PENNWALT CORPORATION v. WARKENTIN

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Court of Appeal, Second District, Division 7, California.

PENNWALT CORPORATION, a Pennsylvania corporation, Plaintiff and Respondent, v. Aaron James WARKENTIN, an individual, Defendant and Appellant.

B020151.

Decided: March 20, 1987

McCutchen, Black, Verleger & Shea, David S. MacCuish, John P. Zaimes and Michael D. Young, Los Angeles, for plaintiff and respondent. Irell & Manella, Gregory R. Smith, Steven L. Sloca and Michael R. Hambly, Los Angeles, for defendant and appellant.

Aaron James Warkentin (Warkentin or appellant) appeals from an order granting a preliminary injunction.1  The injunction enforces a covenant not to complete made by Warkentin when he sold all of his shares in two corporations to respondent Pennwalt Corporation.   We hold that the injunction transgresses Business and Professions Code section 16601 (section 16601) because it does not specify the county or counties to which it applies.   Accordingly, we reverse with directions to the trial court to vacate the amended preliminary injunction.

Business and Professions Code section 16600 (section 16600) states, “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.”  Section 16601 sets forth one of the exceptions.   In relevant part, it provides:  “․ [A]ny shareholder of a corporation selling ․ all his shares in said corporation ․ may agree with the buyer to refrain from carrying on a similar business within a specified county or counties, city or cities, or a part thereof, in which the business so sold, or that of said corporation ․ has been carried on, so long as the buyer ․ carries on a like business therein.” 2

The provisions of section 16600 making void contracts in restraint of trade are based upon “considerations of sound public policy” (Swenson v. File (1970) 3 Cal.3d 389, 394, 90 Cal.Rptr. 580, 475 P.2d 852) and not upon any consideration for the party against whom the relief is sought.  (Ibid.)

With this background in mind we turn to the immediate controversy.   Effective December 28, 1978, Warkentin and Pennwalt entered into an Agreement and Plan of Reorganization under which Warkentin sold all of his shares in two corporations (Tilt-Belt and Electrosort) to Pennwalt, in exchange for Pennwalt stock.   Warkentin owned one-half of the Electrosort stock.   The other one-half was owned by George Mills who joined in the agreement.   Mills is not a party to this appeal nor to the action below.   Warkentin owned 810 of the 900 issued shares of Tilt-Belt, the other owner not being a party to the agreement nor otherwise involved herein.   Tilt-Belt and Electrosort had been in the business of designing, manufacturing and selling machinery and equipment used in the high-speed processing sorting and packing of fresh fruit after harvesting.   Warkentin was well-known in the industry and was the one who designed the Tech-Bilt machinery and did most of the sales.   Pennwalt was in the same business.

The agreement contained a non-competition clause, to be effective for ten years from the date of the agreement.   Warkentin covenanted and agreed that “so long as any like business to Electrosort and Tilt-Belt is carried on by [Pennwalt] ․ in any county of any of the states of the United States where such business is presently conducted, he will not engage in [in any capacity] any business similar to or in competition with any business carried on by Electrosort and Tilt-Belt prior to [the agreement.] ․ [Pennwalt] and Warkentin intend that the covenants and agreements contained in this Paragraph shall be deemed to be a series of separate covenants and agreements, one for each and every county of each state and political subdivision of the United States with respect to the business described in this Paragraph.   If, in any judicial proceeding, a court shall refuse to enforce in such action all of the separate covenants deemed included therein [sic ] then such unenforceable covenants shall be deemed eliminated [sic ] from the provisions hereof for the purpose of such proceeding to the extent necessary to permit the remaining separate covenants to be enforced in such proceeding.”

This somewhat Delphic provision is the focus of the argument on this appeal.

Pennwalt argues that its lawyers drafted the language to read as it now does in order to “track” the language of section 16601.   Having said this, Pennwalt reaches the remarkable conclusion that the provision is of nationwide scope, and that Warkentin, for the ten years now provided in the clause, cannot compete anywhere in the United States.3  This position is untenable.

The words of section 16601 are clear and unambiguous.   The agreements which are validated are agreements to refrain from competing “within a specified county or counties ․ in which the business ․ sold ․ has been carried on.”  (Italics added.)   There is no need to construe that language.

Examination of the agreement here invoked at once shows no county or counties are specified at all.  “Specify” is defined as “to mention or name in a specific or explicit manner;  tell or state precisely or in detail.”   (Webster's Third New International Dictionary (1961) p. 2187.)   The word has also been defined as “[t]o mention specifically;  to state in full and explicit terms;  to point out;  to tell or state precisely or in detail;  to particularize, or to distinguish by words one thing from another.”  (Black's Law Dict. (5th ed. 1979) p. 1255, col. 1.)   The agreement in this case refers, simply to “any county in any of the states of the United States where such business is presently conducted.”   It states that “the covenants and agreements” of the paragraph (although only a singular covenant and agreement has been stated up to this point) “shall be deemed to be a series of separate covenants and agreements, one for each and every county of each state and political subdivision of the United States.”   This is the antithesis of specificity.   There is no mentioning or naming explicitly;  no telling or stating precisely or in detail.

Accordingly, the agreement by which Warkentin sold his shares of Electrosort and Tilt-Belt to Pennwalt does not meet the requirements of section 16601.   We must determine the consequences of this result.4

Several cases have discussed the territorial scope of a non-competition clause.   In Mahlstedt v. Fugit (1947) 79 Cal.App.2d 562, 180 P.2d 777, the seller of a business, located in Los Angeles County, sold it to a buyer who continued to operate it in the same county.   The agreement of sale contained a non-competition clause which did not specify any territory.   The law applicable to the case was the predecessor to section 16601, former Civil Code section 1674, which limited the permissible scope of a restraint on competition to “a specified county, city or part thereof.”   The trial court in Mahlstedt limited the injunction to Los Angeles County.   The appellate court agreed with this result, saying that if the contract is unrestricted as to territory or if it includes more territory than the law allows, it will be construed to be operative in the county or the portion thereof in which the business is located.   The court did not discuss any principles of statutory interpretation.

In support of its conclusion the Mahlstedt court cited three cases.   City Carpet etc. Works v. Jones (1894) 102 Cal. 506, 512, 36 P. 841, was a case where the contract specified three counties.   The seller had done business in only one of them.   The court held that the entire agreement was not invalidated and that the non-competition clause was limited properly to the one county.   Again, statutory interpretation of the word “specified” was not discussed.

Stephens v. Bean (1924) 65 Cal.App. 779, 783, 224 P. 1022, involved the sale of an undertaking business.   The contract of sale set forth that the business was located in the City of Fresno, County of Fresno.   The non-competition clause had no territorial limit.   The court looked to determine the intention of the parties from a consideration of the contract as a whole in light of the surrounding circumstances and affirmed an injunction restraining competition in the City of Fresno.   The court did not look at the effect of this result from the standpoint of the statutory provision referring to specification of counties.

General Paint Corp. v. Seymour (1932) 124 Cal.App. 611, 614, 12 P.2d 990, the contract listed the territory of the non-competition clause as the State of California although the seller had done business only in Los Angeles.   The court adopted concepts of reasonableness and the intent of the parties to hold that the clause was valid if limited to Los Angeles County.   No discussion of the statutory requirement of specificity appears in the opinion.

Again in Kaplan v. Nalpak Corp. (1958) 158 Cal.App.2d 197, 322 P.2d 226, the court did not discuss the statutory requirement of specificity when it construed the territorial scope of covenants not to compete.   The covenant was not to compete within California or Arizona.   The court rejected the argument that section 16601, in referring to the “county ․ in which the business ․ has been carried on ․” meant the county where the seller had a physical presence such as a factory or a plant.   The parties stipulated that the business of the corporation whose stock was sold by the selling shareholder had been carried on in 30 specified counties which they listed by name.   These were counties in which the corporation, it was stipulated, had been selling to its customers in substantial amounts.   The court ruled that the trial court most reasonably could find the business had been carried on in those counties.

In the latest decision by our Supreme Court to discuss this problem, Swenson v. File, supra, 3 Cal.3d 389, 90 Cal.Rptr. 580, 475 P.2d 852, the dispute was between plaintiffs who remained in an accounting partnership, from which the defendant had withdrawn.   The partnership agreement provided that a retiring partner would not render service to a client whose principal office was within a 20–mile radius of any partnership office existing on the date of retirement.   The applicable statute was Business and Professions Code section 16602 which deals with partnerships in much the same manner as section 16601 deals with corporations.   The statute had been amended just a few weeks prior to defendant's withdrawal from the partnership and the court held that the former language should apply.   It had provided that the partners might agree “that none of them will carry on a similar business within the same city or town or a specified part hereof, where the partnership business has been transacted.”  (Former Bus. & Prof.Code, § 16602.)   Following the decision in Kaplan v. Nalpak, supra, 158 Cal.App.2d 197, 322 P.2d 226, the court held that the former section was not limited solely to the very city where the withdrawing party opened his new office.   Thus, the term “carrying on a similar business” should be interpreted more broadly than merely referring to the covenantor's physical location or plant.  (Swenson v. File, supra, 3 Cal.3d at p. 396, 90 Cal.Rptr. 580, 475 P.2d 852.)

It will be noted that none of the cases which we have discussed or which have been brought to our attention by the parties, have considered the validity of the territorial scope of a non-competition clause from the standpoint of specific interpretation of the language of section 16601 validating that scope by reference to a “specified county or counties” (italics added).   Cases are not authority for a proposition which they do not consider.  (McDowell & Craig v. City of Santa Fe Springs (1960) 54 Cal.2d 33, 38, 4 Cal.Rptr. 176, 351 P.2d 344.)   Accordingly, we are not constrained by those decisions.

We have already pointed out that the language of the clause by which Warkentin agreed not to compete simply cannot be reconciled to the clear and unambiguous requirement of section 16601 that the agreement be with reference to specified counties.   In that light, two principles of statutory construction should be mentioned:  First, if the words of a statute are “clear and unambiguous, there is no need for construction, and courts should not indulge in it.”  (Solberg v. Superior Court (1977) 19 Cal.3d 182, 198, 137 Cal.Rptr. 460, 561 P.2d 1148.)   Second, “[i]t is a well established principle of statutory construction that the duty of the court is ‘ “simply to ascertain and declare what is in terms or in substance contained therein, not to insert what has been omitted or to omit what has been inserted;  ․” (Code Civ.Proc., § 1858.)’  (IGA Aluminum Products, Inc. v. Manufacturers Bank (1982) 130 Cal.App.3d 699, 703 [181 Cal.Rptr. 859].)  Our function ‘ “is to construe the words of the Legislature by their ordinary meaning, not to expand their definition to include matters or persons not expressly covered nor included by the law making branch of government [citations].” ’  (Marsille v. City of Santa Ana (1976) 64 Cal.App.3d 764, 769–770 [134 Cal.Rptr. 743].)”  (Los Angeles Unified School Dist. v. Workers' Comp. Appeals Bd. (1984) 150 Cal.App.3d 823, 827, 198 Cal.Rptr. 116.)   It follows that paragraph 10.5 of the Agreement and Plan of Reorganization between the parties does not fall within section 16601 and is, hence, void under the provisions of section 16600.

Pennwalt places heavy reliance upon the decision in Monogram Industries, Inc. v. Sar Industries, Inc. (1976) 64 Cal.App.3d 692, 134 Cal.Rptr. 714.   The facts there, to some extent, parallel those in this case.   It is not necessary to discuss them (or, indeed, any further facts of the instant case) in light of the basis for our holding.   Suffice it to say that in Monogram the sellers of a business covenanted not to become involved in a business activity competitive to that of plaintiff, which was the buyer.   The opinion does not quote the precise language of the restricted area of competition but does set forth some of the language of the clause, putting in brackets the phrase “within the United States, Puerto Rico, the Virgin Islands and Canada.”   The defendants in Monogram argued that the territorial extent of the injunction was overbroad, maintaining that to be permissible under section 16601 an injunction should be limited to the territorial extent of the seller's goodwill.   Discussing Kaplan v. Nalpak Corp., supra, 158 Cal.App.2d 197, 322 P.2d 226, the court rejected the argument and held that the territorial limits envisioned by section 16601 “are coextensive with the entire area in which the parties conducted all phases of their business including production, promotional and marketing activities as well as sales.”   (Monogram Industries, Inc. v. Sar Industries, Inc., supra, 64 Cal.App.3d at p. 702, 134 Cal.Rptr. 714.)   It found that the trial court's order was supported by substantial evidence, and affirmed the grant of the challenged injunction.

Somewhat curiously, the court never quoted the language of section 16601.   Instead it stated that the section permits sellers of all of the shares of a corporation to agree with the buyer not to carry on a similar business “in the area where the business or corporation has previously carried on its business for so long as the buyer carries on a like business therein.”  (64 Cal.App.3d at p. 697, 134 Cal.Rptr. 714;  emphasis is that of the Monogram court.)   This, of course, is not a literal quotation of section 16601.   The word “area” which the Monogram court used and underlined, hardly equates with the phrase “specified county or counties, city or cities, or a part thereof” which is the actual statutory language.   In fact, there is no reference at all to the statutory language anywhere in the Monogram opinion.

Thus, in line with the rule that cases are not authority for propositions which they do not discuss, Monogram does not impede our conclusion.   Further, “[p]robably the strongest reason for [not following] a decision is that it is contrary to a statutory provision which was either not discovered or was known but ignored in the opinion.”  (9 Witkin, Cal. Procedure, (3d ed., 1985) Appeal, § 793, p. 766.)   The Supreme Court has more than once overruled or rejected its own prior decisions when they were guilty of this fault.   (In re Tartar (1959) 52 Cal.2d 250, 258, 339 P.2d 553;  Alferitz v. Borgwardt (1899) 126 Cal. 201, 207–208, 58 P. 460.)   We decline to follow Monogram.

 Inasmuch as there may have been previous reliance upon the interpretation given to section 16601 as a result of the decision in Monogram, our construction of section 16601 shall apply to all cases where the contracts involved were entered into after the date this decision becomes final.   It shall also apply, however, to this action since the appeal herein was the vehicle which brought the matter to the court's attention.

Because the agreement upon which the preliminary injunction is based is void, the order granting the preliminary injunction is reversed with directions to deny it.

FOOTNOTES

FOOTNOTE.  

1.   The notice of appeal states that it is from the amended preliminary injunction and all orders and rulings upon which it was based.   We treat the appeal as being from the order granting the injunction.

2.   The full text of section 16601 is as follows:“Any person who sells the goodwill of a business, or any shareholder of a corporation selling or otherwise disposing of all his shares in said corporation, or any shareholder of a corporation which sells (a) all or substantially all of its operating assets together with the goodwill of the corporation, (b) all or substantially all of the operating assets of a division or a subsidiary of the corporation together with the goodwill of such division or subsidiary, or (c) all of the shares of any subsidiary, may agree with the buyer to refrain from carrying on a similar business within a specified county or counties, city or cities, or a part thereof, in which the business so sold, or that of said corporation, division, or subsidiary has been carried on, so long as the buyer, or any person deriving title to the goodwill or shares from him, carries on a like business therein.   For the purposes of this section, ‘subsidiary’ shall mean any corporation, a majority of whose voting shares are owned by the selling corporation.”

3.   The injunction does not stop at our country's borders.   It reads as follows:“IT IS HEREBY ORDERED that defendant Aaron James Warkentin and his agents, servants, employees, subcontractors, and representatives and all persons acting by, through, for or in concert with him are restrained and enjoined by preliminary injunction pending the final disposition of this action or expiration of the agreement not to compete, whichever first occurs, from owning, managing, operating, joining, controlling, being employed by or performing services in, or being in any other manner connected with, any business activity anywhere in the United States relating to demonstrating, manufacturing, marketing, consulting, quoting prices, selling, leasing, or licensing of systems, equipment or parts thereof used in the post-harvest sorting and packing of fresh-grown agricultural products.   This order is specifically intended to include, without limitation, prohibitions on:  (a) manufacture of such equipment in the United States for use in foreign countries;  (b) consulting work concerning such equipment performed in the United States for use in foreign countries;  (c) exhibitions or demonstrations of such equipment, drawings thereof, in the United States for use in foreign countries;  (d) delivery of such equipment to points in the United States for use in foreign countries;  and (e) delivery of such equipment to foreign countries for use in the United States.“This order does not prohibit:  (a) telephone communications to or from points inside the United States from or to points outside the United States;  (b) mailing of advertisements from points inside the United States to points outside the United States;  (c) ownership of 1% or less of the issues and outstanding stock of a competitor corporation whose stock is publicly traded on a national securities exchange;  (d) being employed by a non-competing division or affiliate of a competitor corporation whose stock is listed on a national securities exchange;  or (e) manufacture and sale and delivery outside of the United States.”

4.   Listing the counties by name and stating affirmatively that the sold corporation actually did “substantial business” (Swenson v. File, supra, 3 Cal.3d at p. 397, 90 Cal.Rptr. 580, 475 P.2d 852) in those counties is the clearest way to comply with the section.   If the counties are so numerous that it would be impractical to name each one it may be possible to comply with section 16601 in other ways, for example by stating “each of the 58 counties of the state of California except the counties of A, B and C, it being agreed that (sold corporation) presently carries on substantial business in those remaining 55 counties.”

COLE, Associate Justice.** FN** Assigned by the Chairperson of the Judicial Council.

THOMPSON, Acting P.J., and JOHNSON, J., concur.