Judge: Robert C. Longstreth, Case: 37-2022-00013335-CU-BC-CTL, Date: 2024-03-22 Tentative Ruling

SUPERIOR COURT OF CALIFORNIA,

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HALL OF JUSTICE

TENTATIVE RULINGS - March 21, 2024

03/22/2024  08:30:00 AM  C-65 COUNTY OF SAN DIEGO

JUDICIAL OFFICER:Robert Longstreth

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Civil - Unlimited  Breach of Contract/Warranty Summary Judgment / Summary Adjudication (Civil) 37-2022-00013335-CU-BC-CTL RWB PLATINUM VAPE INC VS SADLER [E-FILE] CAUSAL DOCUMENT/DATE FILED: Motion for Summary Judgment and/or Adjudication, 01/30/2024

Plaintiffs' Motion for Summary Adjudication Plaintiffs' Motion for Summary Adjudication (ROA 248) is GRANTED.

The only matter to be adjudicated in this motion is 'the validity of the non-compete and non-solicitation covenants signed by Defendants and Cross-Complainants George Sadler and Cody Sadler.' (Ntc. Mtn.

at 2:5-7.) The court previously granted leave for Plaintiffs to file this motion pursuant to the parties' joint stipulation under Code of Civil Procedure section 437c(t). (ROA 227.) As Plaintiffs reiterate in their reply papers, the motion has not sought adjudication of whether Defendants breached either of the covenants, and accordingly, the court's ruling does not reach that issue.

Plaintiff purchased 100 percent of the interests in a group of cannabis businesses called Platinum Vape from Defendant in August 2020. (Def. Resp. Sep. Stmt. at ¶ 1.) As part of the sale, the parties executed a Securities Purchase Agreement ('SPA'). (Id. at ¶ 3.) The SPA provides that '[o]n or before Closing, Buyer shall enter into an employment agreement with each of the Sellers substantially in the form attached hereto as Exhibit D (each, an 'Employment Agreement').' (Rogers Decl., Exh. 1 at § 9(b)(ii).) The exhibits to the SPA were expressly incorporated into the SPA. (Def. Resp. Sep. Stmt. at ¶ 8.) The SPA generally provided that 'Sellers will devote such professional time, attention, best efforts, energy and skill to the business of Platinum Vape during the term of their respective employment necessary to effectively and efficiently execute all job responsibilities set forth in their Employment Agreements.' (Rogers Decl., Exh. 1 at § 9(b)(iv).) Further, 'Sellers agree to, and will cause each of the officers of Platinum Vape to, enter into non-competition and non-solicitation agreements extending two (2) years from the date they are no longer employed by RWB or Platinum Vape substantially in the form included as an Exhibit to the Employment Agreements.' (Pltf. Sep. Stmt. at ¶ 12.) Defendants objected to this material fact on the grounds the phase 'Sellers agreed' calls for a legal conclusion. (Def. Resp.

Sep. Stmt. at ¶ 12.) This objection is overruled. Further, Defendants failed to dispute this fact with any counter-evidence. (Ibid.) Accordingly, the court concludes this fact is undisputed.

Plaintiffs assert both Defendants executed identical Employment Agreements. (Pltf. Sep. Stmt. at ¶ 9.) Defendants purport to dispute this by asserting they 'did not execute Employment Agreements pursuant to the SPA,' but Defendants fail to offer any counter-evidence. (Def. Resp. Sep. Stmt. at ¶ 9.) As noted above, the Employment Agreements were expressly incorporated into the SPA. In support of this assertion, Plaintiffs offer the Employment Agreement signed by Cody Sadler. (Pltf. Sep. Stmt. at ¶ 9; Rogers Decl., Exh. 2.) Plaintiffs also offer the declaration of Brad Rogers, Chief Executive Officer and Calendar No.: Event ID:  TENTATIVE RULINGS

3041127  5 CASE NUMBER: CASE TITLE:  RWB PLATINUM VAPE INC VS SADLER [E-FILE]  37-2022-00013335-CU-BC-CTL Chairman of the Board of Directors of Red White & Bloom Brands, Inc. ('RWB') and President of both RWB and RWB Platinum Vape, Inc., who states both George and Cody Sadler 'each executed identical Employment Agreements (which are attached as Exhibit D to the SPA)....' (Pltf. Sep. Stmt. at ¶ 9; Rogers Decl. ¶¶ 1, 5.) Although only the Employment Agreement executed by Cody Sadler was offered as evidence by Plaintiffs, the court finds it is undisputed that both Defendants executed identical Employment Agreements. For the same reasons, the court finds it is undisputed that both Defendants executed Restrictive Covenant Agreements ('RCAs') containing the subject non-competition and non-solicitation clauses. (Def. Resp. Sep. Stmt. ¶¶ 9-11.) The court further notes Defendants appear to concede throughout their opposition that they both executed the relevant agreements.

Subject to statutory exceptions, '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. Code § 16600(a).) An exception applies when a person is selling the goodwill of a business. (Id. at § 16601.) Under such circumstance, the seller 'may agree with the buyer to refrain from carrying on a similar business within a specified geographic area in which the business is so sold, or that of the business entity, division, or subsidiary has been carried on, so long as the buyer, or any person deriving title to the goodwill or ownership interest from the buyer, carries on a like business therein.' (Ibid.) Defendants make four arguments in opposition to Plaintiffs' motion. First, they assert Plaintiffs have not owned a cannabis manufacturing license since March 28, 2022. This appears to be an argument that Defendants could not have breached the non-competition clause if Plaintiffs were not legally permitted to operate the business. Defendants assert, without citing any legal authority to the court, that a license is required to manufacture and distribute cannabis in California. (Opp. at 5:14-15.) Regardless, even accepting Defendants' unsupported representation that a license was required, and further accepting Cody Sadler's statement that Plaintiffs lost their licenses to manufacture and distribute cannabis (C.

Sadler Decl. ¶ 8), the court agrees with Plaintiffs' assertion on reply that whether Plaintiffs had a license or not is irrelevant to the issue to be determined in this motion, which is only whether the non-competition and non-solicitation clauses are valid.

Second, Defendants argue the non-competition clauses in the RCA are unenforceable based on Fillpoint, LLC v. Maas (2012) 208 Cal.App.4th 1170. In Fillpoint, the court determined a noncompete clause in an employment agreement was not enforceable under section 16601 of the Business and Professions Code. Like this case, the sale involved both a purchase agreement and an employment agreement. (Fillpoint at p. 1181.) The court held 'the purchase agreement and the employment agreement must be read together as an integrated agreement.' (Ibid.; see also Civ. Code § 1642, '[s]everal contracts relating to the same matters, between the same parties, and made as parts of substantially one transaction, are to be taken together.') Reading both contracts together, the court found there were effectively two non-identical non-compete clauses. (Fillpoint at p. 1183.) The covenant not to compete in the purchase agreement 'protected the goodwill of [the business] for three full years, served the purpose of Business and Professions Code section 16601, and was fully performed.' (Id. at p. 1182.) In contrast, the court found the employment agreement's non-compete clause was 'much broader,' and the buyer had conceded the two covenants were intended 'to deal with the different damage Maas might do wearing the separate hats of major shareholder and key employee.' (Id. at pp. 1182-83.) 'The purchase agreement's covenant was focused on protecting the acquired goodwill for a limited period of time. The employment agreement's covenant targeted an employee's fundamental right to pursue his or her profession.' (Id. at p. 1183.) Here, reading both the SPA and the RCA together, there is one covenant not to compete contained in the RCA that is cross-referenced in the SPA. The SPA states Defendants agree to enter into non-competition agreements 'extending two (2) years from the date they are no longer employed by RWB or Platinum Vape substantially in the form included as an Exhibit to the Employment Agreements.' (Rogers Decl. at Exh. 1, § 9(b)(iv).) It otherwise lists what Defendants may do and which is expressly not considered by the parties to compete with the business, e.g., own or sell real estate for any purpose, own or operate any non-cannabis business, and 'own or operate cannabis businesses that do not Calendar No.: Event ID:  TENTATIVE RULINGS

3041127  5 CASE NUMBER: CASE TITLE:  RWB PLATINUM VAPE INC VS SADLER [E-FILE]  37-2022-00013335-CU-BC-CTL manufacture or distribute cannabis vape products, license technology, brands, processes, or any other intellectual property involving cannabis vape products or provide services to any person or entity involving cannabis vape products in states where Platinum Vape has operations.' (Ibid.) The court is not persuaded there are two different covenants not to compete, as there were in Fillpoint.

Third, Defendants assert the RCA runs afoul of the statute because it is overbroad in scope and location.

Again, the court is not persuaded. The covenant not to compete in the RCA precludes Defendants from engaging in 'Competition' during their period of employment with RWB and for two years thereafter.

(Pltf. Sep. Stmt. at ¶ 11.) The covenant is limited in scope; it prohibits Defendants from owning or operating 'any business which is competitive, directly or indirectly, with any business carried on by Platinum Vape.' (Rogers Decl., Exh. 3, § 1(a).) This clearly achieves the goal of maintaining the goodwill of the business. Contrary to Defendants' assertions, this does not extend to 'any' business, but only to business that competes with Platinum Vape, and the covenant contains numerous express exceptions. The covenant is also limited to any states in which Platinum Vape operates. (Ibid.) This is significantly more generous than, for example, the covenant upheld in Monogram Industries, which restricted any competitive business activity 'within the United States, Puerto Rico, the Virgin Islands and Canada.' (Monogram Industries, Inc. Sar Industries, Inc. (1976) 64 Cal.App.3d 692, 696.) Further, although the statute does not require this, the covenant not to compete is also time-limited to two years after the employment period.

Fourth, Defendants assert goodwill was not part of the SPA. Again, the court is not persuaded. 'Where a covenant not to compete is executed as an adjunct of a sale of a business there is an inference that the business had a 'goodwill' and that [it] was transferred.' (Monogram Industries at p. 701.) In addition to this inference, Plaintiffs offered evidence that goodwill was part of the sale, which Defendants did not dispute. (Def. Resp. Sep. Stmt. at ¶¶ 5-7, 18-19, 22.) The court thus concludes the RCAs were entered into as part of the sale of Defendants business, which included the sale of goodwill of the business.

The RCA also contains a non-solicitation clause which Plaintiffs assert is valid. The only argument Defendant raises in opposition is that the non-solicitation clause violates Business and Professions Code section 16600. Non-solicitation agreements are generally valid. (Loral Corp. v. Moyes (1985) 174 Cal.App.3d 268, 280; see also John F. Matull & Associates, Inc. v. Cloutier (1987) 194 Cal.App.3d 1049, 1054, '[c]ase law provides that the terms of Business and Professions Code section 16600 do not invalidate' agreements not to solicit a former employer's clients, citing Loral Corp.; but see AMN Healthcare, Inc. v. Aya Healthcare Services, Inc. (2018) 28 Cal.App.5th 923, 936-939, finding a non-solicitation provision did violate section 16600.) Like the covenant not to compete, here the non-solicitation provision is appropriately limited in time and scope; indeed, the time period is shorter than that of the non-competition clause. The court concludes it is valid.

Cross-Complainants' Motion for Summary Judgment Defendants/Cross-Complainants' Motion for Summary Judgment (ROA 254) is DENIED.

George and Cody Sadler seek summary judgment on their Cross-Complaint, which asserts a single cause of action for breach of contract against Plaintiffs.

George and Cody Sadler entered into a written Settlement Agreement with Plaintiffs/Cross-Defendants in September 2021. (XC Sep. Stmt. at ¶ 6.) The Settlement Agreement contained a non-disparagement clause. (Id. at ¶ 8.) Therein, the parties agreed 'they will not defame, disparage, criticize, or otherwise speak of the other party in a negative, derogatory, or unflattering manner.' (Ibid.) On March 25, 2022, RWB sent 43 cease-and-desist letters to clients and vendors of the Sadlers. (Id. at ¶ 11.) The letters state '[t]he conduct of the Sadlers... constitutes breaching and illegal conduct and unfair business practices under California law' and advises that Plaintiffs have filed suit against the Sadlers 'and their newly formed companies to stop the illegal marketing and sale of Gelato products.' (Id. at ¶ 12.) The letters further state the recipients 'are now on notice that the conduct of the Sadlers... is in breach of contract, and is fraudulent and illegal' and 'should you continue to sell Gelato products, the Company Calendar No.: Event ID:  TENTATIVE RULINGS

3041127  5 CASE NUMBER: CASE TITLE:  RWB PLATINUM VAPE INC VS SADLER [E-FILE]  37-2022-00013335-CU-BC-CTL may pursue its rights against you, to the fullest extent permitted by law....' (Ibid) All of the above facts are undisputed. As the moving parties, the Sadlers bear the initial burden to prove each element of their claim. (Code Civ. Proc. § 437c(p)(1); Aguilar v. Atlantic Richfield (2001) 25 Cal.4th 826, 850-51.) The court finds that there is, at a minimum, a triable issue of fact as to whether the letters are communications made in anticipation of possible litigation. In their opposition, Plaintiffs assert the litigation privilege provides a complete defense. (Civ. Code § 47(b).) On reply, the Sadlers assert the litigation privilege was waived because Plaintiffs did not assert it as an affirmative defense in their answer to the Sadlers' Cross-Complaint. 'Although the general rule is that a privilege must be pled as an affirmative defense... California authority suggests an exception where the complaint alleges facts indicating applicability of a defense or where the affirmative defense is raised during a summary judgment proceeding.' (Cruey v. Gannett Co. (1998) 64 Cal.App.4th 356, 367.) Here, the Sadlers' cross-complaint clearly raises a possible defense on the grounds of litigation privilege (see XC at ¶¶ 12-14), and the defense is being raised on a summary judgment proceeding. Under the circumstances, the court is not persuaded Plaintiffs have waived the defense, or that, at this stage of the litigation, they would be denied leave to assert the defense if such leave were necessary.

The Sadlers also assert the litigation privilege does not apply, pointing out the letters 'were not part of a lawsuit, papers filed in support of a motion, or documents confined to the courts for a proper purpose.' (Reply at 6:10-12.) The Sadlers construe the litigation privilege too narrowly. As Plaintiffs asserted in their opposition papers, the privilege 'is not limited to statements made during a trial or other proceedings, but may extent to steps taken prior thereto, or afterwards.' (Rusheen v. Cohen (2006) 37 Cal.4th 1048, 1057; see also Eisenberg v. Alameda Newspapers, Inc. (1999) 74 Cal.App.4th 1359, 1378, 'Although the express language of section 47(b) applies only to communications made in a judicial or other official proceeding, courts have applied the privilege to some communications made in advance of anticipated litigation.') Thus, the court concludes that Plaintiffs have raised triable issues of material fact as to whether the litigation privilege bars the Sadlers' Cross-Complaint, and the Sadlers' Motion for Summary Judgment on the cross-complaint is denied. (Code Civ. Proc. § 437c(p)(1); Pltf. Addl. Facts at ¶¶ 1-8.) Once confirmed, this ruling shall be the final ruling of the court and no further written order is required.

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