Lead Opinion
Opinion
Ronald Weinstock appeals from the trial court’s order granting a preliminary injunction in favor of NewLife Sciences, LLC (NLS), prohibiting Weinstock and other persons and entities from engaging in direct or indirect competition with NLS. We affirm.
BACKGROUND
I. First amended complaint and cross-complaint
NLS filed a first amended complaint against Weinstock
Weinstock, the purported inventor of the device, obtained three patents related to the device and had another patent pending. Weinstock transferred the patent rights to Medico Enterprises, Inc. (Medico). On December 15, 2006, Weinstock, on behalf of himself and NLS, entered into a memorandum of understanding (MOU) with John Crosson. The MOU provided that Weinstock would assign the TMR patents to NLS. In exchange, Crosson agreed to lend NLS $250,000, and if he decided to invest additional money after a due diligence investigation, Crosson would receive an ownership interest in NLS. Weinstock transferred Medico’s interest in the patents to NLS, and in return Weinstock received a 30 percent membership interest in NLS.
Crosson subsequently invested an additional $1.25 million in NLS. NLS, Weinstock, Medico, and Malta entered into an amended and restated operating agreement (Operating Agreement) effective March 1, 2007, to replace an earlier agreement adopted on December 15, 2006. Pursuant to the Operating Agreement, the members of NLS were Weinstock, Crosson, C. Read McLean, John Markham III, the Crosson family trust, Malta, and Medico.
Also effective March 1, 2007, and as provided for in the Operating Agreement, Crosson and Weinstock each entered into an employment contract with NLS. Weinstock’s employment agreement provided that he would serve as NLS’s chief officer of science and technology and board chairman for an initial period of five years, at a salary of $22,000 per month. As consideration, Weinstock agreed to transfer all TMR assets to NLS. Weinstock could be terminated for cause, including “conduct by Weinstock that is fraudulent or unlawful,” in which case he would forfeit his board position.
Weinstock’s employment contract also provided that during his employment Weinstock would not engage in any activity for any other company which competed directly or indirectly with NLS. Further, the employment contract provided: “Weinstock shall not, during or for a period of five years after termination of this contract (whether for cause or otherwise), accept any other employment, service or consulting contract, or perform any work for any other company, endeavor, or individual which competes directly or indirectly with any activity now or in the future engaged in by NLS, unless NLS agrees in writing to allow Weinstock to do so earlier. Weinstock agrees to submit to the jurisdiction of any state or federal court in Los Angeles County, California having jurisdiction over the matter if NLS seeks injunctive relief to enforce this provision . . . .” (the noncompete clause)
The complaint alleged causes of action for claim and delivery, breach of contract, conversion, unjust enrichment, fraudulent transfer, fraud, misappropriation of trade secrets, breach of fiduciary duty, and injunctive relief, including an injunction to enforce the noncompete clause.
Weinstock filed a motion to strike from the complaint the allegations regarding the noncompete clause, arguing that the clause was void and unenforceable under California law, and was not saved by a statutory exception applicable to a noncompete agreement executed upon the dissolution of an individual’s interest in a limited liability company.
Weinstock, Malta, Medico, and Svatik filed a first amended cross-complaint against NLS, Crosson, and other individuals, contending (among other causes of action) that the cross-defendants breached the Operating Agreement, breached Weinsfock’s employment contract, and breached their fiduciary duties by diluting Weinstock’s, Malta’s, and Medico’s interests in NLS.
In late July 2008, NLS filed an ex parte motion to set dates for Weinstock’s deposition, stating that Weinstock had failed to appear for a deposition set for the first week in July. The trial court ordered Weinstock to appear for his deposition no later than the first week of September 2008, and in a further order extended the deadline to September 26, at Weinstock’s request. Weinstock eventually appeared for his deposition on October 13, 2008, but the deposition was adjourned when Weinstock’s counsel was called away. NLS issued a notice of continued deposition for February 17, 2009, but Weinstock objected and failed to appear. Weinstock also objected to some written discovery requests by NLS regarding TMR use or other business activities after his termination, arguing in part that he was not required to respond because the noncompete clause was not enforceable.
In April 2009, the trial court issued three separate discovery orders. On April 15, 2009, the court denied NLS’s motion to compel Weinstock’s deposition, but ordered Weinstock to appear for his deposition between May 18 and 22. On April 22, 2009, the court granted in part NLS’s motion to compel documents with production due by May 4, 2009. On April 24, 2009, the court granted in part NLS’s motion to compel responses to interrogatories, requiring Weinstock to provide supplemental responses by May 8, 2009, but denied NLS’s accompanying motion to deem matters admitted.
Weinstock moved for a protective order, arguing in part that the noncompete clause was void ab initio and he was therefore not required to respond to related discovery. On May 4, 2009, the trial court denied Weinstock’s request for a stay of its discovery orders and set a hearing for May 15, 2009. Weinstock did not produce the documents or provide supplemental responses by the deadlines in the discovery orders. On May 8, 2009, NLS filed a motion for terminating sanctions against Weinstock for failure to comply with discovery orders. The trial court set the motion for terminating sanctions to be heard concurrently with Weinstock’s motion for a protective order. The trial court denied the motion for protective order on May 15, 2009, continued the hearing on NLS’s motion for terminating sanctions, and continued Weinstock’s deposition to the week commencing June 8, 2009. Weinstock filed another motion for a protective order, arguing “much of the discovery at issue cannot be obtained unless and until NLS obtains an adjudication that the covenant not to compete i[s] enforceable.”
III. Issue sanctions
On June 8, 2009, the trial court entered an order denying NLS’s motion for terminating sanctions. The court stated: “The less drastic award of issue
The court provided that the June 8, 2009 order would become effective on June 29, 2009, unless Weinstock produced documents and responded to interrogatories before that date. Weinstock did not do so.
After Weinstock failed to appear for his deposition, reset for June 9, 2009, NLS filed another motion for terminating sanctions. In a June 17, 2009 order, the court concluded “Weinstock has violated numerous court orders regarding his discovery obligations,” showing “an arrogant and contemptuous disregard for the orders of this court.” Although the court concluded “there is more than enough factual and legal basis for granting terminating sanctions,” the order gave Weinstock one last opportunity to appear for a deposition on July 20, 2009. Weinstock appeared for the deposition but refused to answer nearly 400 questions.
IV. Preliminary injunction
On December 10, 2009, NLS filed a motion for preliminary injunction against Weinstock, relying on the issue sanctions and the noncompete clause.
On January 21, 2010, the trial court held a hearing on the motion for a preliminary injunction, having provided the parties with a written tentative ruling. The court’s minute order adopted its tentative ruling, and stated, “[T]he issues set forth in the June 8, 2009 minute order [(the issue sanctions)] were and are deemed established for all purpose[s] in this litigation, including this motion for preliminary injunction. . . . [][] . . . [f] .. . Here, in light of the issues deemed established for all purposes pursuant to the court’s order of June 8, 2009, plaintiff has met its burden of demonstrating a reasonable probability of prevailing on the merits.” The court noted that if the plaintiff makes a strong showing of likelihood of success on the merits, the judge has the discretion to issue the injunction even if the plaintiff has not shown that the balance of harm tips in its favor. Although Weinstock would suffer somewhat greater harm if the preliminary injunction were issued than NLS would suffer if the injunction were not issued, the court concluded: “[T]he court finds that the likelihood that the plaintiff will ultimately prevail in the litigation [is] sufficiently great that it substantially reduces the severity of the harm the plaintiff must show to prevail on the motion. [Citation.] Thus, the court will exercise its discretion to grant the injunction.”
An order filed January 25, 2010, entered a preliminary injunction providing as follows: “IT IS HEREBY ORDERED that during the pendency of this action, Weinstock and his agents, servants, employees, and all persons and entities in active concert and participation with him (including without
V. Terminating sanctions
NLS filed a motion for terminating sanctions on January 19, 2010. On February 5, 2010, the trial court granted the motion, striking Weinstock’s answer and entering Weinstock’s default to the first amended complaint, and dismissing with prejudice Weinstock’s first amended cross-complaint. The court found that Weinstock “willfully and consistently failed to make discovery,” including Weinstock’s continued refusal at his deposition on January 27 and 28 to answer questions the court had ordered him to answer in response to NLS’s motion to compel. The court later denied Weinstock’s motion for a stay of the preliminary injunction pending appeal.
Weinstock, Malta, Medico, Svatik and WOW filed a timely notice of appeal and, four days later, filed a petition for writ of supersedeas seeking a stay of enforcement of the preliminary injunction, which this court denied on April 8, 2010.
DISCUSSION
Weinstock contends that the trial court erred when it issued the preliminary injunction in reliance on the issue sanctions. He also argues that the issue sanctions exceeded the court’s authority and were excessive. Finally, Weinstock argues that the preliminary injunction was overbroad.
As to the court’s weighing of the likely injury and the likelihood of success, “[a]ppellate review is limited to whether the trial court’s decision was an abuse of discretion. [Citation.]” (Butt v. State of California, supra, 4 Cal.4th at p. 678; see Huong Que, Inc. v. Luu (2007)
I. The trial court did not abuse its discretion in granting the preliminary injunction based on the issue sanctions.
“Misuse of the discovery process may result in the imposition of a variety of sanctions. These include . . . sanctions deeming that certain issues are determined against the offending party . . . .” (Karlsson v. Ford Motor Co. (2006)
Weinstock argues that the court erred in relying on the issue sanctions rather than holding a hearing to determine, without regard to the sanctions, whether the noncompete agreement was enforceable. He argues that had the court not granted the issue sanctions, it would have determined that the noncompete clause was invalid and unenforceable and would have found that NLS did not demonstrate a probability of success on the merits. Essentially, Weinstock argues that the court should have ignored the issue sanctions and determined the issues anew. This misunderstands the nature of issue sanctions. Such sanctions for discovery abuse may be proper even when inconsistent evidence is available, leaving the jury with a misimpression as to actual facts, because the sanctions “effectively remov[e] from the jury’s consideration evidence favorable to the offending party’s position, or . . . deem[] issues in favor of the aggrieved party even though the offending party has strong evidence to the contrary. Such is the natural consequence of serious discovery violations.” (Karlsson v. Ford Motor Co., supra,
The issue sanctions established that Weinstock knowingly breached his employment contract, including the noncompete clause, and engaged in unfair competition; that the employment contract and the noncompete clause were enforceable; that Weinstock used the TMR machine in doing so, and without the proper supervision of a physician; and that NLS suffered damages. These issues having been deemed determined against Weinstock, the court was entitled to consider them in determining NLS’s likelihood of success. Given that the determined issues virtually assured that NLS would prevail at trial, there was a very strong showing of likelihood of success on its claim that Weinstock had violated the enforceable noncompete clause and had used the TMR device in doing so, to the detriment of NLS.
“[A] trial court may grant a preliminary injunction upon a sufficiently strong showing of likelihood of success even when the party seeking the injunction cannot show that the balance of harm[] ‘tips’ in its favor [citation] ____” (White v. Davis (2003)
II. Weinstock’s challenge to the issue sanctions on the merits is premature.
Weinstock also challenges the issue sanctions as contrary to law and excessive. As he did in the trial court, Weinstock argues that the noncompete clause is unenforceable under section 16600, which provides; “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.” NLS’s contrary position in the trial court and on appeal is that the noncompete clause is valid and enforceable under an exception in section 16601, which provides that any person selling the goodwill of a business, or any owner of a business selling all of his or her ownership interest in a business, or substantially all of its operating assets together with the business’s goodwill, “may agree with the buyer to refrain from carrying on a similar business within a specified geographic area in which the business so sold, or that of the business entity, . . . has been carried on, so long as the buyer . . . carries on a like business therein.” “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, Inc. v. Sar Industries, Inc. (1976)
NLS argues that Weinstock, as a member of Malta, a limited liability company, was an “owner of a business entity,” so that the noncompete clause was valid as part of the sale of Malta’s business and goodwill to NLS. Weinstock rejoins that the noncompete clause was effective March 1, 2007, while Malta was transferred to NLS in December 2006, so that the noncompete clause was not part of the sale.
The issue sanctions determined that “Weinstock’s employment agreement with NLS, including, without limitation, its non-competition provision, is enforceable.” Thus, the trial court resolved this issue against Weinstock’s argument that the noncompete clause was not part of the transfer of a
The noncompete provision in Weinstock’s employment contract prohibits him from any activity “which competes directly or indirectly with any activity now or in the future engaged in by NLS,” with no geographic restriction. The issue sanctions state that Weinstock breached the noncompete clause in his employment contract with NLS by “engaging in direct competition with NLS in the nationwide market.” The preliminary injunction also contains no geographic restriction, ordering that Weinstock is “enjoined and restrained from engaging, directly or indirectly, in any activity in competition with NLS.” Weinstock argues that the noncompetition clause is void because it is not restricted to the area in which Malta did business; therefore, he argues, the issue sanctions were improper and the scope of the preliminary injunction was too wide.*
III. The preliminary injunction is not overbroad.
Weinstock argues that the preliminary injunction impermissibly enjoins Malta, Medico, Svatik, and WOW, although they were not subject to the issue sanctions or parties to the noncompete clause. “ ‘In matters of injunction, however, it has been a common practice to make the injunction run also to classes of persons through whom the enjoined party may act, such as agents, servants, employees, aiders, abettors, etc., though not parties to the action, and this practice has always been upheld by the courts ....’” (People ex rel. Totten v. Colonia Chiques (2007)
Weinstock also argues that the preliminary injunction is overbroad because it enjoins him from soliciting “new, potential or existing customers of [NLS].” (Italics added.) That language, however, is reasonably construed to enjoin Weinstock from competing with NLS with regard to potential NLS customers of which he is aware, during the pendency of this litigation. Finally, Weinstock argues that the prohibition on “manufacturing TMR devices or similar devices intended for use in providing pain relief treatments” (italics added) could mean almost anything, such as Tylenol or magnetic devices not related to pain management. That is not a reasonable interpretation, as the language provides that the devices Weinstock is enjoined from manufacturing must be similar to the TMR devices and intended for use in managing pain.
The order issuing the preliminary injunction is affirmed. Costs are to be awarded to respondent.
Chaney, J., concurred.
Notes
The complaint also named as a defendant Weinstock’s wife, Susan Svatik.
Weinstock initially owned 100 percent of Medico, Malta, and NLS, and Weinstock, Medico, and Malta initially were the only members of NLS.
NLS rescinded the Medico agreement and cancelled Medico’s membership interest on September 24, 2008, on the ground that the patents Medico transferred to NLS did not cover the TMR devices that NLS acquired from Malta.
A similar covenant not to compete appeared in Crosson’s employment contract.
The exception is codified in Business and Professions Code section 16602.5.
Unless otherwise indicated, all subsequent statutory references are to the Business and Professions Code.
Weinstock argued that he relied on a “ruling” reflected in the transcript of a hearing on February 20, 2008, on NLS’s ex parte application for a temporary restraining order (less than a week after the original complaint was filed) in which a different judge stated that the noncompete clause was unenforceable and “void as a matter of public policy unless you show me otherwise,” but also acknowledged “I . . . could be totally wrong on that, but that’s what happens in an ex parte proceeding” and “[m]aybe you will prevail at trial on a noncompetition clause,” as well as “[n]othing I do in this court is on the merits of the case.”
NLS substituted WOW! Scientific LLC (WOW), formed by Weinstock after the litigation commenced, in place of a Doe defendant on December 7, 2009. NLS states that as to Svatik, named as a defendant in NLS’s first amended complaint, the trial court struck Svatik’s claims from Weinstock’s cross-complaint in February 2009, and granted Svatik’s motion for summary judgment in October 2010.
Weinstock also filed a writ petition seeking relief from the discovery orders, which was summarily denied as premature (Weinstock v. Superior Court (May 26, 2009, B216070)), as well as a similar writ petition after the sanctions orders were issued, which was summarily denied (Weinstock v. Superior Court (July 2, 2009, B217091)).
We note that Weinstock misapprehends the nature of appellate review of discovery sanctions, which is for abuse of discretion. (Britts v. Superior Court (2006)
“[S]ection 16601 limits the geographic scope of a noncompetition covenant to the area where the sold company carried on business.” (Strategix, Ltd. v. Infocrossing West, Inc. (2006)
Dissenting Opinion
I would reverse because the trial court failed to rule whether the employment contract between NewLife Sciences, LLC, and Ronald Weinstock was void under Business and Professions Code section 16600, which provides that, “[ejxcept 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.” Rather, the trial court ruled that the contract, including the noncompetition clause, was enforceable as an issue sanction and never determined whether the provision was void or not.
NewLife Sciences claims that the noncompetition clause was lawful because it was part and parcel of the sale by Weinstock of the assets and goodwill of a business and thus enforceable under Business and Professions Code section 16601. That may turn out to be the case, but the trial court never decided the issue based on the evidence presented by NewLife Sciences, relying instead on a discovery sanction imposed on Weinstock.
“[0]ur courts have consistently affirmed that section 16600 evinces a settled legislative policy in favor of open competition and employee mobility. . . . The law protects Californians and ensures ‘that every citizen shall retain the right to pursue any lawful employment and enterprise of their choice.’ ... It protects ‘the important legal right of persons to engage in businesses and occupations of their choosing.’ ” (Edwards v. Arthur Andersen LLP (2008)
Plain and simple, I do not think that a noncompetition clause void under California law can be enforced as an issue sanction. If that were permitted, contracts void under other laws—those prohibiting usury (Cal. Const., art. XV, § 1), illegal discrimination (Civ. Code, § 51.5), the release of a claim of unpaid wages (Lab. Code, § 206.5), or a waiver of rights under the Consumers Legal Remedies Act (Civ. Code, § 1751)—could be enforced by the courts as a discovery sanction. The courts should have no part in doing so.
A petition for a rehearing was denied August 3, 2011.