Tentative Ruling

Judge Thomas Anderle
Department 3 SB-Anacapa
1100 Anacapa Street P.O. Box 21107 Santa Barbara, CA 93121-1107

CIVIL LAW & MOTION
Beacon Pointe Wealth Advisors, LLC v. Gary Dorfman
Case No: 20CV00257
Hearing Date: Tue Mar 03, 2020 9:30

Nature of Proceedings: OSC re Preliminary Injunction Restraining Order

Motion/ Order to Show Cause re Issuance of Preliminary Injunction

ATTORNEYS

For Plaintiff Beacon Pointe Wealth Advisors, LLC: Christopher C. Marquardt, Ian A. Wright, Alston & Bird LLP

For Defendant Gary Dorfman: Darren S. Enenstein, Ned M. Gelhaar, Dina Marie Randazzo, Ritsa Gountoumas, Enenstein Pham & Glass

RULING: For the reasons set forth herein, the motion of plaintiff Beacon Pointe Wealth Advisors, LLC, for issuance of a preliminary injunction is denied. The temporary restraining order and order to show cause re issuance of preliminary injunction filed by the Court on January 30, 2020, is dissolved and discharged.

Background

This is an order to show cause re issuance of a preliminary injunction after issuance of a temporary restraining order. The Court has considered all of the admissible evidence presented by the parties in support of and in opposition to this motion. The statement of facts below is intended to provide background but is not intended to be exhaustive of the facts or evidence presented.

1) Factual Background

In 2010, defendant Gary Dorfman opened his own boutique investment advisory firm, Pacific Pointe Advisors (PPA). (Dorfman decl., ¶ 7.) Dorfman grew PPA to approximately $170 million in assets under management by mid-2013. (Ibid.) Dorfman developed a clientele of risk-averse high-net-worth individuals and institutions. (Dorfman decl., ¶ 8.)

Around 2011, PPA developed a strategic partnership with Beacon Pointe Advisors (BPA). (Dorfman decl., ¶ 9; Eusey decl., ¶ 6.)

Beacon Pointe Holdings, LLC, is a 45 percent owner of plaintiff Beacon Pointe Wealth Advisors, LLC (Beacon Pointe). (Eusey decl., ¶ 2.) Beacon Pointe is a California limited liability company with its principal place of business in Newport Beach, California. (Eusey decl., ¶ 3.)

On October 1, 2013, Beacon Pointe purchased the business and operations of PPA from Dorfman and his former business partner, Timothy Morton-Smith, for approximately $203,500.00. (Eusey decl., ¶ 6.) As part of this transaction, Dorman executed three documents with Beacon Pointe: (1) a Contribution Agreement; (2) the Second Amended and Restated Operating Agreement (Operating Agreement); and, (3) Executive Employment Agreement. (Eusey decl., ¶¶ 6-8 & exhibits B, C; Dorfman decl., ¶¶ 9, 11, 16 & exhibits A, B.) According to Dorfman, at the time he signed the agreements he understood them to be nonnegotiable and required to be signed if he wanted to be employed by Beacon Pointe. (Dorfman decl., ¶ 9.)

Generally, the transaction documented by the agreements provided for Dorfman to transfer the assets of PPA to Beacon Pointe in exchange for which Dorfman received class B membership interests in Beacon Pointe that equated to a 0.86 percent ownership interest with no voting rights. (Dorman decl., ¶ 10.) Dorfman was also employed by Beacon Pointe and provided financial advisor services for Beacon Pointe in an “exclusive territory” assigned to him. (Eusey decl., ¶ 11.) At the time of his resignation, the “exclusive territory” was defined as the “City of Santa Barbara and south to the city of Westlake, west to the Pacific Ocean and east to the California coastal mountain range. (Ibid.) These agreement also include noncompetition provisions that are at issue in this motion. The specific terms of these agreements are more particularly discussed below. (Note: In ruling on this motion, the Court considers only the evidence presented in connection with this motion. Beacon Pointe has filed redacted versions of documents as exhibits with the assertion that the redacted information is nonpublic information regarding Beacon Pointe’s business operations. Rather than complying with California Rules of Court, rules 2.550 and 2.551 in contemporaneously lodging unredacted documents provisionally under seal, Beacon Pointe offers to lodge unredacted versions at the hearing of this motion. More complete versions of the applicable agreements are provided in opposition.)

According to Dorfman, during the six years he was employed by Beacon Pointe, he continued to work with his existing clients and developed many additional clients. (Dorfman decl., ¶ 19.) By 2019, Dorfman had built his business to around 100 clients and $265 million in assets under management. (Ibid.) Dorfman did this work through teamwork with Tammy Turner (Manager, Client Services) and Sara Kalsman (Senior Wealth Advisor), whom Dorfman had recruited. (Ibid.) Dorfman’s clients are predominantly developed through his and his team’s work and connections, with a minority of clients originating from referral sources. (Dorfman decl., ¶ 20.)

According to Dorfman, in the second quarter of 2019, Beacon Pointe announced a program to shore up its capital structure and to try to attract private equity investment in the firm. (Dorfman decl., ¶ 24.) Dorfman was concerned about how this program would impact his practice at Beacon Pointe. (Dorfman decl., ¶ 25.) With this project, Beacon Pointe management began pressuring class B members such as Dorfman into signing a new operating agreement, signing a new employment agreement, agreeing to a new valuation of business, and implementing a new compensation structure. (Dorfman decl. ¶ 27.) Dorfman believed that the new terms would unreasonably alter and restrict his employment and he did not sign. (Dorfman decl., ¶¶ 28-29.) Dorfman ultimately determined that is was best for him to leave Beacon Pointe and to work for One Capital Management LLC (One Capital). (Dorfman decl., ¶ 35.) Dorfman provided Beacon Pointe with a 30-day notice intent to resign on December 13, 2019. (Dorfman decl., ¶ 36.) Dorfman was thereafter put on “administrative leave,” and was told to go home and not to contact his clients. (Ibid.)

On January 12, 2020, Beacon Pointe emailed documents to Dorfman regarding Beacon Pointe’s notice of intent to repurchase Dorfman’s membership interest in Beacon Pointe pursuant to the terms of the Operating Agreement. (Dorfman decl., ¶ 46.) Beacon Pointe provided a valuation of this membership interest at $142,308 without explanation. (Ibid.) The fair market value of Dorfman’s practice is approximately $5 million. (Dorfman decl., ¶ 48.) Dorfman has not signed the documents. (Dorfman decl., ¶ 49.) Dorfman has separately informed Beacon Pointe that he has withdrawn his interest in Beacon Pointe reserving all rights. (Ibid.)

On January 13, 2020, Dorfman executed an employment agreement with One Capital. (Dorfman decl., ¶ 50.) Dorfman did not accept or begin employment with One Capital until after Dorfman’s employment with Beacon Pointe ended. (Ibid.)

(2) Procedural History

On January 14, 2020, Beacon Pointe filed its original complaint in this action asserting a single cause of action for injunctive relief against Dorfman. The complaint alleges that valid and enforceable arbitration agreements exist based upon which Beacon Pointe intends to pursue its rights in arbitration. (Complaint, ¶ 14.) The complaint was filed to permit Beacon Pointe to seek provisional remedies as permitted by the agreements. (Ibid.)

On January 21, 2020, Beacon Pointe filed an ex parte application for a temporary restraining order (TRO) and order to show cause re preliminary injunction (OSC). The ex parte application was opposed by Dorfman. On January 22, 2020, the Court heard the ex parte application and granted the TRO and OSC.

On February 18, 2020, Beacon Pointe filed its motion for preliminary injunction under the timing permitted by the OSC. The motion is opposed by Dorfman.

Analysis

Notwithstanding the issuance of the TRO, the burden is on the plaintiff, as the party seeking injunctive relief, to show all elements necessary to support issuance of a preliminary injunction. (O’Connell v. Superior Court (2006) 141 Cal.App.4th 1452, 1481.) A preliminary injunction is available “[w]hen it appears by the complaint or affidavits that the commission or continuance of some act during the litigation would produce waste, or great or irreparable injury, to a party to the action.” (Code Civ. Proc., § 526, subd. (a)(2).)

“The trial courts consider two interrelated questions in deciding whether to issue a preliminary injunction: 1) are the plaintiffs likely to suffer greater injury from a denial of the injunction than the defendants are likely to suffer from its grant; and 2) is there a reasonable probability that the plaintiffs will prevail on the merits. [Citations.] ‘[By] balancing the respective equities of the parties, [the court] concludes that, pending a trial on the merits, the defendant should or that he should not be restrained from exercising the right claimed by him.’ [Citations.]” (Robbins v. Superior Court (1985) 38 Cal.3d 199, 206.)

(1) Probability of Success on the Merits

Beacon Pointe’s complaint bases its count for injunctive release upon Dorfman’s alleged breaches of noncompetition provisions of the Operating Agreement. (Complaint, ¶¶ 50, 57.) There are no substantial factual disputes regarding what agreements Dorfman did or did not sign. Dorfman does not argue that he has complied with the provisions Beacon Pointe asserts have been breached, but instead argues that the provisions are not enforceable pursuant to Business and Professions Code section 16600 et seq. The issue of probability of success on the merits therefore depends upon an analysis of the likelihood that the contractual provisions will be found to be enforceable.

(A) Contractual Provisions

The Operating Agreement includes the following provisions (underlining omitted):

“Class B Members shall be those persons listed in Exhibit C as Class B Members and such additional Members who have been admitted to the Company pursuant to Section 2.2(c) and designated as a Class B Member. Class B Members shall not have the right to participate in, or influence, the management of the Company or to vote on any matter put forth for the consent of the Members. Any reference in this Agreement to a ‘Majority of Members’ does not include the vote or consent of the Class B Members. Class B Members shall have no other rights in the Company except for rights provided by law for persons having solely an Economic Interest in the Company.” (Operating Agreement, § 2.1(b).)

“The interest of Class B Member may not be withdrawn in whole or in part, except (i) in the event of the death, Disability, Retirement, Non-Renewal of Employment or Termination for Good Reason of any Class B Member, and in such case, the Company shall be obligated to purchase all of the Membership Interests of such Member in accordance with Section 7.8, (ii) with the prior written consent of and in accordance with the terms agreed upon by a Majority of Members or (iii) in connection with a Target Event as provided in Section 7.9.” (Operating Agreement, § 2.4(b).)

“Officers, Managers and Class A Members may engage in other business activities, provided such other activities do not materially interfere with or adversely affect their ability to perform their duties to the Company. Notwithstanding the foregoing, from the Effective Date until the termination of their interest in or service on behalf of the Company, the Class A Members shall not serve as an officer, director, shareholder (excluding ownership of less than five percent (5%) of the outstanding voting shares of a publicly-traded company), employee, manager, member or partner of or advisor or consultant to, or own (wholly or partially), lend to, participate in, provide services to or otherwise assist, in any material manner or capacity, any investment advisory business which is substantially similar to the Company and which is focused on providing investment advisory services to high net worth individuals; provided, that for purposes of further clarification the Officers, Managers and the Class A Members may continue to serve in any role on behalf of Beacon Pointe Advisors, LLC, Beacon Pointe Holdings: LLC and any of their respective Affiliates. A Manager and officer shall be obligated to devote only as much of his or her time to the business of the Company as shall be reasonably required in light of his or her duties and the purposes of the Company. Class B Members may engage in other business activities only to the extent allowed under any written employment agreement between such Member and the Company and/or an Operating Company.” (Operating Agreement, § 4.6(a).)

“Each Class B Member hereby covenants with the Company and each other Member that while a Class B Member of the Company and following the Transfer of the Member’s Membership Interest, whether voluntary, involuntary, by operation of law or by reason of any provision of this Agreement, the Class B Member will not, directly or indirectly, through an Affiliate or otherwise, for a period of two (2) years following the date of the Transfer, (i) serve as an officer, director, shareholder (excluding ownership of less than five percent (5%) of the outstanding voting shares of a publicly-traded company), employee, manager, member or partner of or advisor or consultant to, or own (wholly or partially), lend to, participate in, provide services to or otherwise assist, in any material manner or capacity whatsoever, any business or other enterprise involved or engaging in a line of business in the United States that is directly competitive with the Business; (ii) attempt to hire or otherwise induce any present or future employee or consultant of the Company or any of its Affiliates to leave the employ of the Company or its Affiliates or to terminate his/her relationship with the Company or its Affiliates or engage in activities competitive with the business of the Company or its Affiliates; or (iii) attempt to induce any client, contractor or customer to or of the Company or its Affiliates to reduce or cease doing business with the Company or its Affiliates. Upon the Transfer of the Class B Member’s Membership Interest, the Class B Member agrees to execute and deliver to the Company a Non-Competition, Non-Solicitation and Confidentiality Agreement as required by Section 7.11(c).” (Operating Agreement, § 4.6(b).)

“Each Class B Member hereby stipulates that a breach of the provisions of this Section 4.6 will result in irreparable damage and injury to the Company for which no money damages could adequately compensate it. If the Class B Member breaches the provisions of this Agreement, in addition to all other remedies to which the Company may be entitled, the Company shall be entitled to (i) cease payments to such Class B Member under any Promissory Note issued pursuant to Section 7.11(a) hereof, (ii) recover from such Class B Member all payments previously made to such Class B Member in connection with the purchase of such Class B Member’s Membership Interest under the provisions of Article 7, and (iii) seek an injunction to enforce the provisions of this Agreement, which may be issued by any court of competent jurisdiction to enjoin and restrain the Class B Member and each and every Person concerned or acting in concert with the Class B Member from the continuance of such breach. Each Class B Member expressly waives any claim or defense that an adequate remedy at law might exist for any such breach.” (Operating Agreement, § 4.6(c).)

“If the provisions contained herein shall be deemed to exceed the time or geographic limits or any other limitation imposed by applicable law in any jurisdiction, then such provision shall be deemed reformed in such jurisdiction to the maximum extent permitted by applicable law.” (Operating Agreement, § 4.6(d).)

“Upon the death, Disability, Retirement, Non-Renewal of Employment or Termination for Good Reason of any Class B Member or any Person who holds and is allocated a Class B Membership Interest through an entity which holds the Class B Membership Interest (an ‘Indirect Member’), the Company shall be obligated to purchase all of the Membership Interests of such Member or all of the Membership Interests allocated within an entity to such Indirect Member. The Company may assign its right to purchase such Membership Interests to the Class A Members or to such other Person as the Company may, in its sole discretion, designate; provided that any such assignment shall not relieve the Company of its obligation to purchase the Class B Membership Interest if the Company’s assignee does not complete such purchase.” (Operating Agreement, § 7.8(a).)

“The purchase price and payment terms for any Membership Interests purchased pursuant to this Section 7.8 shall be as set forth in Section 7.11(a)(i) hereof.” (Operating Agreement, § 7.8(b).)

“If any Class B Member suffers any of the events described in subparagraph (b) below (each of the foregoing, a ‘Target Event,’ and each Member or Indirect Member triggering a Target Event, a ‘Target Member’), then:

“(i) Within ninety (90) days following a Target Event, the Company shall deliver to the Class A Members and the Target Member written notice of such Target Event (‘Target Offer Notice’). The Target Offer Notice shall contain a description of the Target Event and the Purchase Price applicable to such Target Event under Section 7.11. The Company (or its assignee) shall have the option, for a period of ninety (90) days after the Target Offer Notice is given, within which, by means of written notice to the Target Member (the ‘Target Response Notice’), it may purchase all or any portion of the Target Member’s Membership Interest (the ‘Target Interest’). If the Company; (or its assignee) does not elect to purchase all of the Target Interest within the ninety (90) day period, then each of the Class A Members may elect to purchase all or any portion their respective proportionate amount of the non-purchased Target Interest within ninety (90) days thereafter. If the options set forth in this Section 7.9(a)(i) are not exercised by the Company (or its assignee) or any Class A Member within the time periods allowed, then the Target Member shall retain the remainder of its Target Interest.” (Operating Agreement, § 7.9(a).)

“The occurrence of any of the following to any Class B Member or any Indirect Member shall trigger the option and purchase rights set forth in subparagraph (a) above with respect to such Class B Member or Indirect Member: (i) Bankruptcy, except for an involuntary Bankruptcy which is dismissed within ninety (90) days after filing; (ii) an assignment for the benefit of creditors; (iii) the appointment of a receiver for the assets of the Class B Member, unless dismissed within ninety (90) days; (iv) the Class B Member’s or Indirect member’s termination of his or her employment with the Company for any reason other than an event set forth in Section 7.8 hereof; or (v) the Company’s termination of such Class B Member’s or Indirect Member’s employment with the Company for ‘Cause’ (as such term is defined in the employment agreement between such Class B Member or Indirect Member and the Company).” (Operating Agreement, § 7.9(b).)

“Once the Company or other purchaser has given written notice of its exercise of an option to purchase all or a portion of a Target Member’s Membership Interest pursuant to this Section 7.9, such notice shall be irrevocable.” (Operating Agreement, § 7.9(c).)

“The price and terms for the purchase of a Target Member’s Membership Interest pursuant to this Section 7.9 shall be as set forth in Sections 7.11(a)(ii)-(iv) below.” (Operating Agreement, § 7.9(d).)

“Subject to adjustment pursuant to Section 7.11(f), the purchase price for a Class B Member’s or an Indirect Member’s Membership Interest (the “Purchase Price”) for any Transfer contemplated under Sections 7.8, 7.9 or 7.10 hereof shall be determined as follows:

“(i) In the event of a purchase pursuant to Section 7.8 hereof, the Purchase Price shall be the greater of (1) the fair market value of the Class B Member’s or Indirect Member’s Membership Interest; (2) four (4) times Net Income for the Operating Company for which the Class B Member is the Managing Director; or (3) the Class B Member’s capital account balance (as adjusted in accordance with Section 5:1 hereof). The fair market value of a Class B Member’s or Indirect Member’s Membership Interest shall be the equal to one-half of the Fair Market Value of the Company multiplied by the Class B Member’s Percentage Interest. The Fair Market Value of the Company shall [be] determined by appraisal, as of the last business day of the month immediately preceding the month in which the event occurred that triggered the purchase right, conducted by a nationally recognized appraisal firm mutually selected by the Company and the Class B Member or Indirect Member or the heirs or personal representatives of such Class B Member or Indirect Member if the Class B Member or Indirect Member is deceased or Disabled. The fair market value of a Class B Membership Interest shall not include any discounts for lack of marketability or lack of control. If the parties are unable to agree upon an appraiser, the appraiser will be selected by the Association in accordance with the provisions of Section 12.5. The fees and expenses of the appraiser shall be split equally by the parties. The appraisal shall be completed within 120 days of the triggering event. The Purchase Price shall be paid to the Class B Member or Indirect Member or the heirs, personal representative or conservator of such Class B Member or Indirect Member, as applicable, as follows: within thirty (30) days of the determination of the Purchase Price, ten percent (10%) of the Purchase Price shall be paid in immediately available funds (the ‘Down Payment’), and the remainder of the Purchase Price shall be paid pursuant to a Promissory Note with a five (5)-year term, bearing interest at the Prime Rate on the last business day of the month immediately preceding the month in which the event occurred that triggered the purchase right, and which provides for quarterly payments of principal and interest (the ‘Promissory Note’). To the extent the Company receives proceeds under any insurance policy covering a deceased or Disabled Class B Member or indirect Member, the Company shall apply such proceeds, as received, to increase the Down Payment or to reduce or prepay the Promissory Note.

“(ii) In the event of a purchase pursuant to Sections 7.9(b)(i)-(iii) hereof, the Purchase Price shall be calculated as four (4) times Net Income for the Operating Company for which the Target Member is the Managing Director and shall be paid pursuant to a Promissory Note with a five (5)-year term and, bearing interest at the Prime Rate on the last business day of the month immediately preceding the month in which the event occurred that triggered the purchase right, which provides for annual payments of principal and interest. The closing of the purchase of the Target Member’s Membership Interest shall occur within thirty (30) days following the expiration of all option periods in Section 7.9.

“(iii) In the event of a purchase pursuant to Section 7.9(b)(iv) hereof, the Purchase Price shall be calculated as four (4) times Net Income for the Operating Company for which the Target Member is the Managing Director and shall be paid pursuant to a Promissory Note. If the Target Event occurs less than five (5) years following commencement of the Target Member’s employment with the Company, the Promissory Note shall have a term of ten (10) years; and if the Target Member has been employed by the Company for more than five (5) years at the time such Target Event occurs; the Promissory Note shall have a term of five (5) years. The Promissory Note shall bear interest at the Prime Rate on the last business day of the month immediately preceding the month in which the Target Event occurred, and shall provide for quarterly payments of principal and interest. The closing of the purchase of the Target Member’s Membership Interest shall occur within thirty (30) days following the expiration of all option periods in Section 7.9.

“[¶] … [¶]

“(v) In the event of a purchase pursuant to Section 7.9(b)(v) hereof, the Purchase Price shall be calculated as two (2) times Net Income 6or the Operating Company for which the Target Member is the Managing Director and shall be paid pursuant to a Promissory Note with a term of two (2) years. The Promissory Note shall bear interest at the Prime Rate on the last business day of the month immediately preceding the month in which the Target event occurred, and shall provide for quarterly payments of principal and interest. The closing of the purchase of the Target Member’s Membership Interest shall occur within thirty (30) days following the expiration of all option periods in Section 7.9.” (Operating Agreement, § 7.11(a)(i)-(iii), (a)(v).)

“Notwithstanding the foregoing and in addition to, and not in lieu of, any and all rights set forth in the Non-Competition, Non-Solicitation and Confidentiality Agreement to be executed by a Class B Member as required by Section 7.11(c) hereof, in the event of a breach of the Non-Competition, Non-Solicitation and Confidentiality Agreement by a Class B Member, the Purchase Price for the purchase of Class B Membership Interests pursuant to Sections 711(a)(i)-(iv) shall be reduced by the revenues earned by the Class B Member and/or any Affiliate thereof by providing investment advisory services during the non-competition period. The reduction in the Purchase Price shall be an offset against and reduce the remaining balance of the Promissory Note delivered by the purchaser to the Class B Member or Indirect Member.” (Operating Agreement, § 7.11(b).)

“In any case, the closing of the purchase of the Class B Member’s or Indirect Member’s Membership Interest or the Spousal Membership Interest in the Company shall be held at the offices of the attorneys for the Company on a regular business day within the appropriate time period. At the closing, the seller shall deliver to each purchaser a duly executed assignment for the conveyance of the Membership Interest or Spousal Membership interest (or portion thereof being purchased), free and clear of all liens and encumbrances, in exchange for payment of the Purchase Price for such Membership Interest of Spousal Membership Interest and delivery of all other required documents, including if appropriate, delivery of a Promissory Note for all or any part of the Purchase Price. Furthermore, if the selling Member is selling all of its Membership Interest, at the closing, such selling Member shall execute and deliver to the Company a Non-Competition, Non-Solicitation and Confidentiality Agreement with a term of two (2) years and which shall include the terms set out in Section 4.5 hereof in substantially the form attached as Exhibit D hereto, and a general release of the Company, which shall be prepared by the Company.” (Operating Agreement, § 7.11(c).)

“ ‘Fair Market Value’ means the fair market value, as determined by the Company in good faith, using GAAP, and by reasonable methods (including the employment of independent appraisers).” (Operating Agreement, exhibit A.)

(B) Statutory Provisions

“Except as provided in this chapter, every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.” (Bus. & Prof. Code, § 16600.)

“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, or any owner of a business entity that sells (a) all or substantially all of its operating assets together with the goodwill of the business entity, (b) all or substantially all of the operating assets of a division or a subsidiary of the business entity together with the goodwill of that division or subsidiary, or (c) all of the ownership interest of any subsidiary, may agree with the buyer to refrain from carrying on a similar business within a specified geographic area in which the business so sold, or that of the business entity, division, or subsidiary 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. [¶] For the purposes of this section, ‘business entity’ means any partnership (including a limited partnership or a limited liability partnership), limited liability company (including a series of a limited liability company formed under the laws of a jurisdiction that recognizes such a series), or corporation. [¶] For the purposes of this section, ‘owner of a business entity’ means any partner, in the case of a business entity that is a partnership (including a limited partnership or a limited liability partnership), or any member, in the case of a business entity that is a limited liability company (including a series of a limited liability company formed under the laws of a jurisdiction that recognizes such a series), or any owner of capital stock, in the case of a business entity that is a corporation. [¶] For the purposes of this section, ‘ownership interest’ means a partnership interest, in the case of a business entity that is a partnership (including a limited partnership a limited liability partnership), a membership interest, in the case of a business entity that is a limited liability company (including a series of a limited liability company formed under the laws of a jurisdiction that recognizes such a series), or a capital stockholder, in the case of a business entity that is a corporation.” (Bus. & Prof. Code, § 16601.)

The application of Business and Professions Code sections 16600 and 16601 are discussed below in the context of case law construing those provisions. Another potentially applicable section is section 16602.5:

“Any member may, upon or in anticipation of a dissolution of, or the termination of his or her interest in, a limited liability company (including a series of a limited liability company formed under the laws of a jurisdiction recognizing such a series), agree that he or she or it will not carry on a similar business within a specified geographic area where the limited liability company business has been transacted, so long as any other member of the limited liability company, or any person deriving title to the business or its goodwill from any such other member of the limited liability company, carries on a like business therein.” (Bus. & Prof. Code, § 16602.5.)

The application of Business and Professions Code section 16602.5 is complicated by its terminology of “termination of his or her interest” as it relates to limited liability companies. As originally enacted in 1994, section 16602.5 provided: “Any member may, upon or in anticipation of a dissolution of a limited liability company or a sale of his or her or its interest in a limited liability company, agree that he or she or it will not carry on a similar business within a specified county or counties, city or cities, or a part thereof, where the limited liability company business has been transacted, so long as any other member of the limited liability company, or any person deriving title to the business or its goodwill from any such other member of the limited liability company, carries on a like business therein.” (Stats. 1994, ch. 1200, § 1.) The “sale of his or her or its interest” language was deleted by amendment in 2002: “Any member may, upon or in anticipation of a dissolution of a limited liability company, agree that he or she or it will not carry on a similar business within a specified geographic area where the limited liability company business has been transacted, so long as any other member of the limited liability company, or any person deriving title to the business or its goodwill from any such other member of the limited liability company, carries on a like business therein.” (Stats. 2002, ch. 179, § 3.) The current language was adopted by amendment in 2006. (Stats. 2006, ch. 495, § 2.)

Business and Professions Code section 16602.5 was originally enacted as part of the Beverly-Killea Limited Liability Company Act (BK LLC Act), former Corporations Code section 17000 et seq. (West’s Ann. Corp. Code (2020 ed.) appen. § 17000 et seq.; Stats. 1994, ch. 1200, § 27.) The BK LLC Act is organized, and uses terminology at times different from the current California Revised Uniform Limited Liability Company Act (RULLCA), Corporations Code section 17701.01 et seq., enacted in 2012. (Stats. 2012, ch. 419, § 20.) Under the BK LLC Act:

“The operating agreement may provide for the termination in whole or in part of the membership interest or economic interest of a member in the limited liability company. If a member’s economic interest in the limited liability company is terminated pursuant to the operating agreement, the member may demand and shall be entitled to receive a return of that member’s contribution. Any provision in an operating agreement governing the termination of a member’s interest and the return of a member’s contribution shall be enforceable in accordance with its terms unless the member seeking to invalidate the provision establishes that the provision was unreasonable under the circumstances existing at the time the agreement was made. Upon any termination of a membership interest, the list required by paragraph (1) of subdivision (a) of Section 17058 shall be amended accordingly.” (Former Corp. Code, § 17100, subd. (c).)

In the BK LLC Act, termination is treated differently from “withdrawal:” “The articles of organization or a written operating agreement may provide that a member may withdraw, resign, or retire from a limited liability company at the time or upon the happening of events specified in the operating agreement or that the member shall not have the right to withdraw, resign, or retire as a member of a limited liability company. Notwithstanding any restriction upon the right of a member to withdraw, resign, or retire, a member may withdraw from a limited liability company at any time by giving written notice to the other members. However, unless the articles of organization or written operating agreement provide otherwise, the withdrawn member shall not be entitled to payment for the member’s interest in the limited liability company, and, beginning on the date of the withdrawal, the withdrawn member shall have only the right of a holder of an economic interest with respect to that withdrawn member’s interest in the limited liability company, and then only with respect to distributions, if any, to which a holder of an economic interest is entitled under the operating agreement of the limited liability company, and the withdrawn member shall no longer be a member of the limited liability company. If the withdrawal, resignation, or retirement is in violation of the operating agreement, the limited liability company shall have the right to offset any damages for the breach of the operating agreement from the amounts, if any, otherwise distributable to the withdrawn member with respect to the withdrawn member’s economic interest in the limited liability company.” (Former Corp. Code, § 17252, subd. (a); see also former Corp. Code, § 17001, subd. (as) [defining “withdrawal” as “includes the resignation or retirement of a member as a member”].) There is a comparable provision in the RULLCA using “disassociation” instead of “withdrawal”: “A person has the power to dissociate as a member at any time, rightfully or wrongfully, by withdrawing as a member by express will pursuant to subdivision (a) of Section 17706.02.” (Corp. Code, § 17706.01, subd. (a).)

The current text of Business and Professions Code section 16602.5 was enacted prior to the enactment and effectiveness of the RULLCA and has not since been amended. While the BK LLC Act was in effect, the Legislature first completely removed “sale” from the provisions of section 16602.5, then replaced it with the term “termination,” which is a term with a specific meaning within the BK LLC Act. Similarly, “dissolution” is a term with a specific meaning within the BK LLC Act. (Former Corp. Code, § 17350 et seq.; see also Corp. Code, § 17707.01 et seq.) “ ‘A court must, where reasonably possible, harmonize statutes, reconcile seeming inconsistencies in them, and construe them to give force and effect to all of their provisions. [Citations.] This rule applies although one of the statutes involved deals generally with a subject and another relates specifically to particular aspects of the subject.’ [Citation.] Thus, when ‘ “two codes are to be construed, they ‘must be regarded as blending into each other and forming a single statute.’ [Citation.] Accordingly, they ‘must be read together and so construed as to give effect, when possible, to all the provisions thereof.’ [Citation.]” ’ [Citation.]” (Pacific Palisades Bowl Mobile Estates, LLC v. City of Los Angeles (2012) 55 Cal.4th 783, 805.) Because “dissolution” and “termination” have specific meanings as they relate to changes in limited liability company membership and operation, it is reasonable to interpret “termination” in section 16602.5 as intended by the Legislature to be consistent with its meaning within the BK LLC Act.

If “termination” in section 16602.5 were interpreted broadly to include “sale,” which the Legislature expressly eliminated in 2002 when it extended the provisions of section 16601 to include limited liability companies (Stats. 2002, ch. 179, §§ 1, 3), such an interpretation would render the limited liability company provisions of section 16601 superfluous. The limitations of section 16601 would never apply to limited liability companies because section 16602.5 would always apply. These provisions are harmonized by noting the specialized terminology to which section 16602.5 and the reference in section 16602.5 to the remaining members deriving goodwill from the dissolved company or terminated member. Section 16602.5 is most easily harmonized with section 16601 and the BK LLC Act where section 16602.5 is viewed as applying to a limited liability company managed under the model of a traditional partnership where the partners all participate and manage company business. In limited liability companies employing a corporate model of management—as is here the case where class B members expressly have only economic rights but no management rights—section 16601 provides the applicable rule.

As the Operating Agreement here at issue provides, the required transfer of Dorfman’s interest in Beacon Pointe is not a “termination” within the meaning of former Corporations Code section 17100, subdivision (c). The terms of the transfer are not a return of contribution as required by former section 17100 but rather demonstrate a sale at a defined purchase price. There is no claim by any party that the required transfer of Dorfman’s interest in Beacon Pointe effects a dissolution of the limited liability company. Consequently, Business and Professions Code section 16602.5 is inapplicable to this transaction. The remainder of the analysis therefore depends upon section 16600 and 16601.

(C) Application of Business and Professions Code Sections 16600 and 16601

“At common law, and in many states, restraints on the practice of a profession, trade, or business were valid, if reasonable. [Citation.] In contrast, however, California has settled public policy in favor of open competition. [Citations.] California codified its public policy and rejected the common law ‘rule of reasonableness’ in 1872, upon the enactment of the Civil Code. [Citations.] [¶] Section 16600 presently sets out the general rule in California—covenants not to compete are void. [Citation.] ‘[T]his provision [is] an expression of public policy to ensure that every citizen shall retain the right to pursue any lawful employment and enterprise of their choice.’ [Citation.]” (Hill Medical Corp. v. Wycoff (2001) 86 Cal.App.4th 895, 900–901 (Hill).)

The decision in Hill, supra, 86 Cal.App.4th 895, is instructive. The plaintiff in Hill was a professional corporation of radiologists. (Id. at p. 898.) The defendant was a radiologist who was first an employee of the corporation and then a shareholder of the corporation. (Ibid.) All of the shareholders were also radiologists and all worked for the corporation under written employment agreements. (Ibid.) The defendant was a party to a stock redemption agreement with the corporation in which the defendant was required to sell his stock back to the corporation and the corporation was required to repurchase the stock at a price measured by net book value upon the happening of certain events, including the end of the defendant’s employment with the corporation. (Id. at pp. 898-899.) The stock redemption agreement also included a covenant not to compete within the geographic area for a period of three years. (Id. at p. 899.) The defendant resigned and gave notice of his intention to terminate his employment with the corporation. (Ibid.) The defendant intended to practice radiology within the geographic area of the noncompetition provision. (Ibid.) The defendant was paid for his shares as provided in the stock redemption agreement, which amount did not include any component of goodwill. (Ibid.) The plaintiff corporation then sued the defendant radiologist seeking injunctive relief and enforcement of the covenant not to compete. (Ibid.) Two months later, there was a court trial in which the trial court found that the covenant not to compete was unlawful and unenforceable and therefore denied injunctive relief. (Id. at p. 900.) The parties appealed. (Ibid.)

On appeal in Hill, the court first found that the noncompetition provisions of the stock redemption agreement fell squarely within the proscription of Business and Professions Code section 16600. (Hill, supra, 86 Cal.App.4th at p. 901.) The provision was therefore void unless a statutory exception applied. “Section 16601 provides one of the narrow exceptions to section 16600. [Citation.] Pursuant to section 16601, in certain defined circumstances, persons who sell the goodwill of a business may agree to refrain from carrying on a similar business. Section 16601 reflects that when the goodwill of a business is sold, it would be ‘ “unfair” for the seller to engage in competition which diminishes the value of the asset he [or she] sold.’ [Citations.]” (Hill, supra, 86 Cal.App.4th at pp. 901–902, fns. omitted.)

The Hill court then provided the framework for the analysis of the applicability of section 16601: “[I]n order to uphold a covenant not to compete pursuant to section 16601, the contract for sale of the corporate shares may not circumvent California’s deeply rooted public policy favoring open competition. The transaction must clearly establish that it falls within this limited exception. The practical effect of the transaction and the economic realities must be considered. [Citation.] In order to restrain the seller’s profession, trade, or business, there must be a clear indication that in the sales transaction, the parties valued or considered goodwill as a component of the sales price, and thus the share purchasers were entitled to protect themselves from ‘competition from the seller which competition would have the effect of reducing the value of the property right that was acquired.’ [Citations.]” (Hill, supra, 86 Cal.App.4th at p. 903.)

“When sellers transfer all of their corporate shares, which constitutes only a fraction of the corporate shares, the concerns are the same—did the transaction take into account corporate goodwill? The sale of the corporate fractional interest must involve ‘a substantial interest in the corporation so that the owner, in transferring “all” of his [or her] shares, can be said to transfer the goodwill of the corporation.’ [Citation.] Simply selling shares to an individual vendee or back to the corporation does not necessarily demonstrate that goodwill is part of the agreement. To hold otherwise would result in the enforceability of all covenants not to compete involving the sale of all of the vendors’ shares, in violation of the purposes behind sections 16600 and 16601.” (Hill, supra, 86 Cal.App.4th at pp. 903-904.)

“We can foresee situations in which the parties have not allocated a specific portion of the purchase price to goodwill, and yet the parties recognized that goodwill was part and parcel of the transaction involving a substantial corporate interest. [Citation.] In such situations, the transaction would meet the requirements of section 16601. In analyzing whether parties had intended goodwill to be a part of the consideration in the sale of stock, all aspects of the sales arrangement should be evaluated. For example, the entire structure of the transaction, including the sales price, might suggest that it can be said that goodwill had transferred. [Citation.] Additionally, such a conclusion might be reached because the seller has a significant economic investment. Evidence that the amount paid to the departing or selling shareholder approximates the amount the shareholder was expected to lose, as a result of the covenant not to compete, may be strong indicia that the sales price was intended to include goodwill so as to invoke the exception of section 16601. Further, if fair market value is paid for the shares, it may indicate that goodwill is part of the transaction, as an inference can be made that the price includes a value for goodwill.” (Hill, supra, 86 Cal.App.4th at p. 904.)

The Hill court found that there was substantial evidence to support the trial court’s findings that goodwill was not part of the repurchase transaction. (Hill, supra, 86 Cal.App.4th at p. 907.) The factors the Hill court identified as supporting the absence of goodwill in the transaction: (1) The repurchase prices was not fair market value. (Id. at pp. 906-907.) (2) The repurchase price did not show that the defendant significantly benefitted from an appreciation in the value of the stock over the 21 years the defendant held the shares, instead showing that the defendant did not have a real economic investment. (Id. at p. 907.) (3) The defendant owned only 7 percent of the shares and did not involve a substantial interest such that it could be said that the transfer of goodwill was considered. (Ibid.) (4) The defendant was not in the inner circle of people that made business decision and the defendant did not control the business of the entity. (Ibid.) The Hill court concluded that the covenant not to compete was unenforceable. (Id. at p. 908.)

Applying the evidence as presented in this motion to section 16601 as informed by Hill, the analysis first assumes that Dorfman is obligated to sell his membership interest in Beacon Pointe at the price asserted by Beacon Pointe as applicable under the Operating Agreement and would be subject to the noncompetition obligations to the extent such obligations are enforceable. The issue is whether those obligations are enforceable. The present evidence supports a finding that those obligations are not enforceable. The Operating Agreement provides in section 7.11(a) several different methods of determining the purchase price for the mandatory resale. One of those methods, set forth in section 7.11(a)(i), expressly includes fair market value to be determined by appraisal. However, Beacon Pointe asserts that the correct repurchase price is determined by section 7.11(a)(iii) based upon Dorfman’s resignation as a “Target Event” under section 7.9(b)(iv). (Eusey decl., ¶ 29 & exhibit E.) The purchase price as calculated in section 7.11(a)(iii) is a function of a specially defined net income and which is paid over time pursuant to a promissory note. There is no persuasive evidence presented that this purchase price is equal to or substantially related to the fair market value. (See also Dorfman decl., ¶¶ 31, 32, 48 & exhibit C.)

As in Hill, the repurchase price did not show that Dorfman significantly benefitted from an appreciation in the value of the interest. (See Dorfman decl., ¶ 31 & exhibit C.) In fact, the repurchase price here relative to fair market value shows a decrease notwithstanding high levels of growth. (Dorfman decl., ¶¶ 10, 31 & exhibit C.) Moreover, Dorfman never received a distribution based on his ownership interest. (Dorfman decl., ¶ 33.) Dorfman’s ownership interest consisted of less than a one percent interest, not reflecting a substantial interest on its own or relative to other members. (Dorfman decl., ¶ 31; Operating Agreement, exhibit C.) As a class B member, Dorfman expressly had no management role or rights. While the factors identified in Hill are not exclusive, the Court does not find the evidence or argument of Beacon Pointe persuasive as to any other matters to show that the repurchase of Dorfman’s interest in Beacon Pointe represents any meaningful valuation or payment for goodwill. The Court concludes that Beacon Pointe has not shown a probability that Business and Professions Code section 16601 will apply as an exemption to the general rule of invalidity of section 16600.

A further issue exists with respect to the noncompetition provisions of the Operating Agreement applying to existing class B members of Beacon Pointe under section 4.6(b) of the Operating Agreement, which applies for two years following the date of transfer. Beacon Pointe argues that because Dorfman has not transferred his interest back to Beacon Pointe, Dorfman remains a member subject to section 4.6’s application to existing members. Dorfman, however, has formally disassociated himself from Beacon Pointe. (Dorfman decl., ¶ 49 & exhibit F.) “When a person is dissociated as a member of a limited liability company all of the following apply: [¶] … (3) Subject to Section 17705.04 and Article 10 (commencing with Section 17710.01), any transferable interest owned by the person immediately before dissociation in the person’s capacity as a member is owned by the person solely as a transferee.” (Corp. Code, § 17706.03, subd. (a)(3).) While disassociation does not itself discharge Dorfman from obligations to Beacon Pointe (Corp. Code, § 17706.03, subd. (b)), the effect of the disassociation must be considered in connection with the concurrent effectiveness of Dorfman’s resignation of his employment from Beacon Pointe (see Fillpoint, LLC v. Maas (2012) 208 Cal.App.4th 1170, 1182 [employment and purchase agreements read together]).

“As a general rule, the ‘value’ being protected by a noncompetition clause is the goodwill of the business.” (In re Marriage of Greaux & Mermin (2014) 223 Cal.App.4th 1242, 1251.) Once Dorfman formally disassociated with Beacon Pointe, he put himself in the equivalent position of having transferred his membership interest to Beacon Pointe, both parties reserving only the residual obligations from the prior membership interest. The formalities of a transfer have not taken place because of disagreements between the parties regarding those residual obligations, including specifically the enforceability of Dorfman’s obligation to execute a noncompetition agreement in connection with the transfer back to Beacon Pointe. But the substance of the present arrangement is that Dorfman has no continuing membership rights in Beacon Pointe. Beacon Pointe’s argument in this regard comes down to an argument that unless Dorfman agrees to invalid noncompetition post-transfer terms, Dorfman will be perpetually subject to noncompetition pre-transfer terms regardless of his actual relationship to Beacon Pointe. This circular reasoning is equally unavailing. (See Bosley Medical Group v. Abramson (1984) 161 Cal.App.3d 284, 291-292.)

Based on the foregoing, the Court concludes on the evidence and arguments presented that Beacon Pointe has not shown a reasonable probability that it will prevail on the merits of its claim for injunctive relief against Dorfman.

(2) Greater Harms

Both Beacon Pointe and Dorfman argue that they each would suffer the greater irreparable harm if the preliminary injunction is ultimately found to have been erroneously denied or granted, respectively. The nature of the harm claimed by each party is essentially the same. If the injunction is granted, Dorfman will be prohibited from competing with Beacon Pointe. Practically, that means that Dorfman will not be able to practice his financial services in the geographical area where he is known. Clients who would otherwise want to follow Dorfman to his new employment will be prevented from doing so. Those clients may stay with Beacon Pointe under a different person’s management or may go someplace else. If it is ultimately found that the injunction was erroneously granted, Dorfman would have lost the value of the services he would have rendered during the pendency of the action and the goodwill he would have acquired, including the business of at least some of those clients who would have followed him to his new employment.

If the injunction is denied, Dorfman will be permitted to practice his financial services as before, but for a new employer. Clients may follow him from Beacon Pointe or may go someplace else. If the injunction is ultimately found that the injunction was erroneously denied, Beacon Pointe would have lost the value of the services that Beacon Pointe would have rendered in the absence of Dorfman’s competition and the goodwill reflected in the business lost to Dorfman or moved away from Beacon Pointe as a result of Dorfman’s competition.

In either case, the predominant harm is the loss of business and goodwill, either lost to the other party or lost to both. There is no persuasive evidence that this loss of business is quantitatively or qualitatively different as to one or the other. There is also no persuasive evidence that the type of harm would have a significantly different impact upon one party over the other. It may be inferred that the erroneous grant of an injunction may affect Dorfman, as an individual wanting to work, more strongly than it may affect Beacon Pointe, as an entity not relying solely upon the labor of a single person. Although this inference suggests a greater harm to Dorfman, the evidence is weak in this regard.

(3) Balance of Equities

As discussed above, the Court does not find that Beacon Pointe has shown a substantial probability of success on the merits: the general rule is that noncompetition covenants are invalid; from the evidence and arguments presented in this motion, the noncompetition covenants do not fall within any statutory exception to the general rule. As also discussed above, the relative harms do not strongly favor either party. The evidence indicates that most, but not all, of the harm potentially attributable to an erroneously granted or denied injunction may be adequately compensable in money damages. Under these circumstances, and weighing all of the admissible evidence and argument presented by the parties, the Court finds that the moving party has not otherwise met its burden to show that the preliminary injunction sought should be issued and that the balance of the equities favors denial of the preliminary injunction.

Accordingly, the motion for preliminary injunction will be denied.