Recent Developments in Family Law

COURT FINDS PUBLIC POLICY DOES NOT PRECLUDE FAMILY COURTS FROM IMPOSING NONCOMPETITION ORDERS IN DIVIDING COMMUNITY PROPERTY BUT SUCH ORDERS MUST BE REASONABLE AND NOT BROADER THAN NECESSARY TO PROTECT THE VALUE OF THE ASSET AWARDED IN THE DISSOLUTION. IN RE MARRIAGE OF GRÉAUX AND MERMIN (2014) 223 Cal. App. 4th 1242.

FACTS

Husband (H) and wife (W) owned and operated two businesses during their marriage, one of which formulated and marketed a particular type of spirits called “rhum agricole.” That business was created from the parties’ joint efforts during their marriage and therefore was community property. H had little formal education or training in business but his “considerable drive, energy and determination” as well as his contacts were a crucial part of the business. W’s sales and marketing skills, family contacts in the Caribbean, understanding of the production techniques and palate contributed to her standing as “the face of the brand.”

After W filed for dissolution of the parties’ marriage, she filed actions against the parties’ business and against key business contacts. She disrupted the business operations by withdrawing operating capital on two occasions and making statements to employees regarding the demise of the business. At trial W offered evidence that H’s post-separation efforts were less than exemplary but ignored her own actions aimed at destroying the business and reputations of key business contacts. She asked the court to award the business to her at zero value, arguing H had run the company into the ground.

The trial court awarded the business to H. While acknowledging W’s positive attributes toward the company, it found H was better qualified by experience to run the business. Further, H had demonstrated the will and ability to run the business under adverse circumstances while W had shown a willingness to sacrifice the interests of the business for what appeared to have been little more than “spiteful retribution.” The court ordered that W surrender all of her stock shares to the corporation and execute all documents and perform all acts necessary to effectuate the order. W was ordered to refrain from further conduct intended or likely to damage either business in any way and was subject to a five year noncompetition order. She was restrained from setting up a company of her own or with third parties engaged in the production, bottling, marketing or selling of rhum agricole or rum of any kind, wherever produced or grown. W was restrained from consulting with any person or entity in competition, or that could be in competition with the business’ rum product or who proposed to offer a competing product. She was restrained from working for a competitive rhum agricole product or other rum product during the five year period.

W appealed arguing that the court could not order her not to compete with H’s business.

APPELLATE COURT DECISION

Noting the public policy in favor of free competition, the appellate court discussed the state’s “paramount interest” in the fair and equal distribution of marital property upon the dissolution of marriage. The court found the public policy affirming an individual’s right to engage in a trade or business of his or her choosing does not trump the family court’s authority to issue any orders – and specifically a noncompetition order – to achieve an equal division of marital property. The court found that California’s policy that every person should have the right to pursue any lawful employment and enterprise of his or her choice is not undermined when a noncompetition order is imposed as part of a marital judgment. If an ongoing marital business is awarded to one spouse, and if the value of that business includes goodwill, a family court should have the power 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. As a general proposition, a party to a marital dissolution may be ordered not to compete where it is necessary to protect the value of the marital asset. This rationale applies whether the business is sold to a third party or assigned to one of the spouses as an ongoing concern. However, noncompetition orders must be reasonable and not broader than necessary to protect the goodwill included in the valuation and transfer. The terms of the noncompetition order (i.e. the scope of prohibited activities and the length of the prohibition) must be based on findings supported by substantial evidence that they are reasonably necessary to protect the value of the asset awarded in the dissolution.

In this case, the trial court’s statement of decision contained nothing about the geographic market of the business at the time of the dissolution, nor did it contain any findings to support the unlimited geographic reach of the order. The court therefore abused its discretion. The matter was remanded to the trial court to reconsider the geographic scope of the noncompetition order.

COMMENTS

Generally contractual promises not to compete are void in California. There are exceptions to this rule if the noncompetition provision is part of a contract for the sale of a business or upon dissolution of a partnership. Here the appellate court noted that, much like the breakup of a partnership, a divorce results in assigning to each party certain assets. The business’ value would be diminished if W, who had played a key role in the business’ operation during the marriage, was allowed to open another business in direct competition with H. So long as the court’s restraint does not exceed the bounds of reason, we like this result. It serves to protect the value of the asset H received.