California Appellate Court Upholds Stipulated Injunction Prohibiting Solicitation of Customers and Rejects After-The-Fact Effort to Show that Customer Nonsolicit Violated California's Ban on Noncompetes

by Sheppard Mullin Richter & Hampton LLP
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[authors: Jennifer Redmond and Suzanna Winslow]

Wanke v. Superior Court of San Diego, Cal. Ct. of App., Fourth Dist., Div. One, Case Nos. D058825, D058669 (October 4, 2012)

On October 4, 2012, the Fourth District Court of Appeal upheld a stipulated injunction which the trial court had concluded was an unlawful business restraint in violation of the law barring non-competition agreements, California Business & Professions Code section 16600. In so holding, the appellate court determined that a facially-valid injunction may be deemed invalid only if the challenging party can show that the injunction was beyond the trial court’s jurisdiction to issue from the outset.

Wanke Industrial Commercial Residential Inc. (“Wanke”) installs waterproofing systems in Southern California. Two of Wanke’s employees left the company in early 2008 and formed their own competing waterproofing company, WP Solutions. In December 2008, Wanke filed the underlying action against the former employees asserting eight causes of action, including a claim for misappropriation of trade secrets. In addition to other forms of relief, Wanke requested that the court issue an order enjoining the employees from soliciting any business from Wanke’s past or current customers. The parties entered into a settlement and mutual general release agreement in October 2009, which provided that the trial court would retain jurisdiction over the parties to enforce the terms of the settlement agreement and the stipulated injunction, pursuant to California Code of Civil Procedure section 664.6. The stipulated injunction prohibited WP Solutions from using Wanke’s attached customer list.

In May 2010, Wanke filed an application for an order to show cause requesting that the trial court hold the former employees in contempt for violating the stipulated injunction, claiming that the defendants contacted and supplied labor to a Wanke customer eleven separate times. The trial court determined that although Wanke had proven that the defendants had (1) knowledge of the stipulated injunction, (2) the ability to comply with its terms, and (3) willfully disobeyed it, Wanke failed to establish the fourth requirement, the “existence of a lawful order.” The basis for the court’s finding that the stipulated injunction was invalid under Business & Professions Code section 16600 was that neither the identity of the Wanke customer nor its location—the information provided on the customer list—was a trade secret. On these grounds the court concluded the defendants could not be convicted of contempt, and they were acquitted on all 11 counts. Nevertheless, the court awarded Wanke $17,665 in attorneys’ fees as the prevailing party on the motion to enforce the settlement agreement.

Wanke filed another motion to enforce the settlement agreement in September 2010, with respect to a different customer listed in the stipulated injunction. This time the court granted Wanke’s motion, finding that the stipulated injunction applied to “jobs undertaken or proposed to be undertaken…while defendants…were employed by [Wanke],” and thus the defendants had violated it. The court ordered the defendants to pay $58,615, including $50,000 in liquidated damages and $8,615 in attorneys’ fees.

Both parties appealed the trial court’s orders. WP Solutions contended that the trial court erred in awarding Wanke attorneys’ fees as a prevailing party, because the court determined both that the stipulated injunction was invalid and the defendants could not be found to be in contempt of the stipulated injunction or to have violated the settlement agreement. Additionally, WP Solutions challenged the court’s latter decision that it had violated the settlement agreement. Wanke argued that the court incorrectly denied its motion to enforce the settlement agreement as to the first customer, and it also filed a petition for writ of mandate challenging the court’s refusal to hold the defendants in contempt.

First, the Court of Appeal held that the double jeopardy clause of the Fifth Amendment precludes a party from obtaining appellate review of an order acquitting a defendant in a non-summary criminal contempt proceeding.

Second, the appellate court held that a party may not defend against an alleged violation of a facially-valid stipulated injunction—that the trial court had jurisdiction to issue—on the ground that the injunction is invalid. The court explained that in contrast to orders entered “in excess of the jurisdiction of the issuing court,” which may be challenged collaterally, a party may not defend against enforcement of a court order by contending merely that the order is legally erroneous. Thus, the Court of Appeal held that the trial court erred in finding that the stipulated injunction was invalid and in refusing to enforce the injunction on that basis. In its analysis, the court stated that because the stipulated injunction was valid to the extent that it was designed to protect Wanke’s trade secrets, and one cannot conclude from the face of the stipulated injunction that it does not protect Wanke’s trade secrets or that it is unconstitutional or violates a statute, the stipulated injunction is facially valid. Therefore the trial court erred in concluding that the stipulated injunction was an unlawful business restraint under Business & Professions Code section 16600.

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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