Alliant Insurance Services, Inc. v. Gaddy, No. C055192, 2008 WL 331065 (Cal. App. 3 Dist., Feb. 07, 2008)

On February 7, 2008, the California Court of Appeals affirmed a preliminary injunction, enjoining defendant G. Scott Gaddy from competing against his former employer, Alliant Insurance Services, Inc., within the entire state of California. The appellate court also upheld a non-solicitation provision prohibiting Gaddy from contacting Alliant customers. Alliant acquired Gaddy’s insurance brokerage business in 2004. Prior to the acquisition, the brokerage competed directly with Alliant to provide insurance for construction companies. In the Stock Purchase Agreement, Gaddy agreed, for a period of 5 years from the date of acquisition, “to refrain from carrying on a business, directly or indirectly, which provides any [of Alliant’s] business” within the 58 counties of the State of California. Alliant employed Gaddy after the acquisition until it terminated his employment in October 2006. In both the Stock Purchase Agreement and in his employment agreement with Alliant, Gaddy agreed that, for a period of 3 years after termination of his employment with Alliant, he would not solicit clients of his former business or Alliant clients known to him by virtue of his employment with Alliant. After his termination, Gaddy started a business that provided insurance and surety consulting in the construction industry. In connection with that business, he contacted, and admitted to contacting, “[h]alf a dozen to a dozen” former clients. Alliant sued Gaddy and moved for preliminary injunctive relief.

The trial court’s tentative ruling was to deny injunctive relief, but after a hearing during which Gaddy testified, the court ultimately issued an order preliminarily enjoining Gaddy from:

(a) directly or indirectly using or willfully disclosing to any person (without [Alliant]’s permission or court approval) information about [Alliant]’s clients, as defined by the court; (b) directly or indirectly soliciting [Alliant]’s clients within the 58 counties of California; (c) carrying on business directly or indirectly which “provides any Company business” within the 58 counties of California; (d) directly or indirectly soliciting, hiring, retaining the services of plaintiffs’ employees or independent producers who were employees or independent producers of [Gaddy’s former business] or [Alliant]; (e) destroying or altering any information regarding the facts at issue in this case; and (f) directly or indirectly soliciting, hiring, assisting, or accepting assistance of any other person or entity in attempting to accomplish any of the acts prohibited by the preliminary injunction.

On appeal, Gaddy focused only on whether the non-competition and non-solicitation of customers covenants were enforceable. The court of appeal held that substantial evidence supported the enforceability of these provisions.

Although California has a strong public policy of prohibiting non-competition provisions in the employment context (Bus. & Prof. Code § 16600), an exception exists for a non-competition covenants in connection with the sale of a business (Bus. & Prof. Code § 16601). Section 16601 provides, in part: “Any person who sells the goodwill of a business, or any owner of a business entity selling or otherwise disposing of all of his or her ownership interest in the business entity . . . may agree with the buyer to refrain from carrying on a similar business within a specified geographic area in which the business so sold . . . 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.” Id. (emphasis added). In this case, the geographic area encompassed by the non-competition agreement was the entire state of California. Defendant Gaddy argued that the acquired business’s clients were in Northern California. Plaintiff’s supplemental declaration in support of its request for an injunction stated that, although its construction company clients were in Northern California, it procured insurance products from insurance companies located throughout the 58 counties of California. Thus, the court of appeal found that substantial evidence showed that the acquired business “carried on” its business in every county in California. As for the non-solicitation agreement, the trial court found that Alliant’s client information constituted trade secrets and that Gaddy had used trade secret information. The court of appeal rejected Gaddy’s effort to challenge the trade secret ruling on appeal because it was raised for the first time in his reply brief. The court, deciding that the non-solicitation provision was a valid restraint to protect trade secrets, found the non-solicitation provision enforceable.