1 2 3 4 5 6 7 UNITED STATES DISTRICT COURT 8 SOUTHERN DISTRICT OF CALIFORNIA 9 SMARTER HOA SOLUTIONS INC., Case No. 24-cv-01781-JAH-MMP 10 Plaintiff, 11 ORDER GRANTING IN PART AND DENYING IN PART 12 DEFEDANT’S MOTION FOR v. 13 JUDGMENT ON THE
PLEADINGS AND DENYING 14 MOTION FOR SANCTIONS CARMEN PEÑA; CASANET PROPERTY 15 MANAGEMENT LLC, 16 Defendants. [ECF No. 20] 17 18 Pending before the Court is Defendant Carmen Peña’s Motion to Dismiss, which 19 includes a request for sanctions and which the Court previously construed as a motion 20 for judgment on the pleadings. ECF Nos. 20 (“Motion”), 33. Plaintiff Smarter HOA 21 Solutions Inc. (“HOA”) opposes the Motion and Defendant Peña, proceeding pro se, 22 has filed a reply. ECF Nos. 37 (“Response”), 39 (“Reply”). With limited exceptions, 23 all proceedings in this case have been stayed pending the Court’s order on the instant 24 Motion. ECF No. 33. 25 This action arises from HOA’s suit to enforce a Non-Competition and Non- 26 Disclosure Agreement (the “Agreement”) against Defendant Peña, the former co-owner 27 and a former employee of HOA, following the termination of Defendant Peña’s 1 the termination of Defendant Peña employment with HOA, Defendant Peña’s 2 unlawfully retained HOA’s company property and revealed certain confidential, 3 customer information, and/or trade secret information to Defendant Casanet Property 4 Management LLC (“Casanet”). 5 HOA filed suit against Defendant Peña and Casanet asserting claims for (1) 6 Breach of Written Non-Competition and Non-Disclosure Agreement; (2) Conversion; 7 (3) Intentional Interference with Contractual Relations; (4) Intentional Interference with 8 Prospective Economic Advantage; (5) Trade Secret Misappropriation Under the Defend 9 Trade Secrets Act , 18 U.S.C. § 1836; and, (6) Misappropriation of Trade Secrets under 10 Cal. Civ. Code § 3426. HOA alleges all six causes of action against Defendant Peña 11 and Counts 3-6 against Casanet. 12 Relevant here, HOA and Defendant Peña agree that the Agreement relates to the 13 sale of Defendant Peña’s 50% ownership of the issue stock of HOA but disagree as to 14 whether this is sufficient to render the Agreement enforceable under California law. 15 Defendant Peña also disputes the allegations in the remaining claims. ECF No. 8 16 (“Answer”).1 17 For the reasons discussed below, Defendant Peña’s motion for judgment on the 18 pleadings is GRANTED IN PART and DENIED IN PART. Defendant Peña’s motion 19 for sanctions is DENIED. 20 I. BACKGROUND 21 Smarter HOA Solutions Inc. is a company engaged in the business of providing 22 management services for homeowner associations. Defendant Peña was previously an 23 officer, director and owner of 50% of the outstanding and issue stock of HOA. 24 On December 19, 2022, Defendant Peña and co-owner Pierre Dion, on behalf of 25 1 In a separate motion taken under submission by this Court, Casanet has filed a request 26 for good faith settlement determination seeking dismissal of HOA’s claims against 27 Casanet and requesting an order approving a settlement between HOA and Casanet. ECF No. 35. The Court will issue an order on that motion in due course. 1 HOA as the seller, and Luis Adrian Arce, on behalf of Warranted Management Inc. as 2 the buyer (collectively, the “Contracting Parties”), executed a Letter of Intent to 3 Purchase (“Letter of Intent”) for the total sale of HOA’s business operations and assets 4 in exchange for an estimated price of $400,000. ECF No. 1-2 (“Exh. A”) at 6–7. The 5 Letter of Intent sets an expected settlement date on or before February 15, 2023, and 6 contains a covenant not to compete barring HOA from soliciting HOA’s clients for a 7 period of five years from the close of escrow.2 8 On June 23, 2023, prior to the sale of her stock, Defendant Peña entered into the 9 Agreement with HOA. Exh. A at 2–5. The Agreement prohibits Defendant Peña—“for 10 any reason whatsoever, directly or indirectly, for h[er]self or on behalf of or in 11 conjunction with any other person”—from the following within San Diego and 12 Riverside counties: 13 • (i) Participating in “other activities,” defined as “[e]ngag[ing] as an officer, 14 director, shareholder, owner, principal, partner, lender, joint venturer, 15 employee, independent contractor, consultant, advisor, or sales 16 representative, in any Competitive Business3;” 17 • (ii) Soliciting employees, meaning to “[e]ncourage, induce, attempt to 18 induce, recruit, solicit, attempt to solicit or take any action that is intended 19 to induce or encourage, either personally or through others, any person 20 who is, at that time, within the Restricted Territory, an employee of the 21 Company or any of its subsidiaries, in a managerial capacity for the 22 23 2 The noncompete clause expressly prohibits HOA from the following activities: “canvas or solicit any business from [HOA]’s Clients; Request or advise [HOA]’s 24 Clients to withdraw, curtail, or cancel their business with the Buyer; Disclose to any 25 other person, firm, partnership or corporation the names of Seller’s Clients unless required to do so by law, government agency or court order.” Exh. A at 6. 26 3 “Competitive Business” is defined as “[any individual, corporation, limited liability 27 company, partnership, firm, or other business of whatever nature] engaged in the business of providing HOA Management Services.” Exh. A. at 3. 1 purpose or with the intent of enticing such employee away from or out of 2 the employ of the Company or any of its subsidiaries;” and, 3 • Soliciting customers, defined as “[c]all[ing] upon any person or entity that 4 is, at that time, or that has been, within five (5) years prior to that time, a 5 customer of the Company or any of its subsidiaries, within the Restricted 6 Territory for the purpose of soliciting or selling services in direct 7 competition with the Company or any of its subsidiaries within the 8 Restricted Territory.” 9 Exh. A at 2. Although the Agreement establishes a non-compete period of five years, 10 the official start date of the five-year period is unclear as defined in the Agreement.4 11 On June 30, 2023, the Contracting Parties executed a Stock Purchase Agreement5 12 finalizing the sale of HOA’s stock and business assets to Luis Adrian Arce, who is not 13 a party in this suit, in exchange for cash. Following the close of escrow, Defendant 14 Peña became an employee of HOA until the date the termination of her employment 15 with HOA in August of 2024. 16 II. DISCUSSION 17 A. Legal Standard 18 A district court may grant a Rule 12(c) motion for judgment on the pleadings 19 when there is no issue of material fact, and the moving party is entitled to judgment as 20 a matter of law. Fleming v. Pickard, 581 F.3d 922, 925 (9th Cir. 2009). In considering 21 a motion for judgment on the pleadings, a district court accepts all well-pleaded factual 22 23 4 The Agreement defines the “Non-compete Period” as the “five (5) year period immediately following the termination of the Consulting Agreement between [HOA] 24 and Consultant whereby [Defendant Peña] provides services to [HOA].” Exh. A at 3. 25 The Agreement does not define or otherwise identify the “Consulting Agreement” or “Consultant.” 26 5 A copy of the Stock Purchase Agreement (the “Purchase Agreement”) was not 27 attached to the parties’ pleadings, nor are the terms of the Purchase Agreement plead anywhere in the current court record. 1 allegations in the complaint as true and construes the pleadings in the light most 2 favorable to the nonmoving party. Unite Here Loc. 30 v. Sycuan Band of the Kumeyaay 3 Nation, 35 F.4th 695, 700 (9th Cir. 2022). A district court will not consider documents 4 or evidence beyond the pleadings. Hal Roach Studios, Inc. v. Richard Feiner & Co., 5 896 F.2d 1542, 1550 (9th Cir. 1989). 6 Given that Defendant Peña is appearing pro se, the Court will “liberally construe” 7 Defendant Peña’s pleadings. See Erickson v. Pardus, 551 U.S. 89, 94 (2007) (“[a] 8 document filed pro se is ‘to be liberally construed’”); see also Fed. R. Civ. P. 8(f) (“All 9 pleadings shall be so construed as to do substantial justice”). 10 1. Defective Notice Under Fed. R. Civ. P. 7(B)(1) 11 As an initial matter, HOA argues that Defendant Peña failed to comply with the 12 requirements of Rule 7(B)(1) because the motion “does not state the relief sought, which 13 specific causes of action are being challenged, or the exact legal basis upon which the 14 motion is being brought.” Resp. at 6. Specifically, HOA argues that Defendant Peña 15 broadly cited to “California Business & Professions Code 16600 and Public Policy 16 violations,” mentioned “two cases without any citations,” and failed to “state what part 17 of the opinions are relied upon in the motion or make any analysis of the facts or 18 holdings of said cases with regard to the facts alleged in this case.” Id. According to 19 HOA, such deficiencies “make responding to the motion challenging as it is unclear 20 upon what legal authorities moving party is relying upon.” Id. 21 In liberally construing Defendant Peña’s pleadings, and given that HOA 22 successfully identifies and responds to Defendant Peña’s arguments and requested 23 relief, the Court rejects HOA’s argument and finds that Defendant Peña has provided 24 sufficient notice under Rule 7(B)(1). 25 2. Breach of Written Non-Competition and Non-Disclosure Agreement 26 Defendant Peña bases her argument on her assertion that the noncompete 27 provisions of the Agreement are unlawful and therefore voidable and unenforceable 1 premise that the noncompete provisions constitute a restraint on her ability to engage in 2 a lawful profession, trade, or business in an employment context and are therefore 3 violative of public policy in California and void pursuant to section 16600 of the 4 California Business and Professional Code. Id. Moreover, assuming arguendo that the 5 Agreement constitutes a noncompete made in an employment context, Defendant Peña 6 argues that the Agreement does not fall within any exception to the general ban on 7 noncompete agreements under California law. Id.6 8 HOA argues that notwithstanding the general ban on noncompetes in California, 9 the challenged provisions of the Agreement are valid for two reasons: 1) the Agreement 10 falls squarely within the statutory exception under section 16601 because it relates to 11 the sale of a business, and 2) the Agreement is valid because it is necessary to protect 12 HOA’s trade secrets. Resp. at 10–11 (citing Alliant Ins. Services v. Gaddy, 159 13 Cal.App.4th 1292, 1306 (2008). 14 Accordingly, to determine whether Defendant Peña is entitled to judgment on the 15 pleadings, the Court must first consider whether the Agreement is valid and enforceable 16 under section 16600 as a matter of law.7 17 a) Validity of the Noncompete Under Cal. Bus. & Prof. Code § 16600 18 In determining a contract’s validity under section 16600, the Court “direct[s] its 19 inquiry according to the actual statutory language [of section 16600]: whether the 20 21 6 Defendant Peña also argues that HOA failed to provide the requisite notice under section 16600.1 requiring an employer to notify an employee that a noncompete clause 22 in an employment agreement is void under the statute. Mot. at 3; Cal. Bus. & Prof. 23 Code § 16600.1. Such notice is only required, however, where an employer knows a noncompete clause is void. Id. This argument also fails as there is no proof on the 24 record that HOA failed to provide such notice, nor does lack of notice itself provide 25 Defendant Peña with additional or independent grounds to challenge a noncompete clause. 26 7 For purposes of this Motion, the Court shall except the allegations in the complaint as 27 true and disregard Defendant Peña’s challenge to the authenticity of the Agreement attached to HOA’s complaint. Answer ¶ 9; see Unite Here Loc. 30, 35 F.4th at 700. 1 challenged provision ‘restrain[s anyone] from engaging in a lawful profession, trade, 2 or business of any kind.’” Golden v. Cal. Emerg. Physicians Med. Grp. (Golden I), 782 3 F.3d 1083, 1092 (9th Cir. 2015) (citing Cal. Bus. & Prof. Code § 16600(a)). “This 4 prohibition extends to any ‘restraint of a substantial character,’ no matter its form or 5 scope.” Id. (holding § 16600 extends to contracts beyond noncompetition agreements 6 and finding the district court abused its discretion when it “began its analysis by stating 7 a narrower principle: ‘[i]n California, covenants not to compete are void’”). 8 Under Ninth Circuit caselaw, “whether a restraint is one of a substantial character 9 is a mixed question of law and fact.” Golden v. Cal. Emerg. Physicians Med. Grp. 10 (Golden II), 896 F.3d 1018, 1026 (9th Cir. 2018). A contractual restraint qualifies as a 11 “restraint of substantial character” if the restraint “significantly or materially impedes a 12 person’s lawful profession, trade, or business.” Id. at 1024; see also Int’l Bus. Machs. 13 Corp. v. Bajorek, 191 F.3d 1033, 1041 (9th Cir. 1999) (“We are not free to read 14 California law without deferring to our own precedent on how to construe it.”). “To 15 meet this standard, a provision need not completely prohibit the business or professional 16 activity at issue, nor does it need to be sufficient to dissuade a reasonable person from 17 engaging in that activity.” Id. (citing Edwards v. Arthur Andersen LLP, 189 P.3d 285, 18 292 (Cal. 2008)). Rather, “its restraining effect must be significant enough that its 19 enforcement would implicate the policies of open competition and employee mobility 20 that animate section 16600.” Id. (citing Edwards, 189 P.3d at 291). Because “a restraint 21 can be ‘substantial’ even if it is reasonable and even if it is narrow,” a contractual 22 restraint will rarely be “so insubstantial that it escapes scrutiny under section 16600.” 23 Id. at 1023–24 (citing Edwards, 189 P.3d at 290–293). 24 Here, HOA argues that section 16600 is inapplicable because the Agreement falls 25 squarely within the statutory exception under section 16601. Resp. at 10–11. This 26 argument misses the point and falls short of an admission that the Agreement is, in the 27 first instance, barred by section 16600. While true that the challenged provisions may 1 determine which, if any, of the challenged provisions violate section 16600. 2 Defendant Peña generally cites to the noncompetition and nonsolicitation clauses 3 to allege that the Agreement “severely limit[s]” her from “find[ing] alternative 4 employment in [her] career and “restrains . . . [her] from earn[ing] a living.” Mot. at 1. 5 As a result, Defendant Peña moves for sanctions based on lost wages, benefits loss, job 6 searches, and emotional distress. Mot. at 5; Reply at 6. 7 Upon review, the Court finds the terms of section 1 of the Agreement support 8 Defendant Peña’s allegations by impeding Defendant Peña from engaging in the 9 business of providing HOA Management Services in three ways. First, section 1(a)(i) 10 prohibits Defendant Peña from “[e]ngag[ing] as an officer, director, shareholder, owner, 11 principal, partner, lender, joint venturer, employee, independent contractor, consultant, 12 advisor, or sales representative” in “any individual, corporation, limited liability 13 company, partnership, firm, or other business of whatever nature” engaged in the 14 business of providing HOA Management Services. Second, section 1(a)(ii) prohibits 15 Defendant Peña from taking “any action” to solicit employees currently employed by 16 HOA or any of HOA’s subsidiaries. Finally, section 1(a)(iii) prohibits Defendant Peña 17 from “soliciting or selling services in direct competition with [HOA]” to “any person 18 or entity that is, at that time, or that has been, within five (5) years prior to that time, a 19 customer of [HOA] or any of its subsidiaries.” 20 By broadly imposing these restrictions “for any reason whatsoever, directly or 21 indirectly, for h[er]self or on behalf of or in conjunction with any other person,” clauses 22 (i) and (iii) affect Defendant Peña’s current and future ability to seek and maintain any 23 form of employment or compensation for services relating to the business of providing 24 HOA Management Services. See Golden II, 896 F.3d at 1024–26. Thus, in liberally 25 reviewing Defendant Peña’s request for sanctions to assess the impact of such 26 restrictions, the Court agrees the overbroad language of these restrictions create a 27 “restraining effect” that “implicate the policies of open competition and employee 1 compel a finding that clause (ii), which relates to nonsolicitation of current HOA 2 employees, also constitutes a restriction of substantial character under section 16600. 3 See, e.g., Fillpoint, LLC v. Maas, 146 Cal. Rptr. 3d 194, 200 (Cal. Ct. App. 2012) 4 (finding that a clause preventing defendant from “employing or soliciting for 5 employment any of [the company’s] employees or consultants” was not enforceable 6 under sections 16600 and 16601). 7 Accordingly, the Court finds that the challenged clauses in the Agreement 8 constitute substantial restraints, thereby rendering the Agreement void under section 9 16600 unless an exception applies. See Golden II, 896 F.3d at 1028 (finding an entire 10 agreement void under section 16600 where no exception applied); see also Strategix, 11 Ltd. v. Infocrossing W., Inc., 48 Cal. Rptr. 3d 614, 617–618 (Cal. Ct. App. 2006) 12 (declining to “rewrite overbroad covenants not to solicit” because “courts will not strike 13 a new bargain for the parties “for the purposes of saving an illegal contract”). 14 i. Statutory Exception Pursuant to Cal. Bus. & Prof. Code § 16601 15 Because the Court found the Agreement void under § 16600, the Courts accept 16 the factual allegations in the complaint as true and construes the pleadings in the light 17 most favorable to HOA to determine whether the exception pursuant to § 16601 applies. 18 As discussed, section 16600 expressly prohibits noncompetition agreements and 19 clauses in an employment context, no matter how narrowly tailored, unless the 20 agreement falls within a statutory exception. Cal. Bus. & Prof. Code § 16600(b)(1) 21 (citing Edwards, 189 P.3d at 288). Section 16601 provides a statutory exception to 22 California’s general ban on noncompetition agreements when made in connection with 23 the sale or dissolution of a business. Edwards, 189 P.3d at 290. Section 16601 states, 24 in relevant part: 25 [A]ny owner of a business entity selling or otherwise disposing of all of his or her ownership interest in the business entity . . . 26 may agree with the buyer to refrain from carrying on a similar 27 business within a specified geographic area in which the business so sold, or . . . has been carried on, so long as the buyer, or any person 1 deriving title to the goodwill or ownership interest from the buyer, carries on a like business therein. 2 Cal. Bus. & Prof. Code § 16601 (emphasis added). For this exception to apply, courts 3 must determine that 1) the underlying business transaction clearly falls within this 4 limited exception and 2) the restriction satisfies the intent and purpose of section 16601. 5 See Fillpoint, 146 Cal. Rptr. 3d at 200, 203–204 (internal citations omitted). 6 Both HOA and Defendant Peña rely on Fillpoint, LLC v. Maas to support their 7 arguments regarding the validity of the Agreement under section 16601. In Fillpoint, 8 the appellate court considered whether noncompetition and nonsolicitation covenants 9 in an employment agreement were enforceable under section 16600. 146 Cal. Rptr. 3d 10 at 200 (collecting cases). There, the plaintiff sued for breach of an employment contract 11 and interference with a contract after defendant terminated employment with plaintiff 12 and obtained employment with plaintiff’s competitor. Id. at 195–196. The plaintiff 13 argued the challenged covenants in the employment agreement were valid and 14 enforceable because the employment agreement and a stock purchase agreement 15 entered into by the same parties at the same time were “part of a single transaction and 16 must be read together.” Id. at 196. Although the court agreed that, based on the facts, 17 “the purchase agreement and the employment agreement must be read together,” the 18 court ultimately found that “the fact that the purchase agreement and the employment 19 agreement should be read together [does not] automatically mean the covenant not to 20 compete in the employment agreement is enforceable.” Id. at 203. Rather, “that the 21 purchase agreement and the employment agreement should be read together begins, not 22 ends, the analysis [of] whether the covenant not to compete in the employment 23 agreement is enforceable.” Id. 24 The appellate court then went on to analyze the challenged clauses in the context 25 of the “single transaction” and held that the clauses were overbroad and inconsistent 26 with the proposes and terms of section 16601. Id. at 203–204. The court reasoned that 27 the noncompetition terms of the purchase agreement—which prevented defendant from 1 competing with plaintiff, setting up a business to compete with plaintiff, or assisting 2 someone else to set up or continue a business in competition with plaintiff during the 3 three-year period immediately following plaintiff’s acquisition of the company—were 4 “focused on protecting the acquired goodwill for a limited period of time” and therefore 5 served the purpose of section 16601. Id. In contrast, the court found that the 6 “employment agreement’s covenant targeted an employee’s fundamental right to 7 pursue his or her profession” because the covenants prevented defendant from: 8 (1) making sales contacts or making actual sales to anyone who was [the company’s] customer or potential customer during the two 9 years preceding the termination of [defendant’s] employment, or 10 assisting others in doing so; (2) working for or owning an interest in any business that was in the same business as, or would compete 11 with, [the company’s]; or (3) employing or soliciting for 12 employment any of [the company’s] employees or consultants. The covenant in the employment agreement affected [defendant’s] rights 13 to be employed in the future and, in this case, for a year after the end 14 of the three-year period of the purchase agreement's covenant. 15 [. . .] 16 The employment agreement even barred sales to or solicitation of potential customers. 17 18 Id. Accordingly, the court found the challenged provisions of the employment 19 agreement “cannot be reconciled with California’s strong public policy permitting 20 employees the right to pursue a lawful occupation of their own choice” and therefore 21 “do[] not fit within the limited exception and [are] not enforceable.” Id. at 204. 22 Here, HOA’s complaint alleges that the Agreement “was related to the purchase 23 of [Defendant Peña’s] business by [HOA.]” ECF No. 1 (“Complaint”). In support, 24 HOA attaches a copy of the fully executed Agreement to the Complaint which contains 25 the following recitals: 26 A. The Company is engaged primarily in the business of providing Management Services for Home Owner Associations (“HOA 27 Management”) in the San Diego County region and Seller was an 1 stock of the Company (the “Shares”), having sold the Shares to Luis Adrian Arce pursuant to a Stock Purchase Agreement dated 2 June __ 2023 (the “Purchase Agreement”) and as such the Seller has intimate knowledge of the Company’s business operations, 3 technology, clients, trade secrets, competitively sensitive 4 confidential business or professional information that otherwise would not qualify as a trade secret, marketing strategy, or sales plans 5 and other proprietary information (the “Confidential Information”). 6 B. The Company has and will have a protectable interest in 7 connection with Seller’s sale of the Shares and Seller’s knowledge of the Company’s Confidential Information. 8 Exh. A at 2 (emphasis added). Notably, the Agreement does not provide further 9 information regarding the stock purchase or the sale of the business more generally. 10 What is more, although the Agreement is titled “Exhibit B,” neither HOA nor Defendant 11 Peña allege what contract, if any, the Agreement is attached to, nor do the parties 12 include as an attachment to their pleadings the final Purchase Agreement executed by 13 the parties, or any other contract that may be relevant to this Court’s analysis of the 14 underlying business transaction. Without these documents, it is unclear to the Court 15 whether the Agreement was signed as part of the Purchase Agreement or any other 16 relevant contract, such as Defendant Peña’s employment contract with HOA or the 17 Consulting Agreement identified in section 1(b)(iv).8 18 19
20 8 The Court notes that section 2 of the Agreement contains an integration clause 21 referencing an employment agreement and that provides as follows: COMPLETE AGREEMENT. This written Agreement is the final, complete, 22 and exclusive statement and expression of the agreement between the 23 Company and Seller and of all the terms of this Agreement, and it cannot be varied, contradicted, or supplemented by evidence of any prior or 24 contemporaneous oral or written agreements. This written Agreement may not 25 be later modified except by a further writing signed by a duly authorized officer of the Company and Seller, and no term of this Agreement may be 26 waived except by writing signed by the party waiving the benefit of such term. 27 This Agreement hereby supersedes any other employment agreements or understandings, written or oral, between the Company and Seller. 1 HOA does attach the Letter of Intent, signed by Defendant Peña and her co-owner 2 on behalf of HOA, to the Complaint which establishes, inter alia, an estimated sale 3 price of $400,000, an expected settlement date on or before February 15, 2023, and a 4 covenant not to compete barring HOA from soliciting HOA’s clients for a period of five 5 years from the close of escrow. Exh. A at 6–7. However, although the stated purpose 6 of the Letter of Intent is to “outline contingencies relevant to proceeding to final 7 agreement and the terms by which the final agreement of sale will be written,” the Court 8 finds those terms are not dispositive in interpreting the terms of the Agreement pursuant 9 to the integration clause included in the Agreement and given that, by its terms, the 10 Letter of Intent governed the parties’ negotiations and conduct until the close of escrow, 11 at which point a superseding “final agreement of the sale”—with potentially different 12 terms thereto—would be written to settle the transaction. Exh. A at 7. 13 Notwithstanding that the parties failed to provide the Court with potentially 14 relevant documents to assist the Court in its review, a review of the record shows that 15 the following facts are undisputed: 16 • Prior to the sale of HOA, Defendant Peña was an officer, director and 17 owner of 50% of the outstanding and issue stock of HOA. Mot. at 1; 18 Resp. at 11; see also Exh. A at 1. 19 • On June 23, 2023, the parties entered into the Agreement. Compl. ¶ 9; 20 Answer ¶ 9. 21 • The Agreement was related to the “purchase of [Defendant Peña’s] 22 business by [HOA].” Mot. at 1; Resp. at 11–12. 23 • On June 30, 2023, the parties closed on the sale of HOA. Mot. at 1. 24 • Following the execution of the Agreement, Defendant Peña became an 25 employee of HOA. Compl. ¶ 9; Answer ¶ 9. 26 Thus, in accepting the factual allegations in the Complaint as true and construing the 27 Exh. A at 4 (emphasis added). 1 pleadings in the light most favorable to HOA, the Court deems the forgoing undisputed 2 facts sufficient to find the Agreement was made in connection with the sale of 3 Defendant Peña’s entire ownership interest in HOA. See, e.g., Vacco Industries, Inc. v. 4 Van Den Berg, 6 Cal. Rptr. 2d 602, 610 (Cal. Ct. App. 1992), modified (Apr. 14, 1992) 5 (finding that a non-competition agreement that “acknowledged that [defendant] 6 was selling all of his shares” was “expressly motivated by and directly and integrally 7 dependent upon [a] stock sale,” even though the non-competition and stock purchase 8 agreements were entered into at different times and did not reference each other). 9 Accordingly, the Court holds the Agreement was made pursuant to a qualifying 10 transaction under the limited exception of section 16601. 11 Next, the Court will consider, as a matter of law, whether the restrictions outlined 12 in the challenged provisions satisfy the intent and purpose of section 16601. Like in 13 Fillpoint, relied on by the parties, the Court finds they do not. 14 According to Fillpoint, the purpose of section 16601 “is to permit the purchaser 15 of a business to protect himself or itself against competition from the seller which 16 competition would have the effect of reducing the value of the property right that was 17 acquired.” 146 Cal. Rptr. 3d at 200 (internal quotations and citations omitted). To 18 reach its holding that the noncompetition and nonsolicitation covenants in an 19 employment agreement were overbroad and inconsistent with the proposes and terms 20 of section 16601, the court distinguished the facts at issue there9 from other state 21 appellate court decisions analyzing section 16601. Id. For example, the court 22 considered but disregarded: 23 • Hilb, Rogal & Hamilton Ins. Services v. Robb, 39 Cal. Rptr. 2d 887, 896 24 (Cal. Ct. App. 1995), in which there were multiple agreements but only 25 9 “The parties have not cited us to any case with the same facts presented by this case, 26 i.e., a purchase agreement and an employment agreement entered at roughly the same 27 time as part of a single transaction, but containing different covenants not to compete.” Id. at 200. 1 one covenant not to compete contained in the employment agreement; 2 • Vacco, 6 Cal. Rptr. 2d at 606, involving a stock purchase agreement, a 3 separate noncompetition agreement, and an employment agreement 4 containing its own noncompetition agreement; and, 5 • Alliant Ins. Services, Inc. v. Gaddy, 72 Cal. Rptr. 3d 259, 266–272 (Cal. 6 Ct. App. 2008), involving a stock purchase agreement and an employment 7 agreement which contained identical covenants not to compete. 8 See id. (distinguishing Hilb, 39 Cal. Rptr. 2d at 896 (finding an employment contract 9 containing a covenant not to compete for three years after the employee’s termination 10 enforceable as a necessary condition of the merger agreement and rejecting arguments 11 that “section 16601 requires that the covenant be contained in a particular type of 12 document”)); id. at 201–202 (finding Vacco, 6 Cal. Rptr. 2d at 606, “of limited 13 relevance” because “the three documents in question did not cross-reference each other” 14 and “because the trial court in Vacco did not address the covenant not to compete in the 15 employment contract”); id. at 202 (finding Alliant, 72 Cal. Rptr. 3d at 266–272, not 16 instructive because the covenants not to compete were identical). As discussed below, 17 the Court agrees with the parties that an analysis pursuant to Fillpoint is instructive here. 18 Like in Fillpoint, the facts at issue here involve two agreements—the Purchase 19 Agreement and the Agreement—entered at roughly the same time, as part of a single 20 transaction, but containing different restrictive covenants. Here, the recitals in the 21 Agreement refer to the Purchase Agreement. Although the final Purchase Agreement 22 is missing from the record, in accepting the factual allegations in the Complaint as true 23 and construing the pleadings in the light most favorable to HOA, the Court infers that 24 the Letter of Intent is an accurate representation of that agreement. Thus, to the extent 25 HOA alleges that the noncompetition covenant contained in the Letter of Intent is 26 binding on Defendant Peña following the close of escrow, or alternatively, to the extent 27 HOA provides the Letter of Intent as evidence of the terms of the final Purchase 1 restrictions in the Agreement are broader and materially different than those outlined in 2 the Letter of Intent for the following reasons. 3 First, unlike the Letter of Intent, the restrictions in the Agreement go into effect 4 for five years “immediately following the termination of the Consulting Agreement” as 5 opposed to five years “from the Close of Escrow,” with the latter date relating to the 6 effective date of the stock sale as the triggering event. Second, the nonsolicitation 7 covenants in the Agreement contain temporal limitations while the covenant in the 8 Letter of Intent does not. Finally, the restrictions in the noncompetition covenant in the 9 Agreement are much broader than those in the Letter of Intent, including because the 10 Agreement prohibits an expansive breadth of “other activities” that impact Defendant 11 Peña’s future employment upon termination of her employment with HOA, whilst the 12 Letter of Intent immediately protects the value of the property right acquired in the stock 13 purchase by limiting the restriction to solicitation of HOA’s clients. Accordingly, the 14 Court finds the restrictions in the Agreement do not satisfy the intent and purpose of 15 section 16601 because they target Defendant Peña’s fundamental right to pursue her 16 profession. See Fillpoint, 146 Cal. Rptr. 3d at 204 (affirming trial court’s ruling that 17 the “covenants would give the buyer broad protection against competition wherever it 18 happens to have employees or customers, at the expense of the seller’s fundamental 19 right to compete for employees and customers in the marketplace”). 20 ii. Trade Secret Exception 21 As stated, the Court accepts HOA’s allegations in the Complaint as true in 22 holding that the confidential information at issue in this case constitutes trade secrets 23 under California state and federal laws. Compl. ¶¶ 58–59, 68–69. 24 HOA cites to one case, Alliant Insurance Services, Inc. v. Gaddy, in support of 25 its argument that the nonsolicitation clauses in the Agreement are valid to protect 26 HOA’s trade secrets. 72 Cal. Rptr. 3d 259, 271 (Cal. Ct. App. 2008). In Alliant, the 27 California appellate court considered whether, for purpose of issuing a preliminary 1 sale of a business was valid to protect the plaintiff employer’s trade secrets. Id. at 271– 2 272. Under this exception, “[a] covenant for an employee not to solicit the employer’s 3 clients upon termination of the employment may be valid [under section 16600] if 4 necessary to protect the employer’s trade secrets.” Id. at 271; Muggill v. Reuben H. 5 Donnelley Corp., 398 P.2d 147, 149 (Cal. 1965). In finding no abuse of discretion, the 6 appellate court relied on the trial court’s factual findings that 1) the confidential 7 information at issue constituted trade secrets and 2) under the terms of the stock 8 purchase agreement, which were identical to those in defendant employee’s 9 employment agreement, the nonsolicitation covenant “related only to defendant’s 10 employment by [plaintiff], not his sale of [the company]” and was therefore valid to 11 protect trade secrets learned by the defendant employee during the term of their 12 employment. Id. at 271. Accordingly, the court affirmed the trial court’s holding that 13 the nonsolicitation clause was valid under the limited trade secret exception. Id. 14 HOA’s reliance on the limited exception outlined in Alliant is misplaced for 15 several reasons. First, procedurally, Alliant reviewed an order granting a preliminary 16 injunction which involves a different standard of proof than the one used to decide a 17 motion for judgment on the pleadings. Compare id. at 266–267 (affirming grant of 18 preliminary injunction based an abuse of discretion standard) with Thompson v. Impaxx, 19 Inc., 7 Cal. Rptr. 3d 427, 431–432 (Cal. Ct. App. 2003) (reversing judgement on the 20 pleadings in finding that, taking allegations in the complaint as true, the trade secret 21 exception did not apply). Second, Alliant did not consider whether the nonsolicitation 22 clause in the stock purchase agreement was valid on its own terms under the exception 23 because, unlike here, that clause was identical to the one in the employment agreement. 24 Id. at 271–272; see also Fillpoint, 146 Cal. Rptr. 3d at 200 (finding irrelevant and not 25 instructive “any case with[out] the same facts presented by this case” in applying section 26 16600). Third, unlike the court’s reasoning in Alliant, HOA argues here that the 27 nonsolicitation clause relates only to the stock purchase rather than HOA’s employment 1 specifically argues that “[t]here are no facts alleged indicating that the non-competition 2 agreement is an employment agreement of any type and [the Agreement] specifically 3 states on its face that it is related to the purchase of Peña’s stock.” Resp. at 13. Fourth, 4 the relevance of Alliant and the trade secret exception on this Court’s analysis is 5 questionable given that Alliant was decided prior to the California Supreme Court’s 6 landmark ruling in Edwards v. Arthur Andersen LLP, discussed above, in which the 7 Supreme Court expressly declined to “address the applicability of the so-called trade 8 secret exception to section 16600” as the issue was not before the court. Edwards, 189 9 P.3d at 291 n.4. Accordingly, the Court finds that Alliant is not instructive here. 10 Although the Ninth Circuit recognizes a trade secret exception to section 16600, 11 HOA does not cite—nor has this Court found—any Ninth Circuit authority analyzing 12 or upholding a noncompete agreement or clause pursuant to the trade secret exception 13 that would otherwise be invalid under section 16600 and its progeny as established in 14 Edwards. See, e.g., Asset Mktg. Sys., Inc. v. Gagnon, 542 F.3d 748, 758 (9th Cir.2008) 15 (recognizing a trade secret exception to section 16600 but finding the noncompetition 16 agreement invalid because the exception did not apply). Given that HOA does not cite 17 additional authority compelling this Court to find a trade secret exception to the Court’s 18 holding that the Agreement is void under section 16600, the Court finds that no such 19 exception exists under the facts of this case. 20 In light of the foregoing, the Court HEREBY ORDERS the Agreement VOID 21 and UNENFORCEABLE as a matter of law under Cal. Bus. & Prof. Code § 16600 and 22 pursuant to California’s strong public policy of permitting employees the right to pursue 23 a lawful occupation of their own choice. 24 IT IS FURTHER ORDERED Defendant Peña’s motion for judgment on the 25 pleadings is GRANTED as to HOA’s cause of action for Breach of Written Non- 26 Competition and Non-Disclosure Agreement. 27 3. Uncontested Claims 1 remaining claims alleging causes of action for (2) Conversion, (3) Intentional 2 Interference with Contractual Relations, (4) Intentional Interference with Prospective 3 Economic Advantage, (5) Trade Secret Misappropriation Under the Defend Trade 4 Secrets Act under 18 U.S.C. § 1836, and (6) Misappropriation of Trade Secrets under 5 Cal. Civ. Code §3426, Defendant Peña fails to cite any law or facts in support. 6 As to Defendant Peña’s challenge to HOA’s claims for misappropriation of trade 7 secrets, the Court must accept as true HOA’s allegations in the Complaint that the 8 confidential information at issue constitutes trade secrets under California state and 9 federal laws. Compl. ¶¶ 58–59, 68–69. Thus, even under the liberal pleading standard 10 applied to pro se defendants, Fleming, 581 F.3d at 925, Defendant Peña’s argument that 11 the information is not protectable because it is available in the public domain is 12 insufficient under the standard to show she is entitled to judgment as a matter of law. 13 Mot. at 3; Reply at 5. 14 Because Defendant Peña has failed to state a sufficient factual or legal basis in 15 support of her Motion as to the remaining claims, the Court finds that issues of material 16 fact exist, and Defendant Peña is not entitled to judgment as a matter of law. 17 Accordingly, the Court DENIES Defendant Peña’s motion for judgment on the 18 pleadings as to the remaining claims. 19 B. Motion for Sanctions 20 Defendant Peña moves for sanctions arguing that HOA’s claims are without merit 21 and frivolous, and therefore requesting damages for lost wages, benefits loss, job 22 searches, and emotional distress: 23 • $9,000 attorney’s fees; 24 • $64,000 lost wages (Sept. 2024 - April 2025); 25 • $13,200 job search (through April 2025); 26 • $19,200 lost wages (May - July 2025); 27 • $6,400 lost wages (August 2025); 1 • $1,750 job search (May - July 2025); and, 2 • $500.00 job search (August 2025). 3 Reply at 6. Defendant Peña’s original motion also sought sanctions “due to emotional 4 distress, mental anguish.” Mot. at 3. Defendant Peña provides no argument connecting 5 HOA’s claims to her claim for sanctions other than her general argument that the 6 Agreement is void as a matter of law. 7 Under Rule 11, “[a] motion for sanctions must be made separately from any other 8 motion and must describe the specific conduct that allegedly violates Rule 11(b).” Fed. 9 R. Civ. P. 11(c)(2). Here, Defendant Peña improperly files her motion for sanctions in 10 conjunction with her motion for judgment on the pleadings in violation of Rule 11. 11 Defendant Peña also fails to comply with other procedural and substantive requirements 12 of Rule 11, such as providing the offending party substantive and procedural notice of 13 a violation and a reasonable opportunity to respond. 14 Accordingly, the Court DENIES Defendant Peña’s motion for sanctions. 15 III. CONCLUSION 16 IT IS HEREBY ORDERED: 17 1. The Non-Competition and Non-Disclosure Agreement is VOID and 18 UNENFORCEABLE under California law. 19 2. Motion for judgment on the pleadings is GRANTED as to the cause of 20 action for Breach of Written Non-Competition and Non-Disclosure 21 Agreement. 22 3. Motion for judgment on the pleadings is DENIED as to the cause of action 23 for Conversion. 24 4. Motion for judgment on the pleadings is DENIED as to the cause of action 25 for Intentional Interference with Contractual Relations. 26 5. Motion for judgment on the pleadings is DENIED as to the cause of action 27 for Intentional Interference with Prospective Economic Advantage. 1 for Trade Secret Misappropriation Under the Defend Trade Secrets Act 2 under 18 U.S.C. § 1836. 3 7. Motion for judgment on the pleadings is DENIED as to the cause of action 4 for Misappropriation of Trade Secrets under Cal. Civ. Code §3426. 5 8. Motion for sanctions is DENIED. 6 IT IS FURTHER ORDERED the stay on all proceedings previously issued by 7 Court is VACATED. ECF No. 33. The case shall proceed according to a 8 || Superseding Scheduling Order to be issued by the Honorable Magistrate Judge 9 || Michelle M. Pettit. 10 IT IS SO ORDERED. : | | | | 11 |} DATED: March 27, 2026 12 JOHN A. HOUSTON TED STATES DISTRICT JUDGE 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 41