Judge: Mark H. Epstein, Case: 24SMCV02013, Date: 2024-10-22 Tentative Ruling

Case Number: 24SMCV02013    Hearing Date: October 22, 2024    Dept: I

The demurrer is OVERRULED.

The case involves the sale of a business and a non-compete clause.  Multi Social (cross complainant) contends that Sunset and its principal (cross defendants) breached the contract by breaching the non-compete clause in that cross defendants allegedly helped or provided aid to another entity to help that entity compete with the business just sold.  In the cross complaint, Multi Social contends that Sunset made a series of misstatements to induce Multi Social to enter into the sales contract, including the promise not to help anyone compete with a Multi Social.  According to the cross complaint, after the agreement was signed and Multi Social paid over money, Multi Social learned that Sunset was supposedly helping other businesses compete by promoting web sites similar to the Plixi site that was sold in the transaction.  Sunset brings this demurrer to the cross complaint. 

The court is assuming that the recently-filed cross complaint is merely the same cross complaint that had been earlier filed in the related case, and therefore that the demurrer goes to a pleading filed before the demurrer was filed.  If that is not the case, then the demurrer is MOOT because the cross complaint to which it refers has been superseded.  For now, the court will assume that the demurrer is live.

The gravamen of the demurrer is that the non-compete is unenforceable.  California is an unusually restrictive state when it comes to noncompete clauses.  Business & Professions Code section 16600 outlaws all of them subject to certain exceptions.  Those without exception are simply void per se.  That would include non-compete provisions in an employment contract, for example.  Even a key employee cannot be restrained from leaving the company and starting a competing enterprise the next day.  (Of course, protections for trade secrets remain, but know-how and personal relationships travel with the employee.)  Even where there is an exception to the outright ban, the clause must be reasonable.  A restraint is reasonable if it does not harm competition more than it helps.  (Ixchel Pharma, LLC v. Biogen, Inc. (2020) 9 Cal.5th 1130.)  Sunset has not really briefed which standard applies, seeming to assume that the per se standard is the one applicable here.  The court is not so sure.  This case involves the sale of a business.  When a business is sold, a reasonable non-compete clause is appropriate.  After all, the buyer is buying a going concern, and part of the value of that concern is the reputation built up over time.  A buyer might well, and reasonably, want to know that the seller will not open up a competing shop next door the next day, thereby undercutting the value of the business sold.  And if the per se test is not applicable, then the demurring parties have failed to explain why the clause here is unreasonable.  The court would need some analysis of that point before ruling.  And the court notes that such an analysis would likely fail on demurrer.  On demurrer, the court cannot consider evidence; an allegation of unreasonableness need not be accompanied by much to survive the pleading stage.  Things might (or might not) be different on summary judgment, but not now.  Accordingly, the demurrer as to the unenforceability of the non-compete clause is OVERRULED.

The remaining arguments also lack merit.  The breach of contract cause of action (in which the court includes the breach of the covenant of good faith and fair dealing) and the UCL cause of action are adequately pled.  The fraud is also adequately pled and detailed in paragraphs 10-15 and 18 of the cross complaint.  Nor does the economic loss rule bar the cause of action for fraud.  Fraud is an exception to that doctrine, including fraudulent concealment.  And the court is not, at this point, concerned that the causes of action are duplicative.  On their face, they are not.  Fraud and breach of contract are different, and the UCL cause of action triggers different remedies.  However, cross defendants should rest assured that there will be no double recovery.  In any event, the remaining demurrers are OVERRULED.  Sunset has 30 days to answer.