ARONSON, J.
This case arises out of a 71-page purchase agreement that contained several provisions purporting to restrict an accountant's ability to compete with his former employer. The purchase agreement's noncompetition provisions were unenforceable under Business and Professions Code
The accountant and his new firm reaped considerable benefits from the purchase agreement over the next two years, but they eventually had a change of heart and tried to rescind the contract. Following a bench trial, the trial court determined the noncompetition provisions were unenforceable but severable, and consequently the court enforced the remainder of the purchase agreement. The court awarded the former employer royalties under the purchase agreement, and denied the accountant's and his firm's claims for restitution. This appeal followed.
In brief, this case presents two issues. First, may a court sever the invalid noncompetition provisions from the purchase agreement, or do the invalid provisions void the entire agreement? Second, do the accountant and his new firm have standing to sue the former employer for unfair competition based on its attempt to restrain the accountant's trade, even though the accountant knew before signing that the noncompetition provisions were unenforceable, and even though he received substantial benefits from the purchase agreement for two years? For the reasons detailed below, we conclude the invalid provisions should be severed, and the accountant and his new firm do not have standing to sue for unfair competition. We therefore affirm the judgment.
Plaintiff Kenneth H. Pun is a certified public accountant who specializes in governmental accounting and auditing. At all relevant times, he has lived and worked in California. After obtaining his CPA license in 2001, Pun worked for the accounting firm of Caporicci & Larson (C&L) until March 2010.
One of the named partners at C&L, Gary Caporicci, acted as Pun's mentor. Caporicci was and is extremely well-known and respected in the field of government accounting.
In March 2010, the accounting firm of Stonefield Josephson, Inc. (Stonefield) acquired C&L, and Pun became an employee of Stonefield. As part of Stonefield's acquisition of C&L, Caporicci agreed to help transition C&L's clients to Stonefield in exchange for royalty payments on the revenue generated on the C&L client accounts he brought to Stonefield. Caporicci also entered into a noncompetition agreement with Stonefield (the Caporicci Noncompetition Agreement), in which he agreed not to compete in California with Stonefield, its successors, or assigns for three years after his employment with Stonefield ended or for five years from the date of the agreement, whichever was longer.
Stonefield did not own C&L for long. After just seven months, Stonefield sold certain assets, including all C&L stock, to defendant Marcum, LLP (Marcum), an accounting firm based in New York with offices in California. As a result of that transaction, Pun and Caporicci both became Marcum employees effective October 1, 2010.
When he joined Marcum, Pun entered into a written Non-Equity Partner Agreement (NEPA) governing his employment terms. Among other provisions, the NEPA included noncompetition and nonsolicitation provisions barring Pun from hiring Marcum employees and from providing accounting services to Marcum clients for three years after leaving Marcum. The NEPA further provided Pun could purchase the right to perform accounting work for Marcum clients after he left Marcum if he paid Marcum an amount equal to 125 percent of Marcum's billings to those clients in the 12-month period before Pun's termination date.
Pun was not happy at Marcum. After just a few months he began talking to his former colleague from C&L, Mark McGeady, about starting their own accounting firm. Their discussions evolved to include the prospect of Caporicci also becoming a partner in the new venture. The idea turned into a plan, and in December 2011, Pun resigned from Marcum and created his own firm, plaintiff Pun & McGeady, LLP (P&M).
In response to Pun's resignation, the Marcum partner in charge of Southern California operations, Ronald Friedman, reminded Pun of his contractual obligations under his NEPA and cautioned Pun that Marcum's clients "belonged" to Marcum. Friedman warned Pun he would have to pay Marcum for the right to take any of Marcum's clients with him to his new firm and asked Pun to put together a proposal. From this, Pun understood Marcum would sue him if necessary to enforce the NEPA's noncompetition provisions.
Faced with the threat of litigation, Pun proceeded to negotiate the terms under which he would "purchase" certain clients from Marcum. Pun and Friedman memorialized the intended key terms in a Letter of Intent and then turned the matter over to their respective lawyers to finalize the negotiations and document the transaction.
During those negotiations, Pun's attorney told Pun and others in writing the NEPA's noncompetition provisions were "completely unenforceable" against Pun. Nevertheless, Pun decided to continue negotiations with his attorney's assistance.
The negotiations resulted in a 71-page Asset Purchase Agreement (APA) between Marcum and P&M that accomplished several objectives. First, Marcum assigned and transferred to P&M all "right, title, or interest" in its relationships with 37 Marcum clients (the so-called Accounts), all Marcum files and documents on those Accounts, and Marcum's rights in its written contracts with those Accounts. Marcum also agreed to take, at its own expense, "such other action as [P&M] may reasonably request to more effectively consummate the assignments and assumptions" — in other words, to obtain assignments directly from the clients.
Obtaining the Account assignments from Marcum as part of the APA was evidently important to Pun and P&M (collectively, Plaintiffs) because it allowed for a transfer of files from Marcum to P&M and gave P&M an immediate income stream. As Pun stated in an e-mail to Friedman urging him to forward the assignment letters, "Without these letters, we would not be able to collect from our clients and [that] will cause delay [of] any payments to you and cause financial hardship to our business." Obtaining assignments from Marcum was preferable to the alternative business development method of submitting proposals to prospective clients — a process that was onerous, had a lower success rate, and would not ensure an immediate revenue stream for P&M. As Caporicci explained, most clients stay with their existing service provider, so without the assignments, P&M would have had to contact each client individually and convince them to terminate their contracts with Marcum.
In exchange for the Account assignments, P&M agreed to pay Marcum $100,000, plus a nine percent royalty on the gross revenue P&M received from the Accounts over the next eight years, and to allow Marcum to inspect and audit P&M's books and records to confirm the accuracy of P&M's royalty payments.
The APA included several noncompetition and nonsolicitation provisions. Sections 3.5(b) and (c) restrained P&M from performing accounting services to or soliciting business from certain specified Marcum clients for five years. The parties also executed an amendment to Pun's NEPA, which they attached to the APA, affirming Pun was still bound by the NEPA's noncompetition provisions except on the Accounts he purchased under the APA. During the negotiations, Pun's attorney stated unequivocally in writing to Pun and others that the proposed noncompetition provisions in the APA were unenforceable under California law, but Pun signed the APA nevertheless.
The APA also included provisions allowing Caporicci to join P&M and service the purchased Accounts notwithstanding the Noncompetition Agreement he had signed with Stonefield in 2010. In the Amended Caporicci Noncompetition Agreement attached to the APA, Marcum agreed to lift certain provisions in the original Caporicci Noncompetition Agreement (which Stonefield had assigned to Marcum when Marcum acquired C&L from Stonefield) to allow Caporicci to provide professional services to the Accounts. In exchange, Caporicci relinquished his right to royalties from Marcum.
Obtaining the Caporicci release as part of the APA was extremely important to Plaintiffs. Caporicci made clear to Pun he would need a release from his Noncompetition Agreement before he could join P&M, and given Caporicci's industry reputation, Pun and McGeady viewed Caporicci's involvement in P&M as critical to P&M's success. Indeed, Pun listed "Release Gary Caporicci's non-compete covenants" as the first "term" of any potential deal with Marcum in his Letter of Intent, and the recitals to the Amended Caporicci Noncompetition Agreement describe it "as a material part of the consideration" for the APA.
The APA also contained two severance clauses, which we discuss below.
The parties initially performed their respective obligations under the APA without issue. Plaintiffs paid over $200,000 in royalties to Marcum in the two-year period after the APA took effect, and P&M's revenue on the Accounts exceeded $1 million per year.
In 2014, however, Plaintiffs sent Marcum a notice of rescission of the APA. Plaintiffs asserted the NEPA's noncompetition provision was an invalid restraint on trade, Marcum had used that provision to fraudulently induce Plaintiffs to enter the APA, and the APA therefore failed for lack of consideration.
Plaintiffs then sued Marcum for (1) declaratory relief concerning the parties' rights, duties, and obligations under the APA; (2) restitution under Civil Code section 1692; and (3) restitution and injunctive relief under Business & Professions Code section 17203.
Marcum filed a separate lawsuit against Plaintiffs. After voluntarily dismissing certain claims, Marcum's three remaining causes of action were for (1) an accounting of amounts due to Marcum under the APA; (2) specific performance of the APA; and (3) declaratory relief concerning the parties' rights and obligations under the APA, including a declaration that the APA is enforceable and that Plaintiffs owe Marcum past and future royalty payments under it. The two cases were consolidated because Marcum's operative pleading essentially raised the same issues as Plaintiffs' complaint.
Following a bench trial, the trial court issued a 40-page Amended Final Statement of Decision. The court found the NEPA's noncompetition and nonsolicitation provisions were invalid under section 16600; the APA's noncompetition and nonsolicitation provisions were invalid under section 16600 but were severable from the remainder of the APA; the original and Amended Caporicci Noncompetition Agreements were both valid under section 16601 (one of the statutory exceptions to section 16600); the Amended Caporicci Noncompetition Agreement and Marcum's assignments of the Accounts constituted lawful consideration for the APA; and Plaintiffs lack standing to assert a section 17200 claim.
The trial court entered a judgment in favor of Marcum and against Plaintiffs, awarding Marcum over $275,000 in unpaid royalties. Plaintiffs timely appealed.
Plaintiffs make two arguments on appeal. First, they contend the APA's noncompetition and nonsolicitation provisions invalidate the entire APA and cannot be severed. Second, they contend they are entitled to relief under section 17200, asserting the court erred in concluding they lacked standing. We do not find either contention persuasive.
We review de novo pure issues of law, including the enforceability of a contract, but we review the trial court's factual determinations for substantial evidence. (VL Systems, Inc. v. Unisen, Inc. (2007) 152 Cal.App.4th 708, 712.) Where, as here, the trial court's "`statement of decision sets forth the factual and legal basis for the decision, any conflict in the evidence or reasonable inferences to be drawn from the facts will be resolved in support of the determination of the trial court decision.'" (In re Marriage of Davenport (2011) 194 Cal.App.4th 1507, 1531.) "A judgment or order of a lower court is presumed to be correct on appeal, and all intendments and presumptions are indulged in favor of its correctness." (In re Marriage of Arceneaux (1990) 51 Cal.3d 1130, 1133.)
Before turning to the merits of Plaintiffs' arguments, it is helpful to examine section 16600 and its exceptions, and review how those provisions apply to the various contract provisions at issue here.
Section 16600 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." "California courts have consistently declared this provision an expression of public policy to ensure that every citizen shall retain the right to pursue any lawful employment and enterprise of their choice." (Metro Traffic Control, Inc. v. Shadow Traffic Network (1994) 22 Cal.App.4th 853, 859.) Section 16600 bars an employer from restraining by contract "a former employee from engaging in his or her profession, trade, or business unless the agreement falls within one of the exceptions to the rule." (Edwards v. Arthur Andersen LLP (2008) 44 Cal.4th 937, 946-947.) "Those exceptions include noncompetition agreements made in connection with the sale of a business (§§ 16601, 16602.5) or the dissolution of a partnership (§ 16602)." (In re Marriage of Gréaux & Mermin (2014) 223 Cal.App.4th 1242, 1248.)
Of the various statutory exceptions to section 16600, the only one relevant to this case is section 16601, which provides in relevant part: "[A]ny owner of a business entity that sells (a) all or substantially all of its operating assets together with the goodwill of the business entity, (b) all or substantially all of the operating assets of a division or a subsidiary of the business entity together with the goodwill of that division or subsidiary, or (c) all of the ownership interest of any subsidiary, 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, 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." (Italics added.) This "exception serves an important commercial purpose by protecting the value of the business acquired by the buyer," as it would be "`"unfair" for the seller to engage in competition which diminishes the value of the asset he sold.'" (Strategix, Ltd. v. Infocrossing West, Inc. (2006) 142 Cal.App.4th 1068, 1072-1073.)
Looking at how these statutory provisions apply to the various noncompetition provisions at play here, the Caporicci Noncompetition Agreement, which Caporicci entered into with Stonefield as part of Stonefield's acquisition of Caporicci's partnership, C&L, is permissible under section 16601 because that transaction involved the sale of C&L's assets and goodwill to Stonefield. Although the documents memorializing Stonefield's acquisition of C&L did not expressly state Stonefield was acquiring C&L's goodwill, the transfer of C&L's goodwill was certainly implicit. As the trial court noted in its statement of decision, "the primary goal of the Stonefield-C&L Transaction was to get all the existing C&L clients to transition their business to Stonefield and to continue to retain Stonefield as their accountant. [¶] . . . In light of the purpose, practical effect, and economic realities of the Stonefield-C&L transaction, as well as the entire structure of the transaction, . . . goodwill was part of what was transferred in the Stonefield-C&L Transaction." The original Caporicci Noncompetition Agreement is therefore valid under section 16601.
The same cannot be said of the noncompetition and nonsolicitation provisions in Pun's NEPA or the APA. The NEPA purported to prohibit Pun from hiring any Marcum employee and from providing accounting services to Marcum clients for three years after leaving Marcum. Because those provisions restrained Pun from engaging in his trade, they are void under section 16600. The section 16601 exception is not applicable because Pun entered into the NEPA as Marcum's employee following Marcum's acquisition of Stonefield; Pun did not sell a business or its goodwill to Marcum. Accordingly, the noncompetition provisions in Pun's NEPA were unenforceable. The trial court reached this same conclusion in its statement of decision, and not surprisingly, Plaintiffs do not challenge that finding on appeal.
Similarly, section 16600 renders void the noncompetition provisions in the APA. As noted above, these provisions purported to restrain P&M from performing accounting services to or soliciting business from certain specified Marcum clients for five years. The APA also purported to amend the (invalid) noncompetition provisions in Pun's NEPA, affirming Pun was still bound by the NEPA's noncompetition provisions except for the Accounts purchased under the APA. These restraints on Plaintiffs' ability to compete with Marcum do not fall within any of section 16600's exceptions because the APA did not involve the sale of Plaintiffs' business or goodwill. Consequently, the APA's noncompetition provisions also were unenforceable. The trial court reached this same conclusion in its statement of decision, and not surprisingly, Plaintiffs do not challenge that finding on appeal.
Having laid the above foundation, we now turn to Plaintiffs' contention that the invalid noncompetition and nonsolicitation provisions in the APA void the entire contract. The trial court reached the opposite conclusion; it found those provisions "are not the only object of the APA, that they are severable, and that the remainder of the APA can and does survive after severance." We agree with the court.
To begin, we are aware of no authority preventing the severance of an invalid restraint on trade from the rest of an otherwise valid contract. Indeed, section 16600 provides that a contract restraining trade is "to that extent void."
Allowing severance of an illegal restraint on trade from an otherwise valid contract is also in accord with the general rules on severance of unlawful provisions in contracts. Although Civil Code section 1598 invalidates an entire contract when it "has but a single object, and such object is unlawful," Civil Code section 1599 states that if "a contract has several distinct objects, of which one at least is lawful, and one at least is unlawful, in whole or in part, the contract is void as to the latter and valid as to the rest." (Italics added.)
In Keene v. Harling (1964) 61 Cal.2d 318, our Supreme Court elaborated on those statutory provisions: "`Whether a contract is entire or separable depends upon its language and subject matter, and this question is one of construction to be determined by the court according to the intention of the parties. If the contract is divisible, the first part may stand, although the latter is illegal. [Citation.]' [Citations.] It has long been the rule in this state that `"[w]hen the transaction is of such a nature that the good part of the consideration can be separated from that which is bad, the Courts will make the distinction . . . ."' [Citation.] Thus, the rule relating to severability of partially illegal contracts is that a contract is severable if the court can, consistent with the intent of the parties, reasonably relate the illegal consideration on one side to some specified or determinable portion of the consideration on the other side." (Id. at pp. 320-321, fn. omitted.)
More recently, our Supreme Court explained in Armendariz v. Foundation Health Psychcare Services, Inc. (2000) 24 Cal.4th 83 (Armendariz), that in determining whether to sever a contract provision, "[c]ourts are to look to the various purposes of the contract. If the central purpose of the contract is tainted with illegality, then the contract as a whole cannot be enforced. If the illegality is collateral to the main purpose of the contract, and the illegal provision can be extirpated from the contract by means of severance or restriction, then such severance and restriction are appropriate." (Id. at p. 124.) "The overarching inquiry is whether `"the interests of justice . . . would be furthered"' by severance." (Ibid.)
Thus, in determining whether the illegal noncompetition provisions may be severed from the APA, we must consider the central purpose or purposes of the APA, the parties' intent, and the interests of justice. All three of those considerations weigh in favor of severance.
To start, the unenforceable noncompetition provisions are collateral to the various other purposes of the APA. Plaintiffs contend the APA's sole purpose was to illegally restrain P&M's trade, but the four corners of the APA belie that assertion. To be sure, one of the APA's several purposes was to restrict P&M's accounting practice: the APA reaffirmed the unenforceable noncompetition provisions in Pun's NEPA and barred P&M from servicing certain specified Marcum clients. If that were the sole purpose of the APA, we would have little difficulty in concluding the APA, as a whole, is unenforceable. (Civ. Code, § 1598 ["Where a contract has but a single object, and such object is unlawful, whether in whole or in part, . . . the entire contract is void"].) This would be a very different case if the APA's sole purpose was to memorialize Pun's purchase of the "right" to compete with Marcum, which is something he was legally entitled to do regardless of any invalid noncompetition provision to the contrary.
But the APA had several other purposes unrelated to restricting P&M's trade. For example, the APA enabled Caporicci to join P&M and service certain Marcum Accounts by lifting certain restrictions in the original Caporicci Noncompetition Agreement. It also procured Marcum's assignments of the Accounts, Marcum's files and documents on the Accounts, and Marcum's assistance in obtaining assignment agreements from its clients. As noted above, all of those terms were extremely important to Plaintiffs for various business reasons. Those terms also show Plaintiffs purchased more than the mere "right" to compete with Marcum. They also purchased a book of business, file materials, the convenience of avoiding individual client proposals, and Caporicci's ability to join P&M and lend it his industry reputation.
Because the APA's invalid noncompetition provisions were collateral to and independent of those other valid purposes, the illegal provisions are severable. (Civ. Code, § 1599 ["Where a contract has several distinct objects, of which one at least is lawful, and one at least is unlawful, in whole or in part, the contract is void as to the latter and valid as to the rest"].)
Severing these provisions is also consistent with the parties' intent, as evidenced by the APA's multiple severance provisions. The first provision, Section 3.5(e), specifically addressed the APA's noncompetition and nonsolicitation provisions: "If, in any judicial proceeding, a court shall refuse to enforce any of the covenants deemed included in Sections 3.5(b), (c) and (d), the unenforceable covenant shall be deemed eliminated from these provisions for the purpose of those proceedings to the extent necessary to permit the remaining separate covenants to be enforced." The second more general severance clause, Section 5.10, provided: "In the event that any provision of this Agreement is deemed invalid, illegal, or unenforceable, all other provisions of the Agreement which are not affected by such invalidity, illegality or unenforceability, shall remain in full force and effect. Further, the parties hereby agree that if any such provision is deemed invalid, illegal or unenforceable, that provision shall be limited or eliminated in scope, power or effect to the minimum extent necessary so that this Agreement shall otherwise remain in full force and effect and enforceable." Severing the unlawful provisions is consistent with these provisions. And considering Pun's attorney advised him during the drafting process that the APA's noncompetition clauses are invalid, and considering P&M specifically agreed those clauses would be severed from the APA if found invalid, Plaintiffs cannot now reasonably claim they did not intend those clauses to be severed.
Public policy and the interests of justice support this result as well. According to our Supreme Court, two policies weigh in favor of severing an illegal term rather than voiding the contract altogether: "The first is to prevent parties from gaining undeserved benefit or suffering undeserved detriment as a result of voiding the entire agreement — particularly when there has been full or partial performance of the contract. [Citations.] Second, more generally, the doctrine of severance attempts to conserve a contractual relationship if to do so would not be condoning an illegal scheme." (Armendariz, supra, 24 Cal.4th at pp. 123-124.) Both of those policies support severing the invalid provisions. Severance prevents Plaintiffs from reaping an undeserved benefit from a partially performed contract. For two years P&M enjoyed substantial benefits under the APA, including the Account assignments from Marcum, Caporicci's ability to service P&M's new clients, and millions of dollars in revenue from the assigned Accounts. It would be fundamentally unjust to permit P&M to now avoid its royalty payment obligations under the APA, particularly when P&M's own attorney advised Pun before the APA was executed that the offending provisions were unenforceable. Severing the illegal provisions also preserves the parties' contractual relationship and leaves the parties with an agreement that is otherwise enforceable.
For all the above reasons, we agree with the trial court that the APA's invalid noncompetition and nonsolicitation provisions are severable and the remainder of the APA is enforceable.
We now turn to Plaintiffs' second argument on appeal: that they are entitled to relief under section 17200 et seq. We disagree.
California's unfair competition law protects competitors and consumers from "unlawful, unfair or fraudulent business act[s] or practice[s]." (§ 17200.) An employer's attempted reliance on a noncompetition provision in an employment contract in violation of section 16600 constitutes an unfair business practice under section 17200. (Application Group, Inc. v. Hunter Group, Inc. (1998) 61 Cal.App.4th 881, 908.)
A private plaintiff only has standing to sue for unfair competition if he or she "has suffered injury in fact and has lost money or property as a result of the unfair competition." (§ 17204.) "`The phrase "as a result of" in its plain and ordinary sense means "caused by" and requires a showing of a causal connection or reliance on the alleged misrepresentation.'" (Kwikset Corp. v. Superior Court (2011) 51 Cal.4th 310, 326.)
Plaintiffs contend they suffered injury in fact and lost money — specifically, over $200,000 in royalties paid to Marcum under the APA — as a result of Marcum's "scheme" to "exact payment" from Pun by threatening to enforce the NEPA's invalid noncompetition provisions. We are not persuaded.
To start, substantial evidence supports the trial court's finding that Plaintiffs "were not fraudulently or otherwise improperly induced to enter into the APA," but rather "chose to enter into the APA knowing their own lawyer had concluded that the non-competition clauses were unenforceable." During negotiations for the APA, about two weeks before Pun signed the APA, Pun's attorney e-mailed Marcum's counsel, copying Pun, and stated among other things: "I respectfully disagree with your contention as to the enforceability of your proposed non-competition provision in favor of Marcum LLP [referring to APA Section 3.5] and can assure you that it most certainly is not enforceable under California law." Pun concedes he read that portion of the e-mail. Two days later, Pun's attorney e-mailed Caporicci's counsel, copying Pun, and stated the NEPA's noncompetition restrictions "are completely unenforceable against [Pun] under B&P Code Section 16601 since he was a non-equity partner and therefore cannot be properly subjected to a valid non-competition restriction in California by Marcum, under any circumstances." Although Pun did not specifically recall reading this e-mail, he also had no reason to believe he did not receive it.
In short, Plaintiffs chose to enter into the APA despite having been told the noncompetition provisions in both the NEPA and the APA were unenforceable. This defeats any argument Marcum unfairly mislead or tricked Plaintiffs into paying royalties by threatening to enforce the NEPA's noncompetition provisions. Plaintiffs cannot show they lost money or suffered injuries "as a result of" Marcum's conduct. In fact, Plaintiffs received considerable benefits from the APA, including the Account assignments from Marcum and Caporicci's ability to service P&M's new clients. As the trial court observed, fundamental fairness and equity preclude Plaintiffs from entering into the APA knowing it contained unenforceable provisions and then later claiming they were wronged or damaged by those very provisions. (Civ. Code, § 3515 ["He who consents to an act is not wronged by it"].) Plaintiffs therefore lack standing to assert a claim against Marcum under section 17200.
The judgment is affirmed. Marcum shall recover its costs on appeal. (Cal. Rules of Court, rule 8.278(a)(1).)
O'LEARY, P. J. and GOETHALS, J., concurs.
