Judge: James C. Chalfant, Case: 24STCV03402, Date: 2024-05-14 Tentative Ruling

Case Number: 24STCV03402    Hearing Date: May 14, 2024    Dept: 85

Plaintiffs Medina Culver, D.O. (“Culver”), Ruby Guardia (“Guardia”), Julie Eisenberg (“Eisenberg”), Kellie Sibley (“Sibley”), Charla Bagzis (“Bagzis”), Jeana Zirlin (“Zirlin”), Cindy Persky (“Persky”), and Stacey Heiny (“Heiny”) (“Moving Plaintiffs”) seek a preliminary injunction to enjoin Defendant Counter Brands, LLC (“Counter Brands”) from enforcing its non-solicitation clause against former consultants and current consultants to the extent that they are soliciting other consultants for a non-competing business. 

The court has read and considered the moving papers, opposition, and reply, and renders the following tentative decision.

A. Statement of the Case

1. Complaint

Plaintiffs filed this action on February 9, 2024 against Defendant Counter Brands for declaratory relief and tortious interference with prospective advantage.  The operative pleading is the First Amended Complaint, filed on February 23, 2024, which alleges causes of action for (1) declaratory relief,[1] (2) injunctive relief, (3) breach of implied covenant of good faith and fair dealing, (4) unfair business practices in violation of Business and Professions Code section 17200, (5) promissory estoppel, (6) unjust enrichment, (7) fraudulent misrepresentation, (8) breach of implied contract, and (9) breach of contract. The FAC alleges in pertinent part as follows.

Defendant Counter Brands, dba Beautycounter, is a multi-level marketing company, headquartered at 1733 Ocean Avenue #325, Santa Monica, California.  FAC ¶¶ 1-2.  Beautycounter has since its inception unilaterally imposed non-solicitation policies on its Consultants.  FAC ¶¶ 4-5.

Plaintiffs Culver, Guardia, Eisenberg, Sibley, Bagzis, Zirlin, Persky, Heiny, Paige Calla (“Calla”), Ruby Garcia (“Garcia”), Renee Hill (“Hill”), Staci Kalvaitis (“Kalvaitis”), Michelle Lilly (“Lilly”), Gina Quattrochi (“Quattrochi”), Carrie Smith (“Smith”), Rikki Miller (“Miller”), Darcy Ivanans (“Ivanans”), (“consultants”) became Beautycounter consultants between the years of 2013 and 2019.  FAC ¶¶ 24-25, 27-28, 33-34, 38-39, 42-43, 47-48, 51-52, 55-56, 58-59, 61-62, 65-66, 68-69, 71-72, 75-76, 78-79, and 81-82.  Consultants found out that they were subject to non-solicitation restrictions after Beautycounter implemented a unilateral cut in commissions in 2022.  FAC ¶9.  Consultants dependent on Beautycounter commissions were subjected to pay cuts of up to 70%.  FAC ¶9.  Consultants began looking for alternative ways to supplement their income and found additional products to sell through other multi-level marketing (“MLM”) companies while still working with Beautycounter.  FAC ¶¶ 10-11.

In response, Beautycounter falsely told some Consultants that they were prohibited from selling products for another MLM company, despite there being no such restriction in the Consultant Agreement or in the policies and procedures.  FAC ¶13.  Beautycounter’s management also had individual meetings with top-earning consultants to interrogate them about their attempts to supplement their incomes and threatened discipline to stop them from selling products for any other MLM company.  FAC ¶14.  Further, Beautycounter falsely accused many top-earning consultants of “soliciting” their recruited consultants in their downlines for other MLM companies.  FAC ¶15.  As a result, Beautycounter suspended, froze, and cut-off the consultants from their businesses overnight.  FAC ¶15.

Beautycounter conducted sham investigations, took credit for consultants’ sales, refused to interview consultants as part of the investigations, and terminated consultants for purported breaches of the non-solicitation restrictions.  FAC ¶16.  Beautycounter sent threatening letters to former consultants, directing them to comply with the unlawful non-solicitation policies or risk being sued by Beautycounter.  FAC ¶18.

Plaintiffs Guardia, Eisenberg, Kalvaitis, Culver, Sibley, Zirlin, Bagzis, Persky, and Heiny are under immediate threat of enforcement of the non-solicitation policy.  FAC ¶21.  Plaintiffs Guardia, Bagzis, Sibley, Zirlin, and Persky are still Beautycounter consultants but currently suspended.  FAC ¶ 21.  Plaintiffs Culver, Eisenberg, Kalvaitis, and Heiny were recently terminated or resigned and are within the purported one-year non-solicitation term.  FAC ¶ 21.

Plaintiffs Calla, Hill, Lilly, Quattrochi, Smith, Miller, and Ivanans are no longer subject to the one-year non-solicitation policy.  However, they struggle to build comparable businesses outside of Beautycounter without the ability to leverage their own networks.  FAC ¶ 22.

Plaintiffs seeks a declaration that (1) the non-solicitation policy is invalid as a matter of California law under Business and Professions Code section 16600 and (2) Plaintiffs are not bound by any arbitration provision in any purported agreement with Beautycounter.  FAC at 52.

Plaintiffs also seeks an injunction prohibiting Beautycounter from using, relying on, or threatening enforcement of the non-solicitation policy, an award of compensatory and punitive damages, attorney’s fees allowed by law, costs, prejudgment interest, and other relief deemed just and proper.  FAC at 52-53.

2. Course of Proceedings

Defendant Counter Brands filed a Notice of Appearance on March 15, 2024.

On March 14, 2024, the court issued a temporary restraining order (“TRO”) and issued an order to show cause (“OSC”) against Counter Brands.

B. Applicable Law

An injunction is a writ or order requiring a person to refrain from a particular act; it may be granted by the court in which the action is brought, or by a judge thereof; and when granted by a judge, it may be enforced as an order of the court.  CCP §525.  An injunction may be more completely defined as a writ or order commanding a person either to perform or to refrain from performing a particular act.  See Comfort v. Comfort, (1941) 17 Cal.2d 736, 741. McDowell v. Watson, (1997) 59 Cal.App.4th 1155, 1160.[2]  It is an equitable remedy available generally in the protection or to prevent the invasion of a legal right.  Meridian, Ltd. v. City and County of San Francisco, et al., (1939) 13 Cal.2d 424.

The purpose of a preliminary injunction is to preserve the status quo pending final resolution upon a trial.  See Scaringe v. J.C.C. Enterprises, Inc., (1988) 205 Cal.App.3d 1536. Grothe v. Cortlandt Corp., (1992) 11 Cal.App.4th 1313, 1316; Major v. Miraverde Homeowners Assn., (1992) 7 Cal.App.4th 618, 623.  The status quo has been defined to mean the last actual peaceable, uncontested status which preceded the pending controversy.  Voorhies v. Greene (1983) 139 Cal.App.3d 989, 995, quoting United Railroads v. Superior Court, (1916) 172 Cal. 80, 87. 14859 Moorpark Homeowner’s Assn. v. VRT Corp., (1998) 63 Cal.App.4th 1396. 1402.

A preliminary injunction is issued after hearing on a noticed motion.  The complaint normally must plead injunctive relief.  CCP §526(a)(1)-(2).[3]  Preliminary injunctive relief requires the use of competent evidence to create a sufficient factual showing on the grounds for relief.  See e.g. Ancora-Citronelle Corp. v. Green, (1974) 41 Cal.App.3d 146, 150.  Injunctive relief may be granted based on a verified complaint only if it contains sufficient evidentiary, not ultimate, facts.  See CCP §527(a).  For this reason, a pleading alone rarely suffices.  Weil & Brown, California Procedure Before Trial, 9:579, 9(ll)-21 (The Rutter Group 2007).  The burden of proof is on the plaintiff as moving party.  O’Connell v. Superior Court, (2006) 141 Cal.App.4th 1452, 1481.

A plaintiff seeking injunctive relief must show the absence of an adequate damages remedy at law.  CCP §526(4); Thayer Plymouth Center, Inc. v. Chrysler Motors, (1967) 255 Cal.App.2d 300, 307; Department of Fish & Game v. Anderson-Cottonwood Irrigation Dist., (1992) 8 Cal.App.4th 1554, 1565.  The concept of “inadequacy of the legal remedy” or “inadequacy of damages” dates from the time of the early courts of chancery, the idea being that an injunction is an unusual or extraordinary equitable remedy which will not be granted if the remedy at law (usually damages) will adequately compensate the injured plaintiff.  Department of Fish & Game v. Anderson-Cottonwood Irrigation Dist., (1992) 8 Cal.App.4th 1554, 1565.

In determining whether to issue a preliminary injunction, the trial court considers two factors: (1) the reasonable probability that the plaintiff will prevail on the merits at trial (CCP §526(a)(1)), and (2) a balancing of the “irreparable harm” that the plaintiff is likely to sustain if the injunction is denied as compared to the harm that the defendant is likely to suffer if the court grants a preliminary injunction.  CCP §526(a)(2); 14859 Moorpark Homeowner’s Assn. v. VRT Corp., (1998) 63 Cal.App.4th 1396. 1402; Pillsbury, Madison & Sutro v. Schectman, (1997) 55 Cal.App.4th 1279, 1283; Davenport v. Blue Cross of California, (1997) 52 Cal.App.4th 435, 446; Abrams v. St. Johns Hospital, (1994) 25 Cal.App.4th 628, 636.  Thus, a preliminary injunction may not issue without some showing of potential entitlement to such relief.  Doe v. Wilson, (1997) 57 Cal.App.4th 296, 304.  The decision to grant a preliminary injunction generally lies within the sound discretion of the trial court and will not be disturbed on appeal absent an abuse of discretion.  Thornton v. Carlson, (1992) 4 Cal.App.4th 1249, 1255.

A preliminary injunction ordinarily cannot take effect unless and until the plaintiff provides an undertaking for damages which the enjoined defendant may sustain by reason of the injunction if the court finally decides that the plaintiff was not entitled to the injunction.  See CCP §529(a); City of South San Francisco v. Cypress Lawn Cemetery Assn., (1992) 11 Cal.App.4th 916, 920.

C. Governing Law

Non-competition covenants are disfavored under the law, and those that purport to restrict the ability of a person to practice his or her profession are invalid in the absence of a statutory exception.  Business and Professions Code[4] §16600; Edwards v. Arthur Andersen LLP, “Edwards”) (2008) 44 Cal.4th 937, 942, 948.  Section 16600 declares that, except as provided in other statutory exceptions, such agreements are void as a matter of public policy.  Thus, covenants not to compete generally are not enforceable in California by injunction or otherwise.  Dowell v. Biosense Webster, Inc., (2009) 179 Cal.App.4^th 564, 575.  Even though an employee’s contractual agreement not to solicit an employer’s customers is not enforceable under B&P section 16600, the court may still enjoin tortious conduct as violation of trade secret law or as unfair competition under B&P section 17200.  The Retirement Group v. Galante, (2009) 176 Cal.App.4^th 1226, 1238-41.

Section 16601 contains an exception for non-competition agreements entered into as part of a business owner’s sale of his or her ownership interest or a company’s sale of all or substantially all of its assets.  See Edwards, supra, 34 Cal.4th at 945-46.  The reason for the exception is to prevent the seller from depriving the buyer of the full value of its acquisition, including the sold company’s goodwill.  Alliant Insurance Services Inc. v. Gaddy, (2008) 159 Cal.App.4th 1292, 1301.  Where goodwill is sold with a business, it is unfair for the seller to engage in competition which diminishes the value of the goodwill asset.  Monogram Industries, Inc. v. SAR Industries, Inc., (1976) 64 Cal.App.3d 692, 698.  “The sold business’s goodwill is the ‘expectation of ... that patronage which has become an asset of the business.’”  Alliant supra, 159 Cal.App.4th at 1302 (citing Strategix, Ltd. v. Infocrossing West, Inc. (2006) 142 Cal.App.4th 1068, 1073). 

The courts will not attempt to construe a covenant not to compete narrowly in an attempt to save a statutorily proscribed and void provision.  D’Sa v. Playhut, Inc., (2000) 85 Cal.App.4th 927, 935.

Section 16600 does not invalidate an employee’s agreement not to solicit former co-workers.  Loral Corp. v. Moyes, (1985) 174 Cal.App.3d 268, 276-77.  The co-workers may not be restrained from moving to the competitor; enforcement of an agreement not to raid a former employer simply prevents the former employee from contacting them first.  Id. at 279.  Enforcement of such an agreement provides an employer with assurance of a stable work force, has no overall negative impact on trade or business, and is not void on its face under B&P Code section 16600.  Id. at 280.  Compare AMN Healthcare, Inc. v. Aya Healthcare Services, Inc., (“AMN”) (2018) 298 Cal.Ap.5^th 923, 951-52 (concluding that non-solicitation provision for employees was unenforceable under section 16600).

D. Statement of Facts

1. Moving Plaintiffs’ Evidence

Moving Plaintiffs were either suspended, forced to resign, terminated, or currently suspended from Beautycounter for alleged violations of a Non-Solicitation Policy embedded in Beautycounter’s Policies and Procedures.  Bagzis Decl. ¶ 2; Persky Decl. ¶ 2; Heiny Decl. ¶ 2; Guardia Decl. ¶ 2; Culver Decl. ¶ 2; Sibley Decl. ¶ 2; Eisenberg Decl. ¶ 2; and Zirlin Decl. ¶ 2.  Plaintiffs Medina did not see nor sign the Non-Solicitation Policy.  Bagzis Decl. ¶ 2; Persky Decl. ¶ 2; Heiny Decl. ¶ 2; Guardia Decl. ¶ 2; Culver Decl. ¶ 2; Sibley Decl. ¶ 2; Eisenberg Decl. ¶ 2; and Zirlin Decl. ¶ 2.   Moving Plaintiffs were not involved in reviewing, negotiating, or discussing the terms of a non-solicitation policy with Beautycounter at any point.  Bagzis Decl. ¶ 2; Persky Decl. ¶ 2; Heiny Decl. ¶ 2; Guardia Decl. ¶ 2; Culver Decl. ¶ 2; Sibley Decl. ¶ 2; Eisenberg Decl. ¶ 2; and Zirlin Decl. ¶ 2.   Moving Plaintiffs were only made aware of this policy after they already started working with other multi-level marketing (“MLM”) companies.  Bagzis Decl. ¶ 2; Persky Decl. ¶ 2; Heiny Decl. ¶ 2; Guardia Decl. ¶ 2; Culver Decl. ¶ 2; Sibley Decl. ¶ 2; Eisenberg Decl. ¶ 2; and Zirlin Decl. ¶ 2.

Moving Plaintiffs would not have joined Beautycounter had they known Beautycounter would try to prevent them from leveraging their own network for other MLM businesses.  Bagzis Decl. ¶ 3; Persky Decl. ¶ 3; Heiny Decl. ¶ 3; Guardia Decl. ¶ 3; Culver Decl. ¶ 3; Sibley Decl. ¶ 3; Eisenberg Decl. ¶ 3; and Zirlin Decl. ¶ 3.  Most independent consultants represent multiple MLM companies.  Bagzis Decl. ¶ 3; Persky Decl. ¶ 3; Heiny Decl. ¶ 3; Guardia Decl. ¶ 3; Culver Decl. ¶ 3; Sibley Decl. ¶ 3; Eisenberg Decl. ¶ 3; and Zirlin Decl. ¶ 3.

Moving Plaintiffs have not been provided with any evidence by Beautycounter supporting their allegations that they breached the non-solicitation policy.  Bagzis Decl. ¶ 4; Persky Decl. ¶ 4; Heiny Decl. ¶ 4; Guardia Decl. ¶ 4; Culver Decl. ¶ 4; Sibley Decl. ¶ 4; Eisenberg Decl. ¶ 4; and Zirlin Decl. ¶ 4.

Since the suspensions, Moving Plaintiffs have been cut-off from their website, customers, downline, and all information relating to their Beautycounter businesses.  Bagzis Decl. ¶ 5; Persky Decl. ¶ 5; Heiny Decl. ¶ 5; Guardia Decl. ¶ 5; Culver Decl. ¶ 5; Sibley Decl. ¶ 5; Eisenberg Decl. ¶ 5; and Zirlin Decl. ¶ 5.  Moving Plaintiffs also received checks from Beautycounter that do not reflect what their commissions should be for the sales Beautycounter has received from their customers and downline since their suspensions.  Bagzis Decl. ¶ 6; Persky Decl. ¶ 6; Heiny Decl. ¶ 6; Guardia Decl. ¶ 6; Culver Decl. ¶ 6; Sibley Decl. ¶ 6; Eisenberg Decl. ¶ 6; and Zirlin Decl. ¶ 6.  The suspension, forced resignation, and/or terminations have imposed significant hardships on Moving Plaintiffs since they are prevented from generating the level of sales they would typically generate.  Bagzis Decl. ¶¶ 7-8; Persky Decl. ¶¶ 7-8; Heiny Decl. ¶¶ 7-8; Guardia Decl. ¶¶ 7-8; Culver Decl. ¶¶ 7-8; Sibley Decl. ¶¶ 7-8; Eisenberg Decl. ¶¶ 7-8; and Zirlin Decl. ¶¶ 7-8. 

The MLM industry requires independent consultants to leverage their personal networks to recruit people to sell under them in addition to selling the products/services directly to customers to build their business and commission streams.  Bagzis Decl. ¶ 9; Persky Decl. ¶ 9; Heiny Decl. ¶ 9; Guardia Decl. ¶ 9; Culver Decl. ¶ 9; Sibley Decl. ¶ 9; Eisenberg Decl. ¶ 9; and Zirlin Decl. ¶ 9.  Beautycounter’s threats to enforce the non-solicitation policy are impeding Moving Plaintiffs’ ability to recruit for their new businesses, make commissions in their new roles, continues to damage their professional reputations, and impeding on their ability to earn a living in their chosen profession.  Bagzis Decl. ¶¶ 10-11; Persky Decl. ¶¶ 10-11; Heiny Decl. ¶¶ 10-11; Guardia Decl. ¶¶ 10-11; Culver Decl. ¶¶ 10-11; Sibley Decl. ¶¶ 10-11; Eisenberg Decl. ¶¶ 10-11; and Zirlin Decl. ¶¶ 10-11.

2. Counter Brand’s Evidence

Beautycounter sells a variety of safer and clean beauty products such as skincare, haircare, body care, cosmetics, and fragrances.  Rollin Decl. ¶ 3.  Beautycounter operates, in part, MLM company, where independent contractors known as “Brand Advocates” enter into consultant agreements with Beautycounter to sell its products to consumers.  Rollin Decl. ¶ 4.  Beautycounter also sells its products through other channels, including its own retail stores, own website, and strategic partnerships, including with Ulta Beauty.  Rollin Decl. ¶ 4.  Beautycounter’s Brand Advocates are crucial to its success and drive the majority of Beautycounter’s revenue.  Rollin Decl. ¶ 5.  Like other MLM companies, Beautycounter compensates Brand Advocates for their sales and sales their downline members generate.  Rollin Decl. ¶ 6. 

Beautycounter also competes with other MLM companies not only for product sales but for independent contractors to make those sales.  Rollin Decl. ¶ 7.  The Companies that Beautycounter considers competitors at the product level include Olive Tree People and Green Compass, which are both MLM companies that sell many products that compete with Beautycounter products.  Rollin Decl. ¶ 8.  For instance, both Beautycounter and Olive Tree People sell skin care products including serums, toners, cleansers, face masks, and more, as well as shampoo.  Rollin Decl. ¶ 9.  Similarly, both Beautycounter and Green Compass sell a wide variety of skin care products including serums, body oils, creams, and more.  Rollin Decl. ¶ 10.  For example, Beautycounter's highest-selling product is a Vitamin C serum, and Green Compass offers a competing Vitamin C serum.  Rollin Decl. ¶ 10.

E. Analysis

Moving Plaintiffs seek a preliminary injunction precluding Defendant Counter Brands from enforcing its non-solicitation clause against former consultants and current consultants to the extent that they are soliciting other consultants for a non-competing business. 

Although Moving Plaintiffs argue that they never agreed to the non-solicitation clause (Supp Mem. at 11-14), the court will assume, arguendo, that they did for purposes of this application.

1. Mootness as to Former Consultants

Counter Brands states that it does not intend to enforce its non-solicitation policy against former consultants.  Accordingly, a preliminary injunction to prevent such enforcement is unnecessary.  See Madrid v. Perot Sys. Corp., (2005) 130 Cal. App. 4th 440, 463 (“Injunctive relief is appropriate only when there is a threat of continuing misconduct.”).  Opp. at 11, n. 4.

Petitioners are skeptical about this representation and argue that Counter Brands has continued to threaten to enforce its illegal non-solicitation policy against former consultants even after the TRO was entered.   On April 17, 2024, Counter Brands summarily fired swaths of consultants as part of its founder’s buyback of the company from the private equity company that purchased a majority interest in 2021.  In an April 17 termination email from the CEO and founder of Counter Brands, Gregg Renfrew, a consultant was informed: “As a reminder, you remain bound by all post-termination obligations under the Brand Advocate Agreement….”  Bures Decl., Ex. A.    The consultant was never told, before or after receipt of this email, that her “post-termination obligations” no longer included the non-solicitation restriction Counter Brands expressly threatened to enforce against Plaintiffs, which has been enjoined by this Court.  Id., ¶5.  Reply at 2-23. 

Injunctive relief in favor of Moving Plaintiffs who are former consultants is not mooted.

2. Probability of Success

Under Section 16600, all covenants not to compete – including non-solicitation covenants – are void absent an express statutory exception.  See Kelton v. Stravinski, (“Kelton”) (2006) 138 Cal.App.4^th 941, 946.  Sections 16601 and 16602 permit covenants not to compete in two narrow situations: where a person sells the goodwill of a business and where a partner agrees not to complete in anticipation of dissolution of a partnership.  Id.[5]  Covenants not to compete in contracts other than for either the sale of goodwill or dissolution of a partnership are void.  Ibid.  California courts have read an exception into the statute for in-term non-solicitation restrictions on employees. See, e.g., Techno Lite, Inc. v. Emcod, LLC, (“Techno Lite”) (2020) 44 Cal.App.5th 462, 471. The justification for this exception stems from the employee’s implied duty of loyalty owed to their employer.  Id.

Counter Brands argues that California law generally recognizes that the limitations of section 16600 apply only after an employee or independent contractor is no longer in an employment or contractor relationship.  See Techno Lite, supra, 44 Cal. App. 5th at 471 (“[Section 16600] does not affect limitations on an employee’s conduct or duties while employed.”) (emphasis in original)); Angelica Textile Servs., Inc. v. Park, (“Angelica”) (2013) 220 Cal. App. 4th 495, 509 (“[S]ection 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.”) (emphasis in original)).  Opp. at 11.

Thus, businesses are generally free to enforce non-solicitation clauses against current employees.  Techno Lite, supra, 44 Cal. App. 5th at 473 (“Appellants do not cite – and we have not found – a single case in which Section 16600 was held to invalidate an agreement not to compete with one’s current employer while employed by that employer.”).  “The public policy behind Section 16600 is to ensure ‘that every citizen shall retain the right to pursue any lawful employment and enterprise of their choice’ [Citation.] and to encourage open competition and employee mobility [Citation.]; it is not to immunize employees who undermine their employer by competing with it while still employed.”  Id.

The problem with Counter Brands’ argument is that its current consultants are independent contractors, not employees.  By their nature, independent contractors owe no duties to their contract partner outside the duties assigned in their contract and any contract-related duties implied by law (i.e., the implied covenant of good faith and fair dealing).  Unlike an employee, the current consultants owe no contract duty of loyalty which is the very basis of the court-created exception to section 16600 for non-solicitation restrictions on employees.  See Techno Lite, supra, 44 Cal.App.5th at 471.[6]

Moving Plaintiffs rely on case law holding that in-term covenants not to compete for non-employees have been held invalid under section 16600.  Supp. Mem. at 6-7.

In Kelton v. Stravinski, two partners entered a covenant not to directly compete with the partnership’s warehouse development business during the lifetime of the partnership, although the partners were otherwise free to conduct other “competitive real estate activities.” 138 Cal.App.4th at 944–45.  The Fifth District Court of Appeals found that the covenant not to compete did not fall within the two statutory exceptions to section 16600. “The covenant not to compete violates California's public policy of open competition and therefore is unenforceable.” Id. at 947.  The Kelton court expressly rejected the plaintiff’s argument that “the covenant not to compete is valid because the parties were involved in an ongoing business relationship.” Id.

In a New York federal district case, FaZe Clan Inc. v. Tenney, (S.D.N.Y. 2020) 467 F.Supp.3d 180, 187, an independent contractor (Tenney) asserted that the non-compete restrictions in his contract with a video game promoter (FaZe Clan) were invalid under section 16600.  The district court distinguished Techno Lite and Agenlica as cases in which a current employee sought to invoke section 16600.  Id. at 188.  Outside of the current employee context, “state and federal courts applying California law typically hold that § 16600 does bar in-term agreements not to compete.” Id. (citing Kelton, supra, 138 Cal.App.4th at 941.  The district court pointed out that the Ninth Circuit, in a non-precedential decision, “relied on Kelton to hold that §16600 barred an in-term non-compete provision in a contract between two independent contractors, a filmmaker and an actor.” Id. (citing ITN Flix, LLC v. Hinojosa, (“ITN Flix”) (9th Cir. 2017) 686 Fed.App'x 441 (memorandum).  While ITN Flix was not binding, the district court believed it to be “strong persuasive authority” that was “consistent with the reasoning of Techno Lite that the exception for employer-employee contracts relates to the unique attributes of the employment relationship, i.e., the fact that during the term of employment, an employer is entitled to its employees’ undivided loyalty.” Id.  The district court further found this result and reasoning consistent with the California Supreme Court’s instruction that “section 16600 represents a strong public policy of the state which should not be diluted by judicial fiat.” Id. (citing Edwards, supra, 44 Cal. 4th at 949).  Supp. Mem. at 7.

Counter Brands distinguishes Kelton, supra, 138 Cal. App. 4th at 941, as dealing with a non-competition provision, not a non-solicitation clause (id. at 946-47) and a partnership, for which the covenant not to compete did not come within any exceptions to the general rule that such covenants are void (id. at 944).  Similarly, FaZe Clan Inc. v. Tenney, supra, 467 F. Supp. 3d at 187-88 is inapposite because it involved a non-compete rather than a non-solicit.  Id. at 187-88.  Moving Plaintiffs have cited no case law endorsing the idea that independent contractors must be allowed to poach a company’s employees or other independent contractors while actively working for that company.[7]

Counter Brands’s distinction of Kelton and FaZe Clan Inc. v. Tenney on the ground that they concern covenants not to compete as opposed to non-solicitation restraints is ineffectual.   Both are analyzed the same way.  See Edwards, supra, 44 Cal. 4th at 955 (holding non-solicitation provision invalid, as it would non-competition agreement, under section 16600 unless it fell within the applicable statutory exceptions of sections 16601, 16602, or 16602.5.”).

Counter Brands points to Youngevity International, Corp. v. Smith, (“Youngevity”) (S.D. Cal. Dec. 1, 2016) 224 F. Supp. 3d 1022, 1032, in which a federal district court enforced a non-solicitation agreement against an independent contractor working for an MLM as an exception to section 16600’s general prohibition.  Opp. at 12.

The Youngevity district court did not mention Kelton and stated that it did not believe “it is proper to make such a distinction” between independent contractors and employees because unlike a restraint that operates for a period after a business relationship expires, an independent contractor can simply cease the business relationship with to whom the covenant runs.  224 F.Supp. 3d at 1032.  While this statement is true, Youngevity ignores California law that all restraints are void absent one of the three statutory exceptions or the court-created exception for employees based on the duty of loyalty.  Edwards, supra, 44 Cal. 4th at 955.  A non-solicitation restraint on independent contractors does not fall within a statutory exception to section 16600 and the weight of case law on the issue shows neither is there a judicial carve-out validating such a provision.  Counter Brands’s policy violates California public policy and section 16600 for both former and current consultants.

3. Competing Businesses

Counter Brands attempts to save its non-solicitation policy by arguing that it only applies to other MLMs that compete with Counter Brands for a sales force.  Moving Plaintiffs concede that they are seeking to be released from their non-solicitation obligations so that they can poach Counter Brands consultants for businesses that sell competing products.  Opp. at 14.

Counter Brands argues that the court indicated at the TRO/OSC hearing that a non-solicitation provision would be enforceable to prevent a current Counter Brands consultant from recruiting other consultants to join competing businesses.  However, the court refrained from defining a “competing business”.  Counter Brands argues that its competing businesses include not only MLM companies that sell similar products as Counter Brands, but also MLM companies, in general, which compete for a sales force of independent contractors.  Opp. at 12.

Moving Plaintiffs concede that MLM companies are part of a unique “MLM industry” in which each company and consultant competes to build a sales force.  Bagzis Decl., ¶9; see also Guardia Decl., ¶9 (same); Eisenberg Decl., ¶9 (same); Persky Decl., ¶9 (same); Zirlin Decl., ¶9 (same); Sibley Decl., ¶9 (same); Heiny Decl., ¶9 (same); Culver Decl., ¶9 (same).  Indeed, courts have recognized that the MLM business model (in which sales take place through independent contractors) means that all MLM companies compete with one another to develop and maintain an effective sales force.  PartyLite Gifts, Inc. v. MacMillan, (“PartyLite Gifts”) (M.D. Fla. 2012) 895 F. Supp. 2d 1213, 1228  (“PartyLite [MLM that sells candles and related home products] and Park Lane [MLM that sells jewelry] are competitors in that they compete for salespeople by offering competitive income opportunities under similar, albeit not identical, compensation schemes.”); see also Pre-Paid Legal Servs., Inc. v. Cahill, (E.D. Okla. (2013) 924 F. Supp. 2d 1281, 1290-91 (granting injunction to prevent former independent contractor of plaintiff MLM company selling legal services plans from recruiting its current contractors to join another MLM company selling skincare).  As a result, the mere fact that “[MLM] companies may sell different products does not mandate the conclusion that they are neither similar nor competitive.”  PartyLite Gifts, supra, 895 F. Supp. 2d at 1228.  Counter Brands’s non-solicitation policy is properly tailored to extend only to other MLM companies, which are part of one competitive industry.  Opp. at 12-13.

Moving Plaintiffs reply that Counter Brands’s reliance on competition for sales force, and not products, is untenable.  Its definition of “competitor” includes any “network marketing, multilevel marketing, party plan or social media company that sells products or services through independent sales representatives.”  Dattilo Decl., Ex. B, §12.  In other words, Counter Brands wants to restrain recruitment for companies that sell in the same manner rather than those that sell directly competitive products.  Yet, Counter Brands’s leaders actually promote competing products, suggesting they are not concerned about product competition, only about people competition.  Counter Brands’s founder and CEO has several times promoted other beauty and skin care brands on her personal Instagram, promoting them side-by-side with Counter Brands.  Hill Decl., Ex. A.  The company’s Instagram page, too, has posted several times praising other beauty and skin care brands.  Id., Ex. B.  Counter Brands never explains why it and its CEO can promote other skincare products, but it is a contractually fatal offense for consultants to recruit other Counter Brands consultants to do the same.  Reply at 4-5.

The court accepts Counter Brands’ argument that it competes with other MLM companies for a sales force.  But that fact does not affect the unlawfulness of its non-solicitation clause under section 16600.  Nor does it affect the scope of the preliminary injunction.  The OSC does not apply to current consultants soliciting other consultants for competing businesses, but the court will not include competition for consultants in its use of the term competing business, only competition for products.  See post.

Counter Brands further argues that Moving Plaintiffs all seek to solicit Counter Brands’s existing consultants to join MLM ventures that sell directly competing products.  Moving Plaintiffs argue that they should be able to recruit Counter Brands’s consultants to join either Olive Tree People or Green Compass.  See Bagzis Decl., ¶¶ 9-10; Culver Decl., ¶¶ 9-10; Eisenberg Decl., ¶¶ 9-10; Heiny Decl., ¶¶ 9-10; Guardia Decl., ¶¶ 9-10; Persky Decl., ¶¶ 9-10; Sibley Decl., ¶¶ 9-10; Zirlin Decl., ¶¶ 9-10.  These two companies offer products that directly compete against Counter Brands’s products.  See Rollin Decl., ¶¶ 8-10.  Olive Tree People and Green Compass each sell skincare products, just as Counter Brands does.  Rollin Decl., ¶¶ 9-10.  Moving Plaintiffs have not identified any current consultant who is seeking to recruit other consultants to join an MLM company that sells unrelated products.  Opp. at 13.

Moving Plaintiffs reply that Green Compass and Oliveda both sell some skin care products, but it is a stretch to say they are competing for the same market share as Counter Brands.  These two brands sell only a few overlapping products with Counter Brands.  Hill Decl., ¶¶ 5–6; Bagzis Decl., ¶¶ 4–5.  Green Compass is a hemp and CBD-based products company focused on internal wellness and pain relief.  Hill Decl., ¶¶ 3–4.   Just three of Green Compass’s products could even be considered facial skin care products. Unlike Counter Brands, Green Compass does not sell cosmetics.  Hill Decl., ¶6.  Oliveda also does not sell cosmetics and sells only olive tree-based products in skincare, elixirs, teas, olive oils, and shampoo. Bagzis Decl., ¶4.  Reply at 5.

Further, independent contractors can and do successfully sell for multiple companies simultaneously.  Plaintiff Bagzis sold Oliveda and Counter Brands products before her suspension, and recruited teams for those businesses, without her Counter Brands business being negatively affected.  Bagzis Decl., ¶¶6–7.  Counter Brands’s definition of “competitor” is overbroad, nonsensical, and unnecessary to prevent harm to Counter Brands.  Reply at 5-6.

The court will exclude Green Compass and Oliveda from the term competing business as they have not been shown to sufficiently compete with Counter Brands.

4. Balancing of Irreparable Harms

Moving Plaintiffs argue that they are currently subject to great and irreparable harm if Counter Brands is not enjoined from enforcing its unlawful policy.  

Moving Plaintiffs are suffering financial losses from the non-solicitation clause.  While money damages may compensate for some financial harm, “[i]rreparable harm” does not mean “injury beyond the possibility of repair or beyond possible compensation in damages.”  Donahue Schriber Realty Grp. v. Nu Creation Outreach, (2014) 232 Cal. App. 4th 1171, 1184 (citation omitted).  Certain types of monetary damages become irreparable, particularly when a plaintiff is unable to work.  Where the likely harm is  lost wages and the ability to meet family needs, there may be irreparable harm.  Ex Parte App. at 11.

Besides their loss of income, Moving Plaintiffs are losing goodwill with their customers to whom they can no longer sell.  Moving Plaintiff Decls., ¶11.  Their reputation as salespersons is damaged when they cannot sell to their customers.  Loss of goodwill, inability to sell to customers, and reputational harm are each considered irreparable harm in California. Donahue Schriber Realty Grp. v. Nu Creation Outreach, supra, 232 Cal. App. 4th at 1178.  Ex Parte App. at 10-11.

Moving Plaintiffs argue that Counter Brands would lose little in allowing them to recruit other consultants for other MLM opportunities.  If Moving Plaintiffs are able to sell products and recruit sales consultants for other companies, it would not necessarily cause Counter Brands to lose any sales because a customer may purchase from both Counter Brands products and another company.  Ex Parte App. at 11-12.  Even if Counter Brands would lose some sales or consultants, the level of harm is minimal.  Counter Brands is a billion-dollar company and Moving Plaintiffs are only eight out of its more than 40,000 sales consultants.  Finally, “a party suffers no grave or irreparable harm by being prohibited from violating the law,” so a finding that the non-solicitation policy violates section 16600 would preclude a finding that irreparable harm would result if Counter Brands were not allowed to continue enforcing its policy in violation of the law. People v. Uber Techs., Inc., (2020) 56 Cal. App. 5th 266, 305.  Ex Parte App. at 12.

Counter Brands argues that its harm from a preliminary injunction lies in the Moving Plaintiffs’ abandonment of their duty of loyalty.  Ex Parte Opp. at 14-15.[8]  As stated, there is no such duty shown.

The balancing of harms works in favor of a preliminary injunction.[9]

5. Scope of the Preliminary Injunction

Counter Brands argues that Moving Plaintiffs’ contention that non-solicitation agreements may never be enforced against independent contractors is both beyond the scope of this proceeding and meritless.  When the court issued its TRO/OSC against Counter Brands, it explained: “The temporary restraining order only applies to the former employees and the order to show cause applies to the former and also the current employees (sic.) but only to the extent they are soliciting consultants for a non-competing business.”  Mar. 14, 2024 Minute Order (emphasis added).  In other words, the OSC does not encompass Counter Brands’s non-solicitation policy to the extent it applies to Counter Brands’ current consultants working for competing companies.  Rather, the only aspect of Counter Brands’s in-term non-solicitation policy at issue is whether it can be applied to non-competing companies.  Opp. at 14.

Counter Brands is correct.  As stated ante, the OSC does not apply to current consultants soliciting other consultants for competing businesses.  However, the court does not include competition for consultants in this reference to competing businesses, only competition for products.  If Moving Plaintiffs wish to increase the scope of the preliminary injunction, they will have to move to modify it in the I/C court.

Counter Brands also argues that Moving Plaintiffs’ requested preliminary injunction is improperly broad because they request a preliminary injunction that would prevent Counter Brands from enforcing its non-solicitation policy against all persons “similarly situated” to Moving Plaintiffs—even consultants who are not parties.  Moving Plaintiffs rely on AMN, supra, 28 Cal. App. 5th at 951-52, a case that involved a permanent injunction imposed after a fact-intensive merits analysis.  AMN’s permanent injunction analysis does not apply to a preliminary injunction.  Cf. West v. Lind, (1960) 186 Cal. App. 2d 563, 565 (“The power to issue preliminary injunctions is an extraordinary one and should be exercised with great caution and only where it appears that sufficient cause for hasty action exists.”).  Opp. at 19.

Even if AMN were relevant in this procedural context, the injunction served to benefit a party.  In that case, the plaintiff business sought to enjoin a competitor company from enforcing a non-solicitation provision against its former employees, including non-party former employees.  28 Cal. App. 5th at 951–52.  In granting the permanent injunction, the AMN court highlighted evidence that the defendant company had tried to use the non-solicitation provision to stop former employees from joining the plaintiff.  Id.  Thus, by preventing enforcement of the non-solicitation provision, the AMN injunction primarily served to prevent harm to the plaintiff business while indirectly benefiting non-party former employees.  In contrast, Moving Plaintiffs seek an injunction unmoored from any harm to them to the extent that they seek to prevent Counter Brands from enforcing its non-solicitation policy against non-parties.[10]  Opp. at 19-20.

Moving Plaintiffs reply that the TRO/OSC, which Counter Brands agreed to in form and content, states that Counter Brands ordered to show cause why a preliminary injunction should not issue restraining it during the pendency of the action from “(1) using, relying on, or threatening enforcement of its Non-Solicitation Policy with respect to former Independent Consultants; and (2) using, relying on, or threatening enforcement of its Non-Solicitation Policy with respect to current Independent Consultants who seek to directly or indirectly solicit or recruit other Counter Brands consultants for a multi-level-marketing business that does not compete with Beautycounter.”  The OSC is not limited to Moving Plaintiffs.  Reply at 3.

True, but there is no reason at a preliminary stage to enjoin Counter Brands with respect to non-parties or Plaintiffs who have not sought a preliminary injunction.  Moving Plaintiffs have not shown any interim harm for persons other than themselves.  That should be a matter for the I/C court’s full consideration after trial or merits hearing at which issues such as injunctive relief for out-of-state consultants is considered. 

F. Conclusion

The preliminary injunction is granted for Moving Plaintiffs who are former consultants or who are current consultants and who seek to directly or indirectly solicit or recruit other Counter Brands consultants who work for a MLM business that does not compete with Counter Brands in the products it sells.

The court must require a bond from Moving Plaintiffs. The purpose of a bond is to cover the defendant’s damages from an improvidently issued injunction. CCP §529(a). In setting the bond, the court must assume that the preliminary injunction was wrongly issued. Abba Rubber Co. v. Seaquist, (“Abba“) (1991) 235 Cal.App.3d 1, 15. The damages include any lost profits resulting from the injunction. See Allen v. Pitchess, (1973) 36 Cal.App.3d 321, 327-28. The attorney’s fees necessary to successfully procure a final decision dissolving the injunction also are damages that should be included in setting the bond. Abba, supra, 235 Cal.App.3d at 15-16. While Abba reasoned that the plaintiff’s likelihood of prevailing is irrelevant to setting the bond, a more recent case disagreed, stating that the greater the likelihood of the plaintiff prevailing, the less likely the preliminary injunction will have been wrongly issued, and that is a relevant factor for setting the bond.  Oiye v. Fox, (2012) 211 Cal.App.4th 1036, 1062.  The bond is set at a nominal $500.