The opinion
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7 UNITED STATES DISTRICT COURT
8 SOUTHERN DISTRICT OF CALIFORNIA
9
SMARTER HOA SOLUTIONS INC., Case No. 24-cv-01781-JAH-MMP
10
Plaintiff,
11 ORDER GRANTING IN PART
AND DENYING IN PART
12
DEFEDANT’S MOTION FOR
v.
13 JUDGMENT ON THE
PLEADINGS AND DENYING
14
MOTION FOR SANCTIONS
CARMEN PEÑA; CASANET PROPERTY
15
MANAGEMENT LLC,
16 Defendants. [ECF No. 20]
17
18 Pending before the Court is Defendant Carmen Peña’s Motion to Dismiss, which
19 includes a request for sanctions and which the Court previously construed as a motion
20 for judgment on the pleadings. ECF Nos. 20 (“Motion”), 33. Plaintiff Smarter HOA
21 Solutions Inc. (“HOA”) opposes the Motion and Defendant Peña, proceeding pro se,
22 has filed a reply. ECF Nos. 37 (“Response”), 39 (“Reply”). With limited exceptions,
23 all proceedings in this case have been stayed pending the Court’s order on the instant
24 Motion. ECF No. 33.
25 This action arises from HOA’s suit to enforce a Non-Competition and Non-
26 Disclosure Agreement (the “Agreement”) against Defendant Peña, the former co-owner
27 and a former employee of HOA, following the termination of Defendant Peña’s
1 the termination of Defendant Peña employment with HOA, Defendant Peña’s
2 unlawfully retained HOA’s company property and revealed certain confidential,
3 customer information, and/or trade secret information to Defendant Casanet Property
4 Management LLC (“Casanet”).
5 HOA filed suit against Defendant Peña and Casanet asserting claims for (1)
6 Breach of Written Non-Competition and Non-Disclosure Agreement; (2) Conversion;
7 (3) Intentional Interference with Contractual Relations; (4) Intentional Interference with
8 Prospective Economic Advantage; (5) Trade Secret Misappropriation Under the Defend
9 Trade Secrets Act , 18 U.S.C. § 1836; and, (6) Misappropriation of Trade Secrets under
10 Cal. Civ. Code § 3426. HOA alleges all six causes of action against Defendant Peña
11 and Counts 3-6 against Casanet.
12 Relevant here, HOA and Defendant Peña agree that the Agreement relates to the
13 sale of Defendant Peña’s 50% ownership of the issue stock of HOA but disagree as to
14 whether this is sufficient to render the Agreement enforceable under California law.
15 Defendant Peña also disputes the allegations in the remaining claims. ECF No. 8
16 (“Answer”).1
17 For the reasons discussed below, Defendant Peña’s motion for judgment on the
18 pleadings is GRANTED IN PART and DENIED IN PART. Defendant Peña’s motion
19 for sanctions is DENIED.
20 I. BACKGROUND
21 Smarter HOA Solutions Inc. is a company engaged in the business of providing
22 management services for homeowner associations. Defendant Peña was previously an
23 officer, director and owner of 50% of the outstanding and issue stock of HOA.
24 On December 19, 2022, Defendant Peña and co-owner Pierre Dion, on behalf of
25
1 In a separate motion taken under submission by this Court, Casanet has filed a request
26
for good faith settlement determination seeking dismissal of HOA’s claims against
27 Casanet and requesting an order approving a settlement between HOA and Casanet.
ECF No. 35. The Court will issue an order on that motion in due course.
1 HOA as the seller, and Luis Adrian Arce, on behalf of Warranted Management Inc. as
2 the buyer (collectively, the “Contracting Parties”), executed a Letter of Intent to
3 Purchase (“Letter of Intent”) for the total sale of HOA’s business operations and assets
4 in exchange for an estimated price of $400,000. ECF No. 1-2 (“Exh. A”) at 6–7. The
5 Letter of Intent sets an expected settlement date on or before February 15, 2023, and
6 contains a covenant not to compete barring HOA from soliciting HOA’s clients for a
7 period of five years from the close of escrow.2
8 On June 23, 2023, prior to the sale of her stock, Defendant Peña entered into the
9 Agreement with HOA. Exh. A at 2–5. The Agreement prohibits Defendant Peña—“for
10 any reason whatsoever, directly or indirectly, for h[er]self or on behalf of or in
11 conjunction with any other person”—from the following within San Diego and
12 Riverside counties:
13 • (i) Participating in “other activities,” defined as “[e]ngag[ing] as an officer,
14 director, shareholder, owner, principal, partner, lender, joint venturer,
15 employee, independent contractor, consultant, advisor, or sales
16 representative, in any Competitive Business3;”
17 • (ii) Soliciting employees, meaning to “[e]ncourage, induce, attempt to
18 induce, recruit, solicit, attempt to solicit or take any action that is intended
19 to induce or encourage, either personally or through others, any person
20 who is, at that time, within the Restricted Territory, an employee of the
21 Company or any of its subsidiaries, in a managerial capacity for the
22
23 2 The noncompete clause expressly prohibits HOA from the following activities:
“canvas or solicit any business from [HOA]’s Clients; Request or advise [HOA]’s
24 Clients to withdraw, curtail, or cancel their business with the Buyer; Disclose to any
25 other person, firm, partnership or corporation the names of Seller’s Clients unless
required to do so by law, government agency or court order.” Exh. A at 6.
26
3 “Competitive Business” is defined as “[any individual, corporation, limited liability
27 company, partnership, firm, or other business of whatever nature] engaged in the
business of providing HOA Management Services.” Exh. A. at 3.
1 purpose or with the intent of enticing such employee away from or out of
2 the employ of the Company or any of its subsidiaries;” and,
3 • Soliciting customers, defined as “[c]all[ing] upon any person or entity that
4 is, at that time, or that has been, within five (5) years prior to that time, a
5 customer of the Company or any of its subsidiaries, within the Restricted
6 Territory for the purpose of soliciting or selling services in direct
7 competition with the Company or any of its subsidiaries within the
8 Restricted Territory.”
9 Exh. A at 2. Although the Agreement establishes a non-compete period of five years,
10 the official start date of the five-year period is unclear as defined in the Agreement.4
11 On June 30, 2023, the Contracting Parties executed a Stock Purchase Agreement5
12 finalizing the sale of HOA’s stock and business assets to Luis Adrian Arce, who is not
13 a party in this suit, in exchange for cash. Following the close of escrow, Defendant
14 Peña became an employee of HOA until the date the termination of her employment
15 with HOA in August of 2024.
16 II. DISCUSSION
17 A. Legal Standard
18 A district court may grant a Rule 12(c) motion for judgment on the pleadings
19 when there is no issue of material fact, and the moving party is entitled to judgment as
20 a matter of law. Fleming v. Pickard, 581 F.3d 922, 925 (9th Cir. 2009). In considering
21 a motion for judgment on the pleadings, a district court accepts all well-pleaded factual
22
23 4 The Agreement defines the “Non-compete Period” as the “five (5) year period
immediately following the termination of the Consulting Agreement between [HOA]
24 and Consultant whereby [Defendant Peña] provides services to [HOA].” Exh. A at 3.
25 The Agreement does not define or otherwise identify the “Consulting Agreement” or
“Consultant.”
26
5 A copy of the Stock Purchase Agreement (the “Purchase Agreement”) was not
27 attached to the parties’ pleadings, nor are the terms of the Purchase Agreement plead
anywhere in the current court record.
1 allegations in the complaint as true and construes the pleadings in the light most
2 favorable to the nonmoving party. Unite Here Loc. 30 v. Sycuan Band of the Kumeyaay
3 Nation, 35 F.4th 695, 700 (9th Cir. 2022). A district court will not consider documents
4 or evidence beyond the pleadings. Hal Roach Studios, Inc. v. Richard Feiner & Co.,
5 896 F.2d 1542, 1550 (9th Cir. 1989).
6 Given that Defendant Peña is appearing pro se, the Court will “liberally construe”
7 Defendant Peña’s pleadings. See Erickson v. Pardus, 551 U.S. 89, 94 (2007) (“[a]
8 document filed pro se is ‘to be liberally construed’”); see also Fed. R. Civ. P. 8(f) (“All
9 pleadings shall be so construed as to do substantial justice”).
10 1. Defective Notice Under Fed. R. Civ. P. 7(B)(1)
11 As an initial matter, HOA argues that Defendant Peña failed to comply with the
12 requirements of Rule 7(B)(1) because the motion “does not state the relief sought, which
13 specific causes of action are being challenged, or the exact legal basis upon which the
14 motion is being brought.” Resp. at 6. Specifically, HOA argues that Defendant Peña
15 broadly cited to “California Business & Professions Code 16600 and Public Policy
16 violations,” mentioned “two cases without any citations,” and failed to “state what part
17 of the opinions are relied upon in the motion or make any analysis of the facts or
18 holdings of said cases with regard to the facts alleged in this case.” Id. According to
19 HOA, such deficiencies “make responding to the motion challenging as it is unclear
20 upon what legal authorities moving party is relying upon.” Id.
21 In liberally construing Defendant Peña’s pleadings, and given that HOA
22 successfully identifies and responds to Defendant Peña’s arguments and requested
23 relief, the Court rejects HOA’s argument and finds that Defendant Peña has provided
24 sufficient notice under Rule 7(B)(1).
25 2. Breach of Written Non-Competition and Non-Disclosure Agreement
26 Defendant Peña bases her argument on her assertion that the noncompete
27 provisions of the Agreement are unlawful and therefore voidable and unenforceable
1 premise that the noncompete provisions constitute a restraint on her ability to engage in
2 a lawful profession, trade, or business in an employment context and are therefore
3 violative of public policy in California and void pursuant to section 16600 of the
4 California Business and Professional Code. Id. Moreover, assuming arguendo that the
5 Agreement constitutes a noncompete made in an employment context, Defendant Peña
6 argues that the Agreement does not fall within any exception to the general ban on
7 noncompete agreements under California law. Id.6
8 HOA argues that notwithstanding the general ban on noncompetes in California,
9 the challenged provisions of the Agreement are valid for two reasons: 1) the Agreement
10 falls squarely within the statutory exception under section 16601 because it relates to
11 the sale of a business, and 2) the Agreement is valid because it is necessary to protect
12 HOA’s trade secrets. Resp. at 10–11 (citing Alliant Ins. Services v. Gaddy, 159
13 Cal.App.4th 1292, 1306 (2008).
14 Accordingly, to determine whether Defendant Peña is entitled to judgment on the
15 pleadings, the Court must first consider whether the Agreement is valid and enforceable
16 under section 16600 as a matter of law.7
17 a) Validity of the Noncompete Under Cal. Bus. & Prof. Code § 16600
18 In determining a contract’s validity under section 16600, the Court “direct[s] its
19 inquiry according to the actual statutory language [of section 16600]: whether the
20
21
6 Defendant Peña also argues that HOA failed to provide the requisite notice under
section 16600.1 requiring an employer to notify an employee that a noncompete clause
22 in an employment agreement is void under the statute. Mot. at 3; Cal. Bus. & Prof.
23 Code § 16600.1. Such notice is only required, however, where an employer knows a
noncompete clause is void. Id. This argument also fails as there is no proof on the
24 record that HOA failed to provide such notice, nor does lack of notice itself provide
25 Defendant Peña with additional or independent grounds to challenge a noncompete
clause.
26
7 For purposes of this Motion, the Court shall except the allegations in the complaint as
27 true and disregard Defendant Peña’s challenge to the authenticity of the Agreement
attached to HOA’s complaint. Answer ¶ 9; see Unite Here Loc. 30, 35 F.4th at 700.
1 challenged provision ‘restrain[s anyone] from engaging in a lawful profession, trade,
2 or business of any kind.’” Golden v. Cal. Emerg. Physicians Med. Grp. (Golden I), 782
3 F.3d 1083, 1092 (9th Cir. 2015) (citing Cal. Bus. & Prof. Code § 16600(a)). “This
4 prohibition extends to any ‘restraint of a substantial character,’ no matter its form or
5 scope.” Id. (holding § 16600 extends to contracts beyond noncompetition agreements
6 and finding the district court abused its discretion when it “began its analysis by stating
7 a narrower principle: ‘[i]n California, covenants not to compete are void’”).
8 Under Ninth Circuit caselaw, “whether a restraint is one of a substantial character
9 is a mixed question of law and fact.” Golden v. Cal. Emerg. Physicians Med. Grp.
10 (Golden II), 896 F.3d 1018, 1026 (9th Cir. 2018). A contractual restraint qualifies as a
11 “restraint of substantial character” if the restraint “significantly or materially impedes a
12 person’s lawful profession, trade, or business.” Id. at 1024; see also Int’l Bus. Machs.
13 Corp. v. Bajorek, 191 F.3d 1033, 1041 (9th Cir. 1999) (“We are not free to read
14 California law without deferring to our own precedent on how to construe it.”). “To
15 meet this standard, a provision need not completely prohibit the business or professional
16 activity at issue, nor does it need to be sufficient to dissuade a reasonable person from
17 engaging in that activity.” Id. (citing Edwards v. Arthur Andersen LLP, 189 P.3d 285,
18 292 (Cal. 2008)). Rather, “its restraining effect must be significant enough that its
19 enforcement would implicate the policies of open competition and employee mobility
20 that animate section 16600.” Id. (citing Edwards, 189 P.3d at 291). Because “a restraint
21 can be ‘substantial’ even if it is reasonable and even if it is narrow,” a contractual
22 restraint will rarely be “so insubstantial that it escapes scrutiny under section 16600.”
23 Id. at 1023–24 (citing Edwards, 189 P.3d at 290–293).
24 Here, HOA argues that section 16600 is inapplicable because the Agreement falls
25 squarely within the statutory exception under section 16601. Resp. at 10–11. This
26 argument misses the point and falls short of an admission that the Agreement is, in the
27 first instance, barred by section 16600. While true that the challenged provisions may
1 determine which, if any, of the challenged provisions violate section 16600.
2 Defendant Peña generally cites to the noncompetition and nonsolicitation clauses
3 to allege that the Agreement “severely limit[s]” her from “find[ing] alternative
4 employment in [her] career and “restrains . . . [her] from earn[ing] a living.” Mot. at 1.
5 As a result, Defendant Peña moves for sanctions based on lost wages, benefits loss, job
6 searches, and emotional distress. Mot. at 5; Reply at 6.
7 Upon review, the Court finds the terms of section 1 of the Agreement support
8 Defendant Peña’s allegations by impeding Defendant Peña from engaging in the
9 business of providing HOA Management Services in three ways. First, section 1(a)(i)
10 prohibits Defendant Peña from “[e]ngag[ing] as an officer, director, shareholder, owner,
11 principal, partner, lender, joint venturer, employee, independent contractor, consultant,
12 advisor, or sales representative” in “any individual, corporation, limited liability
13 company, partnership, firm, or other business of whatever nature” engaged in the
14 business of providing HOA Management Services. Second, section 1(a)(ii) prohibits
15 Defendant Peña from taking “any action” to solicit employees currently employed by
16 HOA or any of HOA’s subsidiaries. Finally, section 1(a)(iii) prohibits Defendant Peña
17 from “soliciting or selling services in direct competition with [HOA]” to “any person
18 or entity that is, at that time, or that has been, within five (5) years prior to that time, a
19 customer of [HOA] or any of its subsidiaries.”
20 By broadly imposing these restrictions “for any reason whatsoever, directly or
21 indirectly, for h[er]self or on behalf of or in conjunction with any other person,” clauses
22 (i) and (iii) affect Defendant Peña’s current and future ability to seek and maintain any
23 form of employment or compensation for services relating to the business of providing
24 HOA Management Services. See Golden II, 896 F.3d at 1024–26. Thus, in liberally
25 reviewing Defendant Peña’s request for sanctions to assess the impact of such
26 restrictions, the Court agrees the overbroad language of these restrictions create a
27 “restraining effect” that “implicate the policies of open competition and employee
1 compel a finding that clause (ii), which relates to nonsolicitation of current HOA
2 employees, also constitutes a restriction of substantial character under section 16600.
3 See, e.g., Fillpoint, LLC v. Maas, 146 Cal. Rptr. 3d 194, 200 (Cal. Ct. App. 2012)
4 (finding that a clause preventing defendant from “employing or soliciting for
5 employment any of [the company’s] employees or consultants” was not enforceable
6 under sections 16600 and 16601).
7 Accordingly, the Court finds that the challenged clauses in the Agreement
8 constitute substantial restraints, thereby rendering the Agreement void under section
9 16600 unless an exception applies. See Golden II, 896 F.3d at 1028 (finding an entire
10 agreement void under section 16600 where no exception applied); see also Strategix,
11 Ltd. v. Infocrossing W., Inc., 48 Cal. Rptr. 3d 614, 617–618 (Cal. Ct. App. 2006)
12 (declining to “rewrite overbroad covenants not to solicit” because “courts will not strike
13 a new bargain for the parties “for the purposes of saving an illegal contract”).
14 i. Statutory Exception Pursuant to Cal. Bus. & Prof. Code § 16601
15 Because the Court found the Agreement void under § 16600, the Courts accept
16 the factual allegations in the complaint as true and construes the pleadings in the light
17 most favorable to HOA to determine whether the exception pursuant to § 16601 applies.
18 As discussed, section 16600 expressly prohibits noncompetition agreements and
19 clauses in an employment context, no matter how narrowly tailored, unless the
20 agreement falls within a statutory exception. Cal. Bus. & Prof. Code § 16600(b)(1)
21 (citing Edwards, 189 P.3d at 288). Section 16601 provides a statutory exception to
22 California’s general ban on noncompetition agreements when made in connection with
23 the sale or dissolution of a business. Edwards, 189 P.3d at 290. Section 16601 states,
24 in relevant part:
25 [A]ny owner of a business entity selling or otherwise disposing
of all of his or her ownership interest in the business entity . . .
26
may agree with the buyer to refrain from carrying on a similar
27 business within a specified geographic area in which the business so
sold, or . . . has been carried on, so long as the buyer, or any person
1 deriving title to the goodwill or ownership interest from the buyer,
carries on a like business therein.
2
Cal. Bus. & Prof. Code § 16601 (emphasis added). For this exception to apply, courts
3
must determine that 1) the underlying business transaction clearly falls within this
4
limited exception and 2) the restriction satisfies the intent and purpose of section 16601.
5
See Fillpoint, 146 Cal. Rptr. 3d at 200, 203–204 (internal citations omitted).
6
Both HOA and Defendant Peña rely on Fillpoint, LLC v. Maas to support their
7
arguments regarding the validity of the Agreement under section 16601. In Fillpoint,
8
the appellate court considered whether noncompetition and nonsolicitation covenants
9
in an employment agreement were enforceable under section 16600. 146 Cal. Rptr. 3d
10
at 200 (collecting cases). There, the plaintiff sued for breach of an employment contract
11
and interference with a contract after defendant terminated employment with plaintiff
12
and obtained employment with plaintiff’s competitor. Id. at 195–196. The plaintiff
13
argued the challenged covenants in the employment agreement were valid and
14
enforceable because the employment agreement and a stock purchase agreement
15
entered into by the same parties at the same time were “part of a single transaction and
16
must be read together.” Id. at 196. Although the court agreed that, based on the facts,
17
“the purchase agreement and the employment agreement must be read together,” the
18
court ultimately found that “the fact that the purchase agreement and the employment
19
agreement should be read together [does not] automatically mean the covenant not to
20
compete in the employment agreement is enforceable.” Id. at 203. Rather, “that the
21
purchase agreement and the employment agreement should be read together begins, not
22
ends, the analysis [of] whether the covenant not to compete in the employment
23
agreement is enforceable.” Id.
24
The appellate court then went on to analyze the challenged clauses in the context
25
of the “single transaction” and held that the clauses were overbroad and inconsistent
26
with the proposes and terms of section 16601. Id. at 203–204. The court reasoned that
27
the noncompetition terms of the purchase agreement—which prevented defendant from
1 competing with plaintiff, setting up a business to compete with plaintiff, or assisting
2 someone else to set up or continue a business in competition with plaintiff during the
3 three-year period immediately following plaintiff’s acquisition of the company—were
4 “focused on protecting the acquired goodwill for a limited period of time” and therefore
5 served the purpose of section 16601. Id. In contrast, the court found that the
6 “employment agreement’s covenant targeted an employee’s fundamental right to
7 pursue his or her profession” because the covenants prevented defendant from:
8 (1) making sales contacts or making actual sales to anyone who was
[the company’s] customer or potential customer during the two
9
years preceding the termination of [defendant’s] employment, or
10 assisting others in doing so; (2) working for or owning an interest in
any business that was in the same business as, or would compete
11
with, [the company’s]; or (3) employing or soliciting for
12 employment any of [the company’s] employees or consultants. The
covenant in the employment agreement affected [defendant’s] rights
13
to be employed in the future and, in this case, for a year after the end
14 of the three-year period of the purchase agreement's covenant.
15 [. . .]
16 The employment agreement even barred sales to or solicitation of
potential customers.
17
18 Id. Accordingly, the court found the challenged provisions of the employment
19 agreement “cannot be reconciled with California’s strong public policy permitting
20 employees the right to pursue a lawful occupation of their own choice” and therefore
21 “do[] not fit within the limited exception and [are] not enforceable.” Id. at 204.
22 Here, HOA’s complaint alleges that the Agreement “was related to the purchase
23 of [Defendant Peña’s] business by [HOA.]” ECF No. 1 (“Complaint”). In support,
24 HOA attaches a copy of the fully executed Agreement to the Complaint which contains
25 the following recitals:
26 A. The Company is engaged primarily in the business of providing
Management Services for Home Owner Associations (“HOA
27
Management”) in the San Diego County region and Seller was an
1 stock of the Company (the “Shares”), having sold the Shares to
Luis Adrian Arce pursuant to a Stock Purchase Agreement dated
2 June __ 2023 (the “Purchase Agreement”) and as such the Seller
has intimate knowledge of the Company’s business operations,
3
technology, clients, trade secrets, competitively sensitive
4 confidential business or professional information that otherwise
would not qualify as a trade secret, marketing strategy, or sales plans
5
and other proprietary information (the “Confidential Information”).
6
B. The Company has and will have a protectable interest in
7 connection with Seller’s sale of the Shares and Seller’s knowledge
of the Company’s Confidential Information.
8
Exh. A at 2 (emphasis added). Notably, the Agreement does not provide further
9
information regarding the stock purchase or the sale of the business more generally.
10
What is more, although the Agreement is titled “Exhibit B,” neither HOA nor Defendant
11
Peña allege what contract, if any, the Agreement is attached to, nor do the parties
12
include as an attachment to their pleadings the final Purchase Agreement executed by
13
the parties, or any other contract that may be relevant to this Court’s analysis of the
14
underlying business transaction. Without these documents, it is unclear to the Court
15
whether the Agreement was signed as part of the Purchase Agreement or any other
16
relevant contract, such as Defendant Peña’s employment contract with HOA or the
17
Consulting Agreement identified in section 1(b)(iv).8
18
19
20 8 The Court notes that section 2 of the Agreement contains an integration clause
21 referencing an employment agreement and that provides as follows:
COMPLETE AGREEMENT. This written Agreement is the final, complete,
22
and exclusive statement and expression of the agreement between the
23 Company and Seller and of all the terms of this Agreement, and it cannot be
varied, contradicted, or supplemented by evidence of any prior or
24
contemporaneous oral or written agreements. This written Agreement may not
25 be later modified except by a further writing signed by a duly authorized
officer of the Company and Seller, and no term of this Agreement may be
26
waived except by writing signed by the party waiving the benefit of such term.
27 This Agreement hereby supersedes any other employment agreements or
understandings, written or oral, between the Company and Seller.
1 HOA does attach the Letter of Intent, signed by Defendant Peña and her co-owner
2 on behalf of HOA, to the Complaint which establishes, inter alia, an estimated sale
3 price of $400,000, an expected settlement date on or before February 15, 2023, and a
4 covenant not to compete barring HOA from soliciting HOA’s clients for a period of five
5 years from the close of escrow. Exh. A at 6–7. However, although the stated purpose
6 of the Letter of Intent is to “outline contingencies relevant to proceeding to final
7 agreement and the terms by which the final agreement of sale will be written,” the Court
8 finds those terms are not dispositive in interpreting the terms of the Agreement pursuant
9 to the integration clause included in the Agreement and given that, by its terms, the
10 Letter of Intent governed the parties’ negotiations and conduct until the close of escrow,
11 at which point a superseding “final agreement of the sale”—with potentially different
12 terms thereto—would be written to settle the transaction. Exh. A at 7.
13 Notwithstanding that the parties failed to provide the Court with potentially
14 relevant documents to assist the Court in its review, a review of the record shows that
15 the following facts are undisputed:
16 • Prior to the sale of HOA, Defendant Peña was an officer, director and
17 owner of 50% of the outstanding and issue stock of HOA. Mot. at 1;
18 Resp. at 11; see also Exh. A at 1.
19 • On June 23, 2023, the parties entered into the Agreement. Compl. ¶ 9;
20 Answer ¶ 9.
21 • The Agreement was related to the “purchase of [Defendant Peña’s]
22 business by [HOA].” Mot. at 1; Resp. at 11–12.
23 • On June 30, 2023, the parties closed on the sale of HOA. Mot. at 1.
24 • Following the execution of the Agreement, Defendant Peña became an
25 employee of HOA. Compl. ¶ 9; Answer ¶ 9.
26 Thus, in accepting the factual allegations in the Complaint as true and construing the
27
Exh. A at 4 (emphasis added).
1 pleadings in the light most favorable to HOA, the Court deems the forgoing undisputed
2 facts sufficient to find the Agreement was made in connection with the sale of
3 Defendant Peña’s entire ownership interest in HOA. See, e.g., Vacco Industries, Inc. v.
4 Van Den Berg, 6 Cal. Rptr. 2d 602, 610 (Cal. Ct. App. 1992), modified (Apr. 14, 1992)
5 (finding that a non-competition agreement that “acknowledged that [defendant]
6 was selling all of his shares” was “expressly motivated by and directly and integrally
7 dependent upon [a] stock sale,” even though the non-competition and stock purchase
8 agreements were entered into at different times and did not reference each other).
9 Accordingly, the Court holds the Agreement was made pursuant to a qualifying
10 transaction under the limited exception of section 16601.
11 Next, the Court will consider, as a matter of law, whether the restrictions outlined
12 in the challenged provisions satisfy the intent and purpose of section 16601. Like in
13 Fillpoint, relied on by the parties, the Court finds they do not.
14 According to Fillpoint, the purpose of section 16601 “is to permit the purchaser
15 of a business to protect himself or itself against competition from the seller which
16 competition would have the effect of reducing the value of the property right that was
17 acquired.” 146 Cal. Rptr. 3d at 200 (internal quotations and citations omitted). To
18 reach its holding that the noncompetition and nonsolicitation covenants in an
19 employment agreement were overbroad and inconsistent with the proposes and terms
20 of section 16601, the court distinguished the facts at issue there9 from other state
21 appellate court decisions analyzing section 16601. Id. For example, the court
22 considered but disregarded:
23 • Hilb, Rogal & Hamilton Ins. Services v. Robb, 39 Cal. Rptr. 2d 887, 896
24 (Cal. Ct. App. 1995), in which there were multiple agreements but only
25
9 “The parties have not cited us to any case with the same facts presented by this case,
26
i.e., a purchase agreement and an employment agreement entered at roughly the same
27 time as part of a single transaction, but containing different covenants not to compete.”
Id. at 200.
1 one covenant not to compete contained in the employment agreement;
2 • Vacco, 6 Cal. Rptr. 2d at 606, involving a stock purchase agreement, a
3 separate noncompetition agreement, and an employment agreement
4 containing its own noncompetition agreement; and,
5 • Alliant Ins. Services, Inc. v. Gaddy, 72 Cal. Rptr. 3d 259, 266–272 (Cal.
6 Ct. App. 2008), involving a stock purchase agreement and an employment
7 agreement which contained identical covenants not to compete.
8 See id. (distinguishing Hilb, 39 Cal. Rptr. 2d at 896 (finding an employment contract
9 containing a covenant not to compete for three years after the employee’s termination
10 enforceable as a necessary condition of the merger agreement and rejecting arguments
11 that “section 16601 requires that the covenant be contained in a particular type of
12 document”)); id. at 201–202 (finding Vacco, 6 Cal. Rptr. 2d at 606, “of limited
13 relevance” because “the three documents in question did not cross-reference each other”
14 and “because the trial court in Vacco did not address the covenant not to compete in the
15 employment contract”); id. at 202 (finding Alliant, 72 Cal. Rptr. 3d at 266–272, not
16 instructive because the covenants not to compete were identical). As discussed below,
17 the Court agrees with the parties that an analysis pursuant to Fillpoint is instructive here.
18 Like in Fillpoint, the facts at issue here involve two agreements—the Purchase
19 Agreement and the Agreement—entered at roughly the same time, as part of a single
20 transaction, but containing different restrictive covenants. Here, the recitals in the
21 Agreement refer to the Purchase Agreement. Although the final Purchase Agreement
22 is missing from the record, in accepting the factual allegations in the Complaint as true
23 and construing the pleadings in the light most favorable to HOA, the Court infers that
24 the Letter of Intent is an accurate representation of that agreement. Thus, to the extent
25 HOA alleges that the noncompetition covenant contained in the Letter of Intent is
26 binding on Defendant Peña following the close of escrow, or alternatively, to the extent
27 HOA provides the Letter of Intent as evidence of the terms of the final Purchase
1 restrictions in the Agreement are broader and materially different than those outlined in
2 the Letter of Intent for the following reasons.
3 First, unlike the Letter of Intent, the restrictions in the Agreement go into effect
4 for five years “immediately following the termination of the Consulting Agreement” as
5 opposed to five years “from the Close of Escrow,” with the latter date relating to the
6 effective date of the stock sale as the triggering event. Second, the nonsolicitation
7 covenants in the Agreement contain temporal limitations while the covenant in the
8 Letter of Intent does not. Finally, the restrictions in the noncompetition covenant in the
9 Agreement are much broader than those in the Letter of Intent, including because the
10 Agreement prohibits an expansive breadth of “other activities” that impact Defendant
11 Peña’s future employment upon termination of her employment with HOA, whilst the
12 Letter of Intent immediately protects the value of the property right acquired in the stock
13 purchase by limiting the restriction to solicitation of HOA’s clients. Accordingly, the
14 Court finds the restrictions in the Agreement do not satisfy the intent and purpose of
15 section 16601 because they target Defendant Peña’s fundamental right to pursue her
16 profession. See Fillpoint, 146 Cal. Rptr. 3d at 204 (affirming trial court’s ruling that
17 the “covenants would give the buyer broad protection against competition wherever it
18 happens to have employees or customers, at the expense of the seller’s fundamental
19 right to compete for employees and customers in the marketplace”).
20 ii. Trade Secret Exception
21 As stated, the Court accepts HOA’s allegations in the Complaint as true in
22 holding that the confidential information at issue in this case constitutes trade secrets
23 under California state and federal laws. Compl. ¶¶ 58–59, 68–69.
24 HOA cites to one case, Alliant Insurance Services, Inc. v. Gaddy, in support of
25 its argument that the nonsolicitation clauses in the Agreement are valid to protect
26 HOA’s trade secrets. 72 Cal. Rptr. 3d 259, 271 (Cal. Ct. App. 2008). In Alliant, the
27 California appellate court considered whether, for purpose of issuing a preliminary
1 sale of a business was valid to protect the plaintiff employer’s trade secrets. Id. at 271–
2 272. Under this exception, “[a] covenant for an employee not to solicit the employer’s
3 clients upon termination of the employment may be valid [under section 16600] if
4 necessary to protect the employer’s trade secrets.” Id. at 271; Muggill v. Reuben H.
5 Donnelley Corp., 398 P.2d 147, 149 (Cal. 1965). In finding no abuse of discretion, the
6 appellate court relied on the trial court’s factual findings that 1) the confidential
7 information at issue constituted trade secrets and 2) under the terms of the stock
8 purchase agreement, which were identical to those in defendant employee’s
9 employment agreement, the nonsolicitation covenant “related only to defendant’s
10 employment by [plaintiff], not his sale of [the company]” and was therefore valid to
11 protect trade secrets learned by the defendant employee during the term of their
12 employment. Id. at 271. Accordingly, the court affirmed the trial court’s holding that
13 the nonsolicitation clause was valid under the limited trade secret exception. Id.
14 HOA’s reliance on the limited exception outlined in Alliant is misplaced for
15 several reasons. First, procedurally, Alliant reviewed an order granting a preliminary
16 injunction which involves a different standard of proof than the one used to decide a
17 motion for judgment on the pleadings. Compare id. at 266–267 (affirming grant of
18 preliminary injunction based an abuse of discretion standard) with Thompson v. Impaxx,
19 Inc., 7 Cal. Rptr. 3d 427, 431–432 (Cal. Ct. App. 2003) (reversing judgement on the
20 pleadings in finding that, taking allegations in the complaint as true, the trade secret
21 exception did not apply). Second, Alliant did not consider whether the nonsolicitation
22 clause in the stock purchase agreement was valid on its own terms under the exception
23 because, unlike here, that clause was identical to the one in the employment agreement.
24 Id. at 271–272; see also Fillpoint, 146 Cal. Rptr. 3d at 200 (finding irrelevant and not
25 instructive “any case with[out] the same facts presented by this case” in applying section
26 16600). Third, unlike the court’s reasoning in Alliant, HOA argues here that the
27 nonsolicitation clause relates only to the stock purchase rather than HOA’s employment
1 specifically argues that “[t]here are no facts alleged indicating that the non-competition
2 agreement is an employment agreement of any type and [the Agreement] specifically
3 states on its face that it is related to the purchase of Peña’s stock.” Resp. at 13. Fourth,
4 the relevance of Alliant and the trade secret exception on this Court’s analysis is
5 questionable given that Alliant was decided prior to the California Supreme Court’s
6 landmark ruling in Edwards v. Arthur Andersen LLP, discussed above, in which the
7 Supreme Court expressly declined to “address the applicability of the so-called trade
8 secret exception to section 16600” as the issue was not before the court. Edwards, 189
9 P.3d at 291 n.4. Accordingly, the Court finds that Alliant is not instructive here.
10 Although the Ninth Circuit recognizes a trade secret exception to section 16600,
11 HOA does not cite—nor has this Court found—any Ninth Circuit authority analyzing
12 or upholding a noncompete agreement or clause pursuant to the trade secret exception
13 that would otherwise be invalid under section 16600 and its progeny as established in
14 Edwards. See, e.g., Asset Mktg. Sys., Inc. v. Gagnon, 542 F.3d 748, 758 (9th Cir.2008)
15 (recognizing a trade secret exception to section 16600 but finding the noncompetition
16 agreement invalid because the exception did not apply). Given that HOA does not cite
17 additional authority compelling this Court to find a trade secret exception to the Court’s
18 holding that the Agreement is void under section 16600, the Court finds that no such
19 exception exists under the facts of this case.
20 In light of the foregoing, the Court HEREBY ORDERS the Agreement VOID
21 and UNENFORCEABLE as a matter of law under Cal. Bus. & Prof. Code § 16600 and
22 pursuant to California’s strong public policy of permitting employees the right to pursue
23 a lawful occupation of their own choice.
24 IT IS FURTHER ORDERED Defendant Peña’s motion for judgment on the
25 pleadings is GRANTED as to HOA’s cause of action for Breach of Written Non-
26 Competition and Non-Disclosure Agreement.
27 3. Uncontested Claims
1 remaining claims alleging causes of action for (2) Conversion, (3) Intentional
2 Interference with Contractual Relations, (4) Intentional Interference with Prospective
3 Economic Advantage, (5) Trade Secret Misappropriation Under the Defend Trade
4 Secrets Act under 18 U.S.C. § 1836, and (6) Misappropriation of Trade Secrets under
5 Cal. Civ. Code §3426, Defendant Peña fails to cite any law or facts in support.
6 As to Defendant Peña’s challenge to HOA’s claims for misappropriation of trade
7 secrets, the Court must accept as true HOA’s allegations in the Complaint that the
8 confidential information at issue constitutes trade secrets under California state and
9 federal laws. Compl. ¶¶ 58–59, 68–69. Thus, even under the liberal pleading standard
10 applied to pro se defendants, Fleming, 581 F.3d at 925, Defendant Peña’s argument that
11 the information is not protectable because it is available in the public domain is
12 insufficient under the standard to show she is entitled to judgment as a matter of law.
13 Mot. at 3; Reply at 5.
14 Because Defendant Peña has failed to state a sufficient factual or legal basis in
15 support of her Motion as to the remaining claims, the Court finds that issues of material
16 fact exist, and Defendant Peña is not entitled to judgment as a matter of law.
17 Accordingly, the Court DENIES Defendant Peña’s motion for judgment on the
18 pleadings as to the remaining claims.
19 B. Motion for Sanctions
20 Defendant Peña moves for sanctions arguing that HOA’s claims are without merit
21 and frivolous, and therefore requesting damages for lost wages, benefits loss, job
22 searches, and emotional distress:
23 • $9,000 attorney’s fees;
24 • $64,000 lost wages (Sept. 2024 - April 2025);
25 • $13,200 job search (through April 2025);
26 • $19,200 lost wages (May - July 2025);
27 • $6,400 lost wages (August 2025);
1 • $1,750 job search (May - July 2025); and,
2 • $500.00 job search (August 2025).
3 Reply at 6. Defendant Peña’s original motion also sought sanctions “due to emotional
4 distress, mental anguish.” Mot. at 3. Defendant Peña provides no argument connecting
5 HOA’s claims to her claim for sanctions other than her general argument that the
6 Agreement is void as a matter of law.
7 Under Rule 11, “[a] motion for sanctions must be made separately from any other
8 motion and must describe the specific conduct that allegedly violates Rule 11(b).” Fed.
9 R. Civ. P. 11(c)(2). Here, Defendant Peña improperly files her motion for sanctions in
10 conjunction with her motion for judgment on the pleadings in violation of Rule 11.
11 Defendant Peña also fails to comply with other procedural and substantive requirements
12 of Rule 11, such as providing the offending party substantive and procedural notice of
13 a violation and a reasonable opportunity to respond.
14 Accordingly, the Court DENIES Defendant Peña’s motion for sanctions.
15 III. CONCLUSION
16 IT IS HEREBY ORDERED:
17 1. The Non-Competition and Non-Disclosure Agreement is VOID and
18 UNENFORCEABLE under California law.
19 2. Motion for judgment on the pleadings is GRANTED as to the cause of
20 action for Breach of Written Non-Competition and Non-Disclosure
21 Agreement.
22 3. Motion for judgment on the pleadings is DENIED as to the cause of action
23 for Conversion.
24 4. Motion for judgment on the pleadings is DENIED as to the cause of action
25 for Intentional Interference with Contractual Relations.
26 5. Motion for judgment on the pleadings is DENIED as to the cause of action
27 for Intentional Interference with Prospective Economic Advantage.
1 for Trade Secret Misappropriation Under the Defend Trade Secrets Act
2 under 18 U.S.C. § 1836.
3 7. Motion for judgment on the pleadings is DENIED as to the cause of action
4 for Misappropriation of Trade Secrets under Cal. Civ. Code §3426.
5 8. Motion for sanctions is DENIED.
6 IT IS FURTHER ORDERED the stay on all proceedings previously issued by
7 Court is VACATED. ECF No. 33. The case shall proceed according to a
8 || Superseding Scheduling Order to be issued by the Honorable Magistrate Judge
9 || Michelle M. Pettit.
10 IT IS SO ORDERED. : | | | |
11 |} DATED: March 27, 2026
12 JOHN A. HOUSTON
TED STATES DISTRICT JUDGE
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