Bosley Medical Group v. Abramson

• Decision Date: 26 October 1984
• Citation: 161 Cal.App.3d 284,207 Cal.Rptr. 477
• Parties: , 1985-1 Trade Cases P 66,331 BOSLEY MEDICAL GROUP, a medical corporation; L. Lee Bosley, M.D., an individual, Plaintiffs and Respondents, v. Norton R. ABRAMSON, M.D., a medical corporation; Norton R. Abramson, M.D., an individual; and Does 1 to 10 inclusive, Defendants and Appellants. Civ. 69436.
• Court: California Court of Appeals Court of Appeals

Page 477

207 Cal.Rptr. 477

161 Cal.App.3d 284, 1985-1 Trade Cases P 66,331

BOSLEY MEDICAL GROUP, a medical corporation; L. Lee Bosley, M.D., an individual, Plaintiffs and Respondents, v. Norton R. ABRAMSON, M.D., a medical corporation; Norton R. Abramson, M.D., an individual; and Does 1 to 10 inclusive, Defendants and Appellants.

Civ. 69436.

Court of Appeal, Second District, Division 3, California.

Oct. 26, 1984.

As Modified Nov. 9, 1984.

Hearing Denied Dec. 20, 1984.

Marcus Crahan, Jr. and Roger J. Aull, Los Angeles, for plaintiffs and respondents.

Robert W. Eisfelder, Los Angeles, for defendants and appellants.

SOVEN, Associate Justice. ^*

Defendant Norton R. Abramson, M.D., and his medical corporation appeal from a trial court order granting a preliminary injunction in favor of plaintiffs Bosley Medical Group and L. Lee Bosley, M.D.

Facts

Plaintiff Bosley is the president and director of plaintiff Bosley Medical Group, which operates a medical facility specializing in the practice of hair transplantation and male pattern reduction surgery. Defendant Abramson is a medical doctor who practices through his professional corporation.

Defendant first wrote plaintiffs indicating an interest in plaintiffs' practice in May 1979. He was then a clinical instructor in surgery at Stanford University, board certified in ENT medicine, board eligible in emergency room medicine, a fellow in the American Academy of Ophthalmology and Otolaryngology, and had been a Stanford fellow in facial plastic and reconstructive surgery. He had been in private practice for about two years, working for a physician in Palo Alto and practicing cosmetic facial surgery. He was earning between $70,000 and $80,000 a year.

Defendant met several times in late 1979 with plaintiff Bosley or members of plaintiff medical group. Bosley told defendant that he could anticipate earning about one million dollars over a five-year period.

In early 1980, plaintiffs offered defendant a position with the medical group. Defendant began work with plaintiff medical group on May 13, 1980. About two weeks later, ¹ plaintiff Bosley gave defendant an independent contractor's agreement and a stock purchase agreement and advised defendant that he would have to sign those agreements if he wished to stay with the group.

The independent contractor agreement provided that defendant would be paid a percentage of the gross fees, defined defendant's obligations to plaintiff medical group, and stated that either party could terminate the agreement on five days' notice.

The stock purchase agreement provided as follows: Defendant was required to buy nine shares, equal to 9 percent, of plaintiff medical group stock at a price of $10,000, to be paid through a promissory note. He agreed to resell the shares to plaintiffs if he left the medical group, and plaintiffs agreed to pay defendant the purchase price plus 10 percent a year for the shares. Defendant also agreed that for three years after he left plaintiff medical group, he would not engage in a practice similar to plaintiffs' practice within certain counties. The purpose of the stock purchase agreement was to provide an "additional incentive" for defendant.

Defendant worked for the medical group from May 1980 through December 31, 1982. He earned the following amounts: In 1980, $60,500; in 1981, $207,100; in 1982, $158,300. ² He also received a total of $1,417 in dividends on the shares but paid $1,633 in interest on the promissory note for the shares.

In 1980, the net receipts of plaintiff medical group were $864,000, of which plaintiff Bosley received $841,000 in salary and pension contributions, with about $23,000 remaining for distribution to the shareholders. In 1981, plaintiff medical group's net receipts were again about $864,000, of which plaintiff Bosley received $810,000 as salary, with $54,000 remaining for distribution to shareholders. Plaintiff Bosley apparently owned at least 73 percent of the stock in plaintiff medical group.

Various disputes arose between the parties. Defendant quit the group, as noted, effective December 31, 1982, and sold back his shares to plaintiff medical group. He immediately opened a practice under the name of the California Hair Transplant Center Medical Group. He advertised that he had performed over 75,000 grafts and over 450 scalp reductions. Until defendant came to work for plaintiff medical group, he had performed one scalp reduction and about ten hair transplantation surgeries.

In January 1983, plaintiffs filed a complaint alleging a breach of contract and seeking declaratory and injunctive relief. In June 1983, the court granted a preliminary injunction. Defendant was enjoined, consistent with the stock purchase agreement, from engaging in the business or practice of hair restoration services within six southern California counties and San Francisco.

Discussion

Defendant contends that the stock purchase agreement is a sham devised to circumvent state policy against agreements in restraint of business and professions, that plaintiff medical group corporation is merely a "pass through" for the benefit of plaintiff Bosley, that the form stock purchase agreement is an unconscionable adhesion contract, and that defendant and his medical corporation were not competing with plaintiffs.

We agree that the stock purchase agreement is a sham devised to circumvent our state policy against agreements which prevent the practice of a business or profession, and need not reach any other issue raised by defendant. We conclude that the provision contained in the stock purchase agreement that defendant will not compete with plaintiffs for a 3-year period is void and unenforceable.

In the trial court and on appeal, plaintiffs rely on Business and Professions Code section 16601. That section, discussed in detail below, provides as relevant: "... [A]ny shareholder ... selling ... all his shares ... may agree with the buyer to refrain from carrying on a similar business...."

Section 16601 is contained in that portion of the Business and Professions Code dealing with contracts in restraint of trade. Section 16600 provides generally that contracts which prevent anyone from engaging in a lawful profession, trade or business are void. Section 16601 provides generally that any one who sells the goodwill of a business or all the shares of a corporation may agree to refrain from carrying on a similar business. Section 16602 provides generally that any partner as part of a partnership dissolution may agree not to compete with the former partnership business.

Although at common law and in many states, a restraint on the practice of a trade or occupation, even as applied to a former employee, is valid if reasonable (see Rest.Contracts 2d, § 188, pp. 45-47; 14 Williston on Contracts (3d ed. 1972), § 1636, p. 88, et seq., § 1637, p. 103, et seq.), the so-called rule of reasonableness was rejected by this state in 1872. That year Civil Code sections 1673 through 1675--the predecessor sections to Business and Professions Code sections 16600 through 16602--were enacted. At least since 1872, a non-competition agreement has been void unless specifically authorized by sections 16601 or 16602. (See Note (1953) 26 S.Cal.L.Rev. 208, 209.)

Thus, an agreement by an employee or independent contractor not to compete with his employer after leaving that employment is void. (E.g., Gordon Termite Control v. Terrones (1978) 84 Cal.App.3d 176, 178, 148 Cal.Rptr. 310.) Before section 16601 was amended in 1945, a person who sold all his shares in a corporation could not be enjoined from competing with the buyer because the seller could not dispose of the goodwill of the corporation. (Merchants' Ad-Sign Co. v. Sterling (1899) 124 Cal. 429, 434, 57 P. 468; see also, Radiant Industries, Inc. v. Skirvin (1973) 33 Cal.App.3d 401, 403, 109 Cal.Rptr. 96.)

In 1945, however, Business and Professions Code section 16601 was amended to read: "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, ... may agree with the buyer to refrain from carrying on a similar business...." (Stats. 1945, ch. 671, p. 1341, § 1.) ³

In 1963, section 16601 was amended to add any shareholder who sells "all or substantially all" of a corporation's "operating assets together with the goodwill of the corporation" or of a division or subsidiary of the corporation, "or all of the shares of any subsidiary, ...."

In summary, until 1945, only a person selling the goodwill of a business or a partner in a dissolving partnership could enter into an enforceable non-competition agreement. In 1945, another exception was made for "any shareholder ... selling ... all his shares...."

The purpose of the 1945 amendment to section 16601 is contained in a letter from sponsoring Senator Quinn and a memorandum prepared for the committee which twice approved the bill in its amended form (see 1945 Leg.J., S.B. 984) and for the governor who signed the bill. The memorandum points out that the court's interpretation in Merchants' Ad-Sign Co. v. Sterling, supra, 124 Cal. 429, 57 P. 468, was very technical, and was based on the fact that when the predecessor sections to Business and Professions Code sections 16600, 16601 and 16602 were enacted, "the small trading corporation was practically unknown and partnership was the vogue ..." The memorandum states that the benefits of the amendment to section 16601 would flow most conspicuously to the "stockholder in relatively small corporations ... where the customers or clients have become used to and appreciate the personal service of the vendor stockholder...." In such cases, "the ability of the vendor stockholder to validly undertake that he will not engage in competition with the corporation, of which he has ceased to be a stockholder, may well mean that he can not get the price for his shares which he might if...