2012-00132204-CU-BC

Paul Shieh DDS vs. Thomas Yamamoto DDS

Nature of Proceeding: Motion for Judgment on the Pleadings

Filed By: Sawamura, Michael A.

Defendant Thomas Yamamoto’s (“Yamamoto”) motion for judgment on the pleadings
is DENIED.

Overview

This case presents a commercial dispute. Both Yamamoto and Plaintiff Paul Shieh
(“Shieh”) are dentists. In January 2008, Shieh purchased Yamamoto’s dental practice.
Among Yamamoto’s contractual obligations were obligations not to compete with
Shieh. Shieh alleges that Yamamoto breached the covenant not to compete.

The operative second amended complaint (“SAC”) contains three causes of action for
breach of contract, quasi contract and fraud. Yamamoto contends that he is entitled to
judgment because the non-compete provisions in the purchase/sale contract are
unenforceable. The covenant in question reads, in relevant part:

SELLER shall not directly or indirectly engage in the practice of
dentistry…within TEN (10) miles of SELLER’S office for a period of FIVE
(5) years. In addition, SELLER agrees not to solicit or treat any patients
who have been, or are currently being treated within the SELLER’S
practice… .

Discussion

Preliminarily, the court largely rejects Shieh’s argument that, because this court overruled Yamamoto’s demurrer to the subject causes of action as pleaded in the first
amended complaint, it should summarily deny the instant motion. The demurrers in
question did not involve an argument that the covenant not to compete was
unenforceable. As a consequence, the court entertains the instant motion on the
merits notwithstanding its prior rulings. However, to the extent Yamamoto argues that
Shieh’s fraud cause of action is otherwise defective for reasons the court previously
rejected on demurrer, the court continues to reject the arguments.

The covenant not to compete contains two, separate provisions that are at issue.
First, it bars Yamamoto from engaging dentistry within 10 miles of the practice for a
period of five years (the “nonpractice” provision). Yamamoto does not challenge the
lawfulness of this provision.

The covenant also contains the following “nontreatment / nonsolicitation” provision: “[I]
n addition, SELLER agrees not to solicit or treat any patients who have been, or are
currently being treated within the SELLER’s practice… .” In the SAC and his
Opposition to the instant motion, Shieh conflates these two provisions by suggesting
that, like the nonpractice provision, the nontreatment / nonsolicitation provision is only
in force for five years and only applies to a particular geographical area. The court
rejects this conflation, since both the five-year limitation and the 10-mile limitation only
apply to the nonpractice provision. Thus, Yamamoto is correct that the nontreatment /
nonsolicitation provision does not have any geographical or temporal limitations on it.
The only limitation on the nontreatment / nonsolicitation provision is on the patients,
i.e., by limiting the provision to then-current and former patients of the practice.

Because the SAC appears to rest solely on allegations that Yamamoto violated the
nontreatment / nonsolicitation provision, rather than the nonpractice provision, the
lawfulness of the former is key to resolution of the motion. The narrow issue becomes
whether Shieh may enforce Yamamoto’s promises not to treat / solicit a discrete set of
patients anywhere and forever.

Subject to certain limitations, agreements not to compete are unenforceable in
California. (B&P Code §§ 16600-16601.) The exception at B&P § 16601 allows the
buyer of a business’ goodwill, or substantially all of a business’ assets, to require the
seller not to carry on a similar business within a specified geographical area. The
Court of Appeal in Strategix, Ltd. v. Infocrossing West, Inc. [“Strategix”] (2006) 142
th
Cal.App.4 1068, 1073 described the thrust of this exception as permitting the buyer to
protect against competition that “would have the effect of reducing the value of the
property right that was acquired.”

The Strategix court also concluded that, by extension, courts may enforce
nonsolicitation covenants barring seller from soliciting their sold businesses’
customers. (Id. at 1073) Although Strategix involved a nonsolicitation covenant in
force for a period of one year, the Strategix court did not limit its blessing solely to
nonsolicitation covenants that are temporally limited. Rather, it broadly concluded that,
as long as the nonsolicitation covenant is aimed solely at preventing the seller from
poaching customers that the business had at or before the time of sale, the covenant
is enforceable. On the other hand, the court held that, because the nonsolicitation
covenant before it was not so limited, it was an unenforceable restraint of trade. (See
id. [“[N]onsolicitation covenants barring the seller from soliciting all employees and
customers of the buyer, even those who were not former employees or customers of
the sold business, extend their anticompetitive reach beyond the business so
sold” [citation and additional quotation marks omitted] [brackets added].)

The covenant in the instant case prevents Yamamoto from soliciting the practice’s
clients in existence at or before the time of sale. Under Strategix, such a covenant not
to solicit is enforceable. As a consequence, Yamamoto has failed to demonstrated
that Shieh has not stated a valid cause of action, (CCP § 438(c)(1)(B)(ii)), and the
motion must be denied. In this regard, the court notes that, although Shieh
emphasizes the wrongfulness of Yamamoto’s treatment of former practice clients, the
allegations can be construed to state causes of action based on wrongful solicitation.
(See SAC, ¶¶ 8, 33 [Yamamoto agreed not to solicit]; id. ¶ 38 [Yamamoto secretly
solicited the practice’s patients].)

In reaching its conclusion, the court is aware of Yamamoto’s argument that the
nontreatment / nonsolicitation provision could prevent him from treating patients who
have voluntarily left Shieh in search of a different dentist. This argument raises the
question whether the nontreatment component of the nontreatment / nonsolicitation
provision constitutes an unenforceable restraint of trade. The court need not decide
this issue because the nonsolicitation component is enforceable. As long as the SAC
states a causes of action on any theory, the motion for judgment on the pleadings
must be denied. In this regard, the court notes the agreement’s severability provision,
which Yamamoto has not addressed. Thus, the court is not persuaded that, even if
the nontreatment component is unenforceable, it cannot be severed without destroying
the entire agreement or even the entire nontreatment / nonsolicitation provision.

Yamamoto’s citation to Swenson v. File (1970) 3 Cal.3d 389 does not alter the court’s
conclusion, since that case did not involve a nonsolicitation covenant.

Because Shieh has stated a valid theory of quasi contract, i.e., Yamamoto’s solicitation
and receipt of business he promised not to solicit, the court specifically rejects
Yamamoto’s argument that Shieh has failed to state quasi contract. Similarly, the
court rejects Yamamoto’s argument that Shieh’s fraud cause of action is defective for
failing to allege resulting damage: because Shieh has alleged that Yamamoto solicited
and received business from the practice that he promised not to solicit, Shieh has
alleged damage.

Request for Judicial Notice

Yamamoto’s request for judicial notice of the SAC and the contract filed as an exhibit
thereto is GRANTED. In the future, Yamamoto is directed to file all requests for
judicial notice as separate documents pursuant to CRC 3.1113(l), not as footnotes in
another document.

The Sawamura Declaration

Because the court may not consider evidence at this juncture, it disregards the
Sawamura Declaration except to the extent the declaration references judicially
noticeable court records.

Conclusion

The motion is DENIED.