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Divorce Court Can Issue Non-Compete Orders

Posted By Azemika   |   Comments (0)
Community & Separate Property,



A California Court of Appeals has ruled that a Trial Court that awards community property business to one spouse has the authority to issue a non-competition order against the other spouse to preserve the value of the community property asset. But, Trial Court must restrict its scope to geographic area where parties conducted the business absent evidence that broader scope is needed.

In the case of In re Marriage of Greaux and Mermin, Husband and Wife, during their marriage, created two companies (SAF and SBSC). SBSC was engaged in formulation and marketing of “rhum agricole.” Husband used his innate business skills and drive to set up SBSC and keep it running. Mother used her “natural sales and marketing skills” to gain customers for SBSC, and contributed her family contacts in the Caribbean and her “impressive understanding of the production techniques and the unique nature and characteristics of rhum agricole” to making the product successful. Husband and Wife worked hard to make SBSC successful, but their marriage suffered as a consequence.

Ultimately, Wife filed for divorce. At the same time, Wife filed lawsuits against SAF and SBSC and “key SBSC resource contacts,” twice withdrew operating capital, and made statements to employees that disrupted business operations. In her lawsuits, Wife made allegations that impugned the integrity of individuals, questioned the solvency of SBSC, and accused suppliers and corporate executives of shady activities. Wife later dismissed her lawsuits, but not before serious harm had been done to SAF and SBSC.

At trial, Husband and Wife agreed that SAF had no value and should be awarded to Husband. Wife asked Trial Court to award SBSC to her, claiming that Husband had “run SBSC into the ground” and that expert testimony showed it had no value. Trial Court pointed out that the expert had valued SBSC at $49,000, which was completely offset by Husband’s post-separation contributions of between $43,000 and $70,000 to keep SBSC going. Trial Court awarded SBSC to Husband, finding that Husband had shown that he could operate the business under adverse circumstances, while Wife appeared willing “to sacrifice the interests of SBSC for what appeared to have been little more than spiteful retribution.”

In its statement of intended decision, Trial Court ordered Wife to surrender her SBSC stock, to execute all necessary documents, and to refrain from further conduct intended to harm SBSC in any way. Trial Court also ordered Wife to be subject to 5-year non-competition order.

When Husband prepared the statement of decision, he included noncompetition order that restrained Wife from, among other things, competing with Husband or SBSC for five years from the date of judgment, setting up her own company with investors or others engaged in production, bottling, marketing, or selling of rhum agricole, or any other kind of rum wherever produced or grown. The noncompetition order also prevented Wife from consulting with or working for any of SBSC’s competitors. In opposition, Wife claimed that Husband’s proposed noncompetition order violated California Business & Professions Cofe Section 16600 [contract which restrains anyone from engaging in lawful profession, trade, or business is void] and California’s public policy regarding open competition, and that Trial Court lacked authority to make such an order.

Trial Court did not agree. It adopted Husband’s proposed statement of decision, including non-competition order, and entered its judgment. Wife appealed, and now California Court of Appeals has reversed Trial Court’s decision and remanded the case back to Trial Court for further proceedings. Court of Appeals has ruled that (1) public policy in favor of open competition must yield to competing policy of state’s interest in fair and equal distribution of community property in divorce cases; (2) Trial Court has the authority to make non-competition orders to achieve an equal division of community property; (3) Trial Court may issue non-competition order against one spouse to preserve the value of community property asset awarded to the other spouse; (4) Trial Court must not order non-competition clause that is broader than necessary to secure the value of the community property asset to which it attaches; and (5) in this instance, Trial Court abused its discretion by failing to determine the proper geographic scope of the non-competition order (should be limited to geographic area in which SBSC does business) or to make findings as to why scope of the order should not be limited. Court of Appeals reverses the part of the judgment pertaining to the non-competition order and remands the case back to Trial Court for further proceedings consistent with this opinion.