agreement

 

            Plaintiffs seek to invalidate sections 5 and 7 of the Tri-Party Agreement, which pertain to Plaintiffs’ confidentiality obligations. 

 

            “During and after the Term of Agreement, Service Provider nor Key Employee shall and will not, either directly or indirectly, for any reason whatsoever, alone or with others (whether as an employee, employer, trustee, consultant, agent, principal, partner, corporate officer, director, creditor, owner or shareholder, or in any other individual or representative capacity) disclose or use the Company’s Confidential Information (as defined here) for any purpose…”  (Defendant’s Compendium of Evidence, Ex. 3, Section 5.) 

 

            “Service Provider hereby covenants and agrees that during the Service Provider’s services to the Company and thereafter:  (i) Service Provider and Key Employee shall keep strictly confidential any and all Confidential Information; and (ii) shall not disclose or use any Confidential Information other than to the extent necessary in the court of Service Provider’s duties for the Company.”  (Id. at Section 7.) 

 

            “‘Confidential Information’ means, collectively, any and all information that Service Provider possesses or which Service Provider may obtain during the course of Service Provider’s services to the Company or any Affiliate and that relates to the Company, any Affiliate, or any of its or their present or prospective clients, Prospective Clients, customers, vendors, affiliates, licensors, licensees or any of its or their business, software, systems, finances; activities, plans, accounts, broker compensation, commissions sharing, loan arrangements, customer/client lists, transactions…as well as Works, in each case, which information is not generally known to the public, or if generally known to the public, which information was made known due to any wrongful act or omission by any person or entity and/or by any act or omission of Service Provider directly or indirectly…as well as, in each case, any and all derivatives….”  (Id. at Section 7.) 

 

            The legality of a confidentiality provision is a legal issue.  (Brown v. TGS Management Company, LLC (2020) 57 Cal.App.5th 303, 318.)  In Brown, the Court of Appeals found the confidentiality provision in question an illegal agreement restraint under Business and Professions Code §16600, because the definition of “Confidential Information” was so broad that it would “plainly bar Brown in perpetuity from doing any work in the securities field, much less in his chosen profession of statistical arbitrage.  Consequently, we conclude the confidentiality provisions are void ab initio and unenforceable.”  (Id.) 

 

            In Brown, “confidential information” was defined to include any information “used or usable in, or originated, developed or acquired for use in, or about or relating to, the Business” and the “Business” was defined to include “without limitation analyzing, executing, trading and/or hedging in securities and financial instruments and derivatives thereon, securities-related research, and trade processing and related administration….”  (Brown, supra, 57 Cal.App.5th at 316.)  The definition of confidential information also prevented the employee from using non-confidential information in the industry, unless the employee could prove that he had that knowledge prior to his employment with written evidence:  “In other words, securities-related information that was not confidential before Brown’s employment with TGS metamorphoses into TGS’s ‘Confidential Information’ unless Brown has written records proving his prior knowledge of the information.”  (Brown, supra, 57 Cal.App.5th at 317.) 

           

            Likewise, in Dowell v. Biosense Webster, Inc. (2020) 179 Cal.App.4th 564, the court invalidated a noncompete and nonsolicitation provisions contained in an employment agreement based in part on the definition of “confidential information” therein.  “‘Confidential information’ is broadly defined as information disclosed to or known by the employee, including such information as the number or location of sales representatives, the names of customers, customer preferences, needs, requirements, purchasing histories or other customer-specific information. Given such an inclusive and broad list of confidential information, it seems nearly impossible that employees like Dowell and Chapman, who worked directly with customers, would not have possession of such information.”  (Dowell, supra, 179 Cal.App.4th at 578.)

 

            Based on a review of Sections 5 and 7, the definition of “confidential information” renders Sections 5 and 7 illegal and void noncompete provisions that illegally restrain Plaintiffs from practicing their trade and profession.  The definition of confidential information encompasses all information “not generally known to the public” that the Plaintiffs acquired while working for the Defendant, including information that would not qualify as confidential or a trade secret and knowledge that Plaintiffs rightfully acquired in their own right while working with Defendant’s clients. 

 

            The definition of “confidential information” even includes information that Plaintiffs already “possesse[d]” at the time the Tri-Party Agreement was executed that “relates to the Company, any Affiliate, or any of its or their present or prospective clients, Prospective Clients, customers, vendors, affiliates, licensors, licensees or any of its or their business, software, systems, finances; activities, plans, accounts, broker compensation, commissions sharing, loan arrangements, customer/client lists, transactions…as well as Works, in each case, which information is not generally known to the public, or if generally known to the public, which information was made known due to any wrongful act or omission by any person or entity and/or by any act or omission of Service Provider directly or indirectly…as well as, in each case, any and all derivatives.” 

 

            The definition of “confidential information” would prohibit Plaintiffs from using information that they already knew of prior to executing the Tri-Party Agreement and working for Newmark.  Under the definition of confidential information set forth in the agreement, such information “metamorphosizes” into “confidential” information without any indicia of confidentiality.  Moreover, “section 16600 precludes an employer from restraining an employee from engaging in his or her ‘profession, trade, or business,’ even if such an employee uses information that is confidential but not a trade secret.”  (AMN Healthcare, Inc. v. Aya Healthcare Services, Inc. (2018) 28 Cal.App.5th 923, 940 (citing The Retirement Group v. Galante (2009) 176 Cal.App.4th 1226.) 

 

            As discussed in Brown, Newmark is not prevented from enforcing a properly drawn confidentiality agreement which preserves an employee’s right to compete after leaving its employ.  However, “[t]he confidentiality provisions at issue here simply do not meet that test.” (Brown, supra, 57 Cal.App.5th at 319.)  Moreover, Newmark “can prevent former employees from disclosing trade secrets and other confidential information by pursuing injunctive relief and tort remedies under the Uniform Trade Secrets Act.”  (Id.) 

 

            Plaintiff’s Motion for Summary Adjudication on Issue No. 2 as to Sections 5 and 7 of the Tri-Party Agreement is GRANTED.  Defendant’s Motion for Summary Adjudication on Issue No. 2 as to Sections 5 and 7 is DENIED.  Sections 5 and 7 illegally restrain Plaintiffs’ right to compete by defining “confidential information” in such a way that it interferes with Plaintiffs’ right to compete.  (Brown, supra, 57 Cal.App.5th at 317;  Dowell, supra, 179 Cal.App.4th at 578; AMN Healthcare, Inc. v. Aya Healthcare Services, Inc. (2018) 28 Cal.App.5th 923, 940.) 

 

            E.  Section 6 of the Tri-Party Agreement

 

            Plaintiffs seek to invalidate Section 6 of the Tri-Party Agreement.  Section 6 is a nonsolicitation provision.

 

            “Through twenty-four (24) months after the Termination Date, for any reason whatsoever, neither Service Provider nor Key Employee shall, alone or with others, directly or indirectly:  (a) solicit, either directly or indirectly, or through any person or organization other than the Company or any Affiliate, the employment or other services of (i) any person or entity employed by, associated with, or serving as a consultant or independent contractor of, the Company or any Affiliate, or (ii) any person or entity who was employed by or served as a consultant or independent contractor of the Company or any Affiliate at any time during the six (6) month period prior to the act or attempt to solicit such person, or (b) encourage, solicit, influence or induce any such person to terminate or leave his or her employment or other remunerative relationship with the Company or any Affiliate.”  (Defendant’s Compendium of Evidence, Ex. 3, Section 6.) 

 

            In evaluating noncompete clauses “that attempt to dilute or eliminate employee mobility,” California courts have found employee mobility “to be a cherished commercial right, which is paramount to a business’s competitive interest.”  (Quidel Corporation v. Supr. Ct. (2020) 57 Cal.App.5th 155, 166.) Employment agreements will often include nonsolicitation covenants prohibiting employees from soliciting the employer's customers and employees for a certain period of time after termination of employment. Such provisions are generally unenforceable in view of California's strong public policy promoting competition.  (Edwards, supra, 44 Cal.4th at 948 (solicitation of customers); AMN Healthcare, Inc., supra, 28 Cal.App.5th at 935-939.) 

 

            However, section 16600 does not apply to an employee’s promise not to compete with an employer while employed.  “Business and Professions Code section 16600 has consistently been interpreted as invalidating any employment agreement that unreasonably interferes with an employee’s ability to compete with an employer after his or her employment ends.  However, the statute does not affect limitations on an employee's conduct or duties while employed.  While California law does permit an employee to seek other employment and even to make some preparations to compete before resigning, California law does not authorize an employee to transfer his loyalty to a competitor. During the term of employment, an employer is entitled to its employees’ undivided loyalty.”  (Techo Lite, Inc., supra, 44 Cal.App.5th at 471.) 

 

             Section 6 is patently a post-termination nonsolicitation clause.  Newmark does not dispute this.  Instead, Newmark argues that, for purposes of this litigation, it is only seeking to enforce Section 6 against Plaintiffs based on their activities while working for Newmark.  This does not salvage Section 6.  On its face, Section 6 is an unreasonable restraint on Plaintiffs’ engagement in their lawful profession, trade or business. 

 

            The fact that Section 6 can be interpreted in a manner that would be lawful does not salvage it and doing so would create perverse incentives to insert broad, facially illegal covenants into employment contracts.  “Employer would have no disincentive to use the broad, illegal clauses if permitted to retreat to a narrow, lawful construction in the event of litigation.”  (Kolani v. Gluska (1998) 64 Cal.App.4th 402, 407.)  This would also qualify as an improper attempt to reform the agreement.  “Any attempt to construe the noncompete and nonsolicitation clauses in such a manner as to make them lawful would not be reforming the contract to correct a mistake of the parties but rather to save a statutorily proscribed and void provision.”  (Dowell, supra, 179 Cal.App.4th at 579.)

 

            Defendant relies on two unreported federal district court cases (Aramark Management, LLC v. Borgquist (2021) 2021 WL 3932258 and Thomas Weisel Partners, LLC v. BNP Paribas (2010) 2010 WL 546497) to support its position that Section 6 can be salvaged, because Defendant is only seeking to apply it to pre-termination solicitation.  These cases are not binding and offer no persuasive value.  Neither address the concerns raised in either Kolani or Dowell regarding sua sponte reformation of a facially void and illegal clause. 

 

            Plaintiffs’ Motion for Summary Adjudication of Issue No. 2 as to Section 7 of the Tri-Party Agreement is GRANTED.  Defendant’s Motion for Summary Adjudication of Issue No. 2 as to Section 7 of the Tri-Party Agreement is DENIED.  Section 7 is void and unenforceable pursuant to Business and Professions Code §16600. 

 

            F.  Exhibit A, Sections 8-10 of the Tri-Party Agreement

           

            Plaintiffs argue Sections 8-10 of Exhibit A to the Tri-Party Agreement are void and unenforceable under Business and Professions Code §16600.  Exhibit A to the Tri-Party Agreement is entitled “Commissions and Pending Transactions.” 

 

            Section 8 requires that “within thirty days (30) days following the Termination Date, Service Provider shall submit to the Company a complete list (“Pending List”) of any incomplete, potential or pending engagements, assignments, or transactions in which Service Provider is involved as of the Termination Date and for which Service Provider believes Servicer Provider may be entitled to a commission (“Pending Transactions”).  (Defendant’s Compendium of Evidence, Ex. 3, Ex. A, Section 8.) 

 

            Section 9 sets forth the parameters for Plaintiffs’ collection of commissions from “Pending Transactions.”  “Service Provider shall be entitled to Service Provider’s Commissions arising from a Pending Transaction if (a) the Company collects a commission for such Pending Transaction and (b) it is completed during the ‘Entitlement Period’….”  (Id. at Section 9.) 

 

            Section 10 sets forth further rights and obligations of the parties with respect Pending Transactions.  “If any Pending Transaction on the Pending List is not completed by the end of the Entitlement Period, then the Company…shall have the right, without the participation of Service Provider, to continue negotiations and conclude such Pending Transaction without incurring any liability to Service Provider for a Commission or other associated compensation.  Service Provider agrees that Service Provider shall be subject to any contractual provisions relating to the time period in which the Company is to be recognized after the date of termination of an agreement with a client, and such time period may limit the Entitlement Period.  Notwithstanding anything to the contrary, if the Pending Transaction on the Pending List is closed with assistance of additional brokers or salespersons or more time is committed by a team member to close such Pending Transaction and Service Provider was not the sole procuring cause of the Pending Transaction, then Service Provider’s share of the commission may be equitably adjusted by the Company in its discretion to take into account the time committed and the individuals involved.  The Company shall be the broker of record for all Pending Transactions.  In the event Service Provider (a) fails to either include a Pending Transaction on the Pending List which meets the Pending List criteria and a brokerage company other than the Company earns a commission from said Pending Transaction, or (b) completes at any time a transaction identified on the Pending List without the participation of the Company, then Service Provider shall be in material breach of this Agreement, and shall pay to the Company any commissions that should have been paid to the Company, unless it is from paying Service Provider any commissions for Pending Transactions that are then in dispute unless and until such dispute is resolved, and in such instance, such payment shall be subject to and in accordance with the terms of such resolution.”  (Id. at Section 10.)

 

            Plaintiffs argue Sections 8-10 of Exhibit A of the Tri-Party Agreement is illegal and void under section 16600, because those sections require him to identify Pending Transactions and requires him to continue working for Newmark on all Pending Transactions to receive any commissions.  Plaintiffs also argue Section 10 imposes extreme consequences if any transaction on the Pending List is closed without Newmark or Plaintiffs omit a Pending Transaction from the list.  Plaintiffs argue Sections 8-10 forces them to choose between (1) continuing work for a brokerage he decided to leave or (2) to abandon substantial sales contacts and lease forever as the “price” of leaving Nemark.

 

            Plaintiffs’ interpretation of Sections 8-10 and their effect is unsupported by the language of the agreement.  Merely requiring Plaintiffs to compile those Pending Transactions they were working on prior to leaving Newmark is not a restraint on Plaintiffs’ ability to engage in their profession, nor are Plaintiffs required to compile this list after the Termination Date.  The deadline to provide the list is 30 days from the Termination Date. 

 

            Sections 8-10 also do not require Plaintiffs to continue working on the Pending Transactions to obtain their commissions. Section 9 expressly states that Plaintiffs are entitled to their share of commissions on a Pending Transaction if (1) the Company closes the Pending Transaction and (2) and it is completed during the “Entitlement Period.”  Nothing in Section 9 requires Plaintiffs to continue working on the Pending Transaction in order to recover their commissions.  They need only be closed by Newmark within the Entitlement Period. 

 

            Section 10 also does not impose an unreasonable consequence if Plaintiffs omit a Pending Transaction from the Pending List and another broker closes the Pending Transaction.  Plaintiffs have an obligation to identify the Pending Transactions and any failure to do so would deprive Newmark of its entitlement to its share of commissions.  Some penalty must be imposed to ensure that Plaintiffs provide a full and complete list of Pending Transactions. 

 

            At best, Plaintiffs are not entitled to close on Pending Transactions to the exclusion of Newmark.  This is not an unreasonable restraint on Plaintiffs’ ability to engage in the real estate business. 

           

            Plaintiffs’ Motion for Summary Adjudication of Issue 2 as to Sections 8-10 of Exhibit A to the Tri-Party Agreement is DENIED.  Defendant’s Motion for Summary Adjudication of Issue 2 as to Sections 8-10 of Exhibit to the Tri-Party Agreement is GRANTED.  Sections 8-10 of Exhibit A to the Tri-Party Agreement are not illegal and void under Business and Professions Code §16600. 

 

            G.  Exhibit A, Section 2 of the Tri-Party Agreement and Section B of the Amended Tri Party Agreement (Contingent Compensation)

 

            Section 2 of the Exhibit A to the Tri-Party Agreement governs the structure of commissions paid to Plaintiffs.  “Service Provider understands and agrees that up to ten percent of Service Provider’s Commissions…may, as determined in the sole discretion of the Company, be in the form of a contingent non-cash grant award, subject to the terms…of the grant documents and the partnership agreement, if applicable, under which such non-cash grant is awarded…”

 

            Section B of the Amended Tri-Party Agreement amends the definition of “Percentage Rate” and describes the components of prospective commissions. 

 

            Plaintiffs argue Section 2 of Exhibit A violates Section 16600, because Newmark declared that Fulp forfeited his right to future payments on his Newmark equity since he allegedly violated restrictive covenants contained in the Partnership Agreement.  Plaintiffs argue Section 2 of Exhibit A states that the compensation awarded thereunder was “subject to the terms…of the grant documents and the partnership agreement, if applicable, under which such non-cash grant is awarded…” 

           

            Section 2 of Exhibit A does not in any way restrain Plaintiffs’ mobility as real estate brokers.  It merely identifies a form of acceptable payment of Plaintiffs’ commissions, “contingent non-cash grant award,” and a statement of the obvious—those awards would be subject to the terms of any documents creating and granting those awards.  Plaintiffs do not include this provision in its FAC as being illegal and void and they fail to articulate any basis to find it illegal and void on its face. 

 

            Based on Plaintiffs’ argument, Section 2 of Exhibit A to the Tri-Party Agreement is not the problem.  The problem, according to Plaintiffs, is Newmark’s declaration that Plaintiffs forfeited rights to future equity, because they violated restrictive covenants in the parties’ Partnership Agreement.  The issue is therefore not with Section 2 of Exhibit A to the Tri-Party Agreement.  The issue is with the Partnership Agreement’s nonsolicitation and noncompete provisions, which are not before this Court.  As Defendant points out, the parties are currently litigating the Partnership Agreement in Delaware.  (Defendant’s Responsive Separate Statement of Undisputed Fact No. 14.) 

 

            Plaintiffs’ Motion for Summary Adjudication of Section 2 of Exhibit A to the Tri-Party Agreement is DENIED.  Defendant’s Motion for Summary Adjudication of Section 2 of Exhibit A to the Tri-Party Agreement is GRANTED.  Section 2 of Exhibit A to the Tri-Party Agreement is not void and illegal pursuant to section 16600.

           

            H.  Section 9 of the Tri-Party Agreement

 

            Under Section 9 of the Tri-Party Agreement, “The parties acknowledge that in the event of a breach or a threatened breach by Service Provider or Key Employee…of Service Provider’s obligations under Sections 4-8, the Company…will not have an adequate remedy at law.  Accordingly…in the event of any such breach or threatened breach by Service Provider, the Company…shall be entitled to specific performance of this Agreement or such equitable and injunctive relief, without proof of special damages or the posting of any bond or other security, as may be available to restrain Service Provider…The Company shall be entitled to commissions paid to Service Provider, Key Employee or any other person…that were generated from services performed for any client or Prospective Client in violation of Sections 4-8 herein.  Notwithstanding the foregoing, nothing herein shall be construed as prohibiting the Company…from pursuing any other remedies available at law or in equity for such breach of threatened breach in any dispute submitted under any other dispute resolution policy or agreement.”  (Defendant’s Compendium of Evidence, Ex. 3, Section 9.)

 

            Plaintiffs’ MSA does not address Section 9 of the Tri-Party Agreement at all.  Plaintiffs therefore fail to establish that Section 9 is illegal and void under Business and Professions Code §16600 as moving parties.

 

            Defendant establishes that the provision does not itself restrain Plaintiffs’ engagement in their profession, trade or business.  Section 9 is a remedies provision for violations of Sections 4-8 of the Tri-Party Agreement.  The Court has already invalidated those sections of Sections 4-8 that are illegal and void under Business and Professions Code §16600.  As such, Section 9 does not enforce or provide remedies for violations of those void and illegal sections. 

 

            In response, Plaintiff argues Section 9 allows for enforcement of illegal noncompete provisions.  However, as stated above, those sections of Sections 4-8 that are illegal noncompete provisions have already been invalidated. Section 9 therefore cannot be enforced to impose any remedies or penalties based on any illegal noncompete provision that is included in Sections 4-8.

 

            Plaintiffs’ Motion for Summary Adjudication of Issue No. 2 as to Section 9 of the Tri-Party Agreement is DENIED.  Defendant’s Motion for Summary Adjudication of Issue No. 2 as to Section 9 of the Tri-Party Agreement is GRANTED.  Section 9 is not void and illegal under Business and Professions Code §16600. 

 

            I.  Schedule A, Section 1 of the Tri-Party Agreement

 

            Schedule A to the Tri-Party Agreement is an Employment Agreement between Fulp, Inc. and Fulp.  (Defendant’s Compendium of Evidence, Ex. 3.)  Defendant is not a party to the agreement.  The terms of Section 1 of Schedule A are identical to Section 1 of the Tri-Party Agreement, defining “Term of Employment” and “Termination Date” in exactly the same way.  (Id. at Ex. 3, Schedule A, Section 1.) 

 

            Plaintiffs’ MSA does not mention Schedule A, Section 1 of the Tri-Party Agreement.  Plaintiffs’ response to Defendant’s MSA does not respond to Defendant’s arguments regarding Schedule A, Section 1 of the Tri-Party Agreement. 

 

            Defendant argues Schedule A, Section 1 of the Tri-Party Agreement is outside the scope of the FAC, because it is an agreement between Fulp, Inc. and Fulp.  Neither Fulp, Inc. nor Fulp are suing the other for violation of Business and Professions Code §16600 based on Schedule A.  As such, summary adjudication of the issue of whether Schedule A, Section 1 is outside the scope of the FAC and this action. 

 

            Plaintiffs’ Motion for Summary Adjudication of Issue No. 2 as to Schedule A, Section 1 of the Tri-Party Agreement is DENIED.  Defendant’s Motion for Summary Adjudication of Issue No. 2 as to Schedule A, Section 1 of the Tri-Party Agreement is GRANTED on grounds that it is not a party to that agreement and whether Section 1 of Schedule A is violates Business and Professions Code §16600 is outside the scope of this action. 

 

            J.  Entirety of Tri-Party Agreement and Amended Tri-Party Agreement not void due to inclusion of void and illegal sections

 

            Plaintiffs argue in their Motion for Summary Adjudication that the illegal and void Sections cannot be severed from the rest of the Tri-Party Agreement and Amended Tri-Party Agreement and both agreements in their entirety should be found void, illegal and unenforceable.  Plaintiffs rely on Kolani for their position.  Kolani discussed the absence of any “disincentive to use the broad, illegal clauses if permitted to retreat to a narrow, lawful construction in the event of litigation.”  (Kolani, supra, 64 Cal.App.4th at 407.)  Kolani’s reasoning does not support invalidation of the entire agreement containing an illegal clause in violation of Business and Professions Code §16600.  Kolani’s reasoning supports invalidating the entirety of a facially void and illegal noncompete provision rather than construing and applying the provision in a way that would render it legal. 

 

            Instead, the general rule set forth in Code of Civil Procedure section 1599 applies.  “Where a contract has several distinct objects, of which one at least is lawful, and one at least is unlawful, in whole or in part, the contract is void as to the latter and valid as to the rest.” As a result, lawful contract terms that may feasibly be severed must be preserved.  (Baeza v. Superior Ct. (2011) 201 Cal. App. 4th 1214, 1230.  Parties also included a severability provision in the Tri-Party Agreement.  (Defendant’s Compendium of Evidence, Ex. 3, Section 12.) 

 

            Plaintiffs’ Motion for Summary Adjudication of Issue No. 2 as to the illegality and unenforceability of the entirety of the Tri-Party is DENIED.  Defendant’s Motion for Summary Adjudication of Issue No. 2 as to the legality and enforceability of those sections of the Tri-Party Agreement not found to be illegal and void under Business and Professions Code §16600 is GRANTED.