In a decision issued Friday concerning property division in a divorce case, the California Court of Appeal held that it is permissible for a family law judge to order a spouse not to compete against a business awarded to the other spouse. But that is not the entire story.
In the case of Greaux vs. Mermin, the trial court awarded a company called SBSC to the husband. SBSC was in the business of formulating and marketing a type of spirits called “rhum agricole”. The court valued the business, based on expert testimony, at $49,000.00. That meant that in order to keep the business, the husband would have to pay the wife half of that amount, offset by other awards of property in the case.
But it wasn’t the husband who was upset with the court’s order. The wife was the displeased party and she appealed. She did not like the fact that she was was ordered not to contact or communicate with “any person or entity in the SBSC/Batiste infrastructure”; hold herself out as a representative of SBSC; hold herself out as having any connection or involvement with SBSC; enter the premises of SBSC or dealing with hthe books, bank accounts and records of SBSC. It did not end there. The wife was “restrained and enjoined from competing with [husband] or SBSC for a period [of] five years from entry of judgment”. She was ordered not to set “up a company of her own or with other investors, or persons or entities engaged in the production, battling, marketing or selling [of] Rhum Agricole or rum of any kind, wherever produced or grown”. She was also ordered not to “consult with any person or entity that is in competition with or could be in competition with SBSC’s rum product or who proposes to offer a competing product. She shall not work for a competitive Rhum Agricole product or other rum product during the five year period”.
The first issue on appeal was whether a divorce judge, in a division of property order, could make any type of non-compete order when California Business and Professions Code section 16600 renders void any agreement that restrains a person from engaging in a lawful occupation or enterprise, absent certain statutory exceptions. The appeals court answered yes, noting “a family court should have the power, pursuant to Family Code section 2553, to issue a noncompetition order so that the value of that asset is preserved, just as a noncompetition clause in a business purchase and sale agreement is designed to protect the value of the asset purchased”. In other words, “a party to a marital dissolution may be ordered not to compete where it is necessary to protect the value of a marital asset”.
But the Court of Appeal also held that “[I]n keeping with our state’s policy of freedom to choose one’s trade or business, noncompetition orders must be ‘reasonable and not broader than necessary to protect the good will included in the valuation and transfer'”. In this case, the court found that the divorce judge did not attach geographical restrictions to the no-compete order and at the same time made no findings about the geographic market of SBSC. Accordingly, the court found that the trial court had abused his discretion and therefore reversed his order with respect to non-competition. The case will now be heard again by the trial judge with respect to the non-compete order in light of the appeals court order.
But, at least for now, the wife is the “toast of the town”, pun intended.
This case arose in Marin County, but in California, the decisions of the Court of Appeal from one part of the state are usually binding on trial courts throughout the state, including San Diego.