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District Court of Appeal, Second District, Division 2, California.

Michael B. MUGGILL, Plaintiff and Appellant, v. The REUBEN H. DONNELLEY CORPORATION, a corporation, Defendant and Respondent.

Civ. 27534.

Decided: July 27, 1964

Eugene Kelly, Los Angeles, for appellant. O'Melveny & Myers, Maynard J. Toll, Philip F. Westbrook, Jr., Richard E. Sherwood, Los Angeles, for respondent.

Appeal by plaintiff from judgment rendered in declaratory relief action denying him any relief. The first amended complaint charges violation of Section 16600, Business and Professions Code (formerly Section 1673, Civil Code) which reads:

‘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.’

Plaintiff was an employee of defendant The Reuben H. Donnelley Corporation, rendering services in Los Angeles County from February 14, 1938 to July 1, 1960. The company was engaged in a direct mail advertising business. On January 1, 1944, it put into effect ‘The Reuben H. Donnelley Corporation Employees Retirement Plan,’ plaintiff on said date became an employee within the meaning of the Plan and on June 14, 1960, acquired ‘vested rights' in the Plan by completion of fifteen years of service after age thirty.1 On July 1, 1960, his employment terminated ‘under satisfactory circumstances' within the meaning of the Plan. On October 24, 1960, plaintiff entered the employment of Western Empire Direct Advertising Company, which conducts a direct mail advertising business in Los Angeles County and competes directly with defendant company in said county. Plaintiff remained in the employment of Western until May 1, 1962, and since that date has not been engaged in any business which competes directly with defendant.

The Retirement Plan has a Retirement Committee consisting of defendants C. E. Frank, H. B. Mitchell, J. H. Evans, G. B. McCollum, and F. C. Ash; The Northern Trust Company is trustee under said Plan.

‘On or about December 5, 1960 plaintiff received a letter from the Retirement Committee notifying him that his rights to receive annuity payments under the Plan had been terminated pursuant to Section 2, Article Five of said Plan because of his connection with Western Empire Direct Advertising Company.’

The Plan, which is attached to the stipulation, provides in Article Eight for the Retirement Committee and in Article Five, Section 2: ‘The Annuity payments to any retired Employee shall be suspended or terminated in the event such retired Employee at any time enters any occupation or does any act which, in the judgment of the Retirement Committee or of an Employer, is in competition with any phase of the business of any Employer. Acceptance of other employment by a retired Employee not in competition with, nor detrimental to the interests of, an Employer shall not be considered cause for suspension or termination of any Annuity.’

The December 5, 1960, notice to plaintiff said that: ‘The Retirement Committee, at a meeting held this morning, determined that your acceptance of employment with Western Empire was the entry by you into an occupation which was in competition with a phase of the business of The Reuben H. Donnelley Corporation and, further, that because of such action on your part the Annuity payments which might otherwise be made to you under the Plan at some future date are hereby terminated and may not be reinstated at any future time unless you advise me by return mail that you have discontinued or not entered upon your reported employment by the above-named company.’

In due course plaintiff brought this action praying for:

‘1. A declaration of the rights of the parties;

‘2. A decree ordering defendants to reinstate plaintiff to full rights under The Reuben H. Donnelley Corporation Employees Retirement Plan unaffected by his employment since leaving the employ of defendant Company;

‘3. A declaration that Section 2 of Article FIVE of The Reuben H. Donnelley Corporation Employees Retirement Plan is unlawful, against public policy and unenforceable; * * *’

The main question is the applicability of Section 16600, Business and Professions Code, and the validity of the pertinent provision of the Retirement Plan. The authorities in this state clearly indicate that the provision of the Plan found in Article Five, Section 2, (quoted above) is a violation of Section 16600, a partial restraint of trade.

Respondent relies upon Crespinel v. Color Corporation of America, 160 Cal.App.2d 386, 325 P.2d 565 as authority in its favor. We do not agree. The court merely said at p. 392 of 160 Cal.App.2d, at page 568 of 325 P.2d: ‘There is no evidence that Crespinel at any time participated in any activity competitive to the defendant corporation, and the statutory prohibition of Business and Professions Code, section 16600, in our opinion is not applicable to the facts of this case.’

California cases more directly pertinent are the following:

Chamberlain v. Augustine, 172 Cal. 285, 156 P. 479. In the sale of stock of Los Angeles Foundry Company from Augustine to Chamberlain and Buchanan, he, Augustine, agreed for three years not to become interested in any corporation carrying on business similar to that of the foundry company. He took charge of a competitive corporation and an action was brought against him to recover liquidated damages. A demurrer to the complaint was sustained on the ground of violation of section 1673, Code of Civil Procedure, and the judgment was affirmed. It was held on appeal that though the covenant was not negative in form the contract nevertheless restrained the defendant. The court said at page 288 of 172 Cal., at page 480 of 156 P.: ‘* * * If the contract is valid, he is not as free to do so as he would have been if he were not bound by it. To the extent that the necessity of paying $5,000 deters him from engaging therein, he would be restrained. This is clearly a restraint of a substantial character and the form in which it is cast does not make it less a restraint. * * * The covenant in question clearly operates to restrain the defendant from ‘exercising a lawful profession, trade or business,’ and as it does not fall within the exceptions given in section 1673, it is, therefore, void.' At page 289 of 172 Cal., at page 480 of 156 P.: ‘The statute makes no exception in favor of contracts only in partial restraint of trade.’

Morris v. Harris, 127 Cal.App.2d 476, 274 P.2d 22 (opinion by Dooling, J.). A provision of a contract for janitor services contained a clause reading: ‘* * * agrees that in the event he should solicit for himself, or accept for himself without solicitation, individually any of the clients of lessor within a period of ten years from the date hereof that he will be liable in damages in the sum of Twenty ($20.00) dollars a month for each and every month he works for each of said, or such clients as and for liquidated damages for the breach of this agreement.’ Respondent Harris left appellant Morris' service and thereafter did janitor service for certain of appellant's ‘clients' who came to him without any solicitation. Appellant sought recovery of liquidated damages but failed to recover. In affirming the judgment the court said in part at p. 478 of 127 Cal.App.2d, at p. 23 of 274 P.2d:

‘Appellant does assert that the agreement not to ‘accept for himself * * * any of the clients of lessor’ is only a restriction and not a restraint. It is a partial restraint on respondent's right to engage in a ‘lawful * * * trade, or business' and the courts have held that: ‘The statute makes no exception in favor of contracts only in partial restraint of trade.’ Chamberlain v. Augustine, 172 Cal. 285, 289, 156 P. 479, 480; Morey v. Paladini, 187 Cal. 727, 738, 203 P. 760; Davis v. Jointless Fire Brick Co., 9 Cir., 300 F. 1, 3.

‘Equity recognizes a fiduciary duty of an employee after leaving employer's service not to take an unfair advantage of trade secrets and customers' lists. It seems reasonable that to the extent of this rule the parties may implement it by contract. But the rule does not cover the services of a janitor who after leaving the employer's service accepts employment from the employer's customers without solicitation on his part. Aetna Bldg. Maintenance Co. v. West, 39 Cal.2d 198, 204, 246 P.2d 11.

‘Under a statute similar to ours the Oklahoma Supreme Court has held that an employee's contract with an employer not to engage in competition with him after leaving his service contravenes the statute. E. S. Miller Laboratories, Inc. v. Griffin, 200 Okla. 398, 194 P.2d 877, 3 A.L.R.2d 519. Our own statute was similarly construed by the federal court in Davis v. Jointless Fire Brick Co., supra [9 Cir.], 300 F. 1.’

State Farm Mut. etc. Ins. Co. v. Dempster, 174 Cal.App.2d 418, 425, 344 P.2d 821, upholds this type of agreement where confined to protection of a trade secret or trust but plainly implies that it is invalid if not so limited in its scope. Gordon v. Landau, 49 Cal.2d 690, 694, 321 P.2d 456, and Gordon v. Wasserman, 153 Cal.App.2d 328, 314 P.2d 759, fall in the same category as the case last mentioned.

On the Federal side, we find in the Ninth Circuit authority which supports appellant's position.

Ulmann v. Sunset-McKee Co., 9 Cir., 221 F.2d 128, cited by respondent, does not decide the question now before us.

Davis v. Jointless Fire Brick Co., 9 Cir., 300 F. 1, a salesman's contract contained this provision: (page 2) “* * * It is particularly stipulated and made a part of the consideration and the inducement on the part of the principal in entering into this contract, and the terms and prices herein contained, that said agent shall not engage in the sale of any one-piece fire brick lining or high heat resistive bond or cement, or commodity that will compete with the principal's business, for a period of two years immediately following the severing of connections with said principal. * * *” The court held that this violated section 1673, California Civil Code, saying at page 3 of 300 F.: ‘* * * But the vital question is: Does the statute of California interdict the contract, in so far as it restrains Davis from selling a competing product?’ After quoting said section 1673, the court continues at page 3:

‘The adjudications of the highest state court, interpreting the statute, defining the public policy of the state, compel a decision against the validity of the clause whereby Davis agreed not to engage in the business of selling a fire brick that competes with Plibrico. Meister v. Moore, 96 U.S. 76, 24 L.Ed. 826. In the recent case of Chamberlain v. Augustine et al., 172 Cal. 285, 156 Pac. 479, the court considered section 1673, supra, and distinctly held that the statute ‘makes no exception in favor of contracts in partial restraint of trade.’'

Thompson v. Fish, D.C., 152 F.Supp. 779, decided by Judge Yankwich, dealt with a contract which contained a provision reading: “It is also distinctly understood that, if for any reason, this agreement is terminated prior to its expiration date then in that event the said second party [defendant Fish] hereby Warrant, Undertake, Promise and Agree not to become affiliated with or employed, either directly or indirectly, by any person or persons, company or companies engaged in a similar business as that of the first party or the Union Circulation Co., Inc., for the balance of the term of this contract.” (page 779 of 152 F.Supp.)

In dismissing the action the Judge said: (page 779 of 152 F.Supp.) ‘This clause is clearly violative of the Cartwright Act (California Business and Professions Code, § 16600), and is not within any of the exceptions of the Act. California Business and Professions Code, §§ 16601, 16602. However, it is a separable provision. General Paint Corp. v. Seymour, 1932, 124 Cal.App. 611, 12 P.2d 990; Edwards v. Mullin, 1934, 220 Cal. 379, 30 P.2d 997; Cal.Civil Code, § 1599.’ (Page 780 of 152 F.Supp.): ‘If the clause is rejected as illegal, the remainder of the contract still stands if it is certain and enforceable.’

Concerning the condition of the law in other states an annotation in 3 A.L.R.2d 522 says:

‘Although there are very few cases dealing with the question, so that any sweeping generalization on the subject would be unwarranted, the courts have apparently agreed that statutes which have the effect generally of prohibiting contractual restraints on persons seeking to engage in or to conduct a profession, trade, or business are applicable to attempted contractual restrictions in employment or agency contracts, and that such contracts or clauses therein, containing the purported restraints from engaging in the business, etc., are void and unenforceable under the statutes. In so deciding, the courts have sometimes adverted to the point that the common-law rule as to partial restraints of trade, being somewhat uncertain, eventually led to such legislation outlawing contracts which purported to restrain one from exercising a lawful profession, trade, or business of any kind, otherwise than as was specified in certain exceptional cases also by statutory provision.’

Among cases holding contrary to the California decisions are: Good v. Modern Globe (Mich.), 78 N.W.2d 199, 204; Kristt v. Whelan, 4 A.D. 195, 164 N.Y.S.2d 239 (App.Div.; affirmed in 5 N.Y.2d 807, 181 N.Y.S.2d 205, 155 N.E.2d 116); Ekman v. United Film Service, Inc., 53 Wash.2d 652, 335 P.2d 813, 814; Himes v. Masonic Mut. Life Ass'n, 215 Ala. 183, 110 So. 133.

The Kristt case supra seems of doubtful authority in its state of New York. The Court of Appeals affirmed the judgment without adopting the opinion of the Appellate Division. The opinion of the Court of Appeals in Paramount Pad Co. v. Baumrind, 4 N.Y.2d 393, 175 N.Y.S.2d 809, 151 N.E.2d 609, throws considerable doubt upon the soundness of the ruling of the Appellate Division in Kristt. In the Paramount case, plaintiffs sued Eastern Shoulder Pad Co. for inducing breach of contract by its employee Baumrind. The contract provided that the employee should not solicit plaintiff's customers for three years after termination of employment; also, that he should not divulge the names of plaintiff's customers and must obtain plaintiff's written permission before he could accept any position in the shoulder pad industry. Apparently it was this last provision that was violated. The court said at page 610 of 151 N.E.2d:

‘The restrictions set forth in the agreement exceed the degree of protection to which Paramount was entitled in order to preserve its legitimate interests. On its face the agreement unreasonably prevents the former employee, Baumrind, from pursuing his occupation where no harm would come to Paramount. Where the restraint imposed is more extensive than the legitimate interests sought to be protected, the restraint is invalid. Absent a breach of confidence, an employer cannot exact from a former employee an agreement to refrain from putting to use the experience gained while working at his trade. [Citations.]

‘This contract is contrary to the public policy of the State (General Business Law, Consol.Laws, c. 20, § 340). Hence an action may not be maintained for its breach, nor for inducing its breach.’

We are convinced that the contract here under consideration must be held violative of Section 16600, Business and Professions Code, unless perchance the fact that it is found in a private, non-participating, corporate pension plan requires a different result. There is a dearth of authority upon this narrow point. We see no logical basis for drawing such a distinction.

Two cases cited by respondent grew out of such pension plans or the equivalent thereof—Kristt v. Whelan, 4 A.D. 195, 164 N.Y.S.2d 239, 5 N.Y.2d 807, 181 N.Y.S.2d 205, 155 N.E.2d 116; and Jacobus v. Mass. Mut. Life Ins. Co. (D.C.W.D.N.Y.), 91 F.Supp. 674—but neither one of them suggests that the relation to a pension fund affects the solution of the problem. As above indicated, we see no difference and we hold that the restrictive provision of the contract before us is unenforceable.

Counsel have not raised in their briefs or discussed the question whether plaintiff's termination of his employment with Western would revive his pension right in view of the rule that such a contract is illegal only pro tanto, a theory reflected in paragraph 2 of the prayer of the complaint, quoted supra (cf. Edwards v. Mullin, 220 Cal. 379, 382, 30 P.2d 997; General Paint Corp. v. Seymour, 124 Cal.App. 611, 613–615, 12 P.2d 990). Hence we are not concerned with that problem upon this appeal.

The lower court also based its judgment upon an alternate ground that the cause should be dismissed for failure to bring in indispensable parties. The findings say:

‘None of the members of the Retirement Committee named in Paragraph 11 of these findings is or was at any relevant time resident or present in California. The Trustee, The Northern Trust Company, an Illinois corporation, does not and did not at any relevant time do business in California. Neither the aforementioned members of the Retirement Committee nor the Trustee have been personally served in this action.’

‘The Retirement Committee and the Trustee are indispensable parties within the meaning of C.C.P. § 389.’

Article Two of the Plan creates the Retirement Committee to supervise the administration of the Plan and to assist in the administration of the trust created thereby. One of the duties of the Committee is to give the trustee directions concerning payment or non-payment of pensions (Article Eight, section 4) and it determines upon suspension or termination of retirement payments to an employee who enters into competition with the company. (Article Five, section 2.) The trustee holds all property and funds of the Plan and makes the disbursements from same.

‘The contributions under the Plan shall be paid to such Trustee, and all property and funds of the Trust, including income from investments and from all other sources, shall be retained for the exclusive benefit of Employees and their contingent beneficiaries as provided in the Plan, and shall be used to pay Plan benefits or expenses of administration of the Plan and Trust to the extent not paid by Employers.’ (Article Seven, section 3.)

None of the committee members is a resident of California and the Trustee is not doing and has not done business in this state. All these defendants were served by publication and their defaults were entered, but section 417, Code of Civil Procedure, precludes entry of personal judgment against them because of non-residence (Atkinson v. Superior Court, 49 Cal.2d 338, 346, 316 P.2d 960; 28 Cal.Jur.2d section 6, page 619) and, of course, entry of default is a nullity. So it appears that these absent non-resident defendants were not brought into the action pursuant to section 389, Code of Civil Procedure.

It is our view that all these defendants were indispensable for a judgment could not be entered without affecting their rights. If favorable to plaintiff, the judgment would determine that, so far as concerns defendant, plaintiff's pension must be paid regardless of the decision of the committee but no such adjudication runs against the committee. This leaves the parties in position where defendant company should insist upon the payments while the committee and the trustee are free to take (and probably will take) the position that they are not so obligated and, in fact, cannot so do.

This does not seem to be a case in which a judgment may be made saving the rights of the absent parties, but does fall in the category of one in which the ‘interests, rights, or duties [of the absentees] will inevitably by affected by any decree which can be rendered in the action.’ (Bank of California v. Superior Court, 16 Cal.2d 516, 521, 106 P.2d 879, 883.)

So far as the trustee is concerned, it does no business in this state and holds in Illinois any moneys belonging to the Plan and it alone can disburse the same. There is no effort to sequester an intangible asset within this state as in Atkinson v. Superior Court, 49 Cal.2d 338, 316 P.2d 960, and there is no attempted showing here of any res within this state.

We hold that The Northern Trust Company is an indispensable party whose presence cannot be obtained unless through its consent which has not been forthcoming so far.

The judgment is affirmed for want of indispensable parties.


1.  The case was submitted below upon written stipulation of facts, filed on October 18, 1962.

ASHBURN, Justice.*

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