Kaplan v. Nalpak Corp.

• Decision Date: 05 March 1958
• Citation: 158 Cal.App.2d 197,322 P.2d 226
• Court: California Court of Appeals
• Parties: Louis H. KAPLAN, Plaintiff and Appellant, v. NALPAK CORPORATION, a California corporation, and Laz Freedman, Defendants and Respondents. Civ. 22670.

Page 226

322 P.2d 226

158 Cal.App.2d 197

Louis H. KAPLAN, Plaintiff and Appellant, v.NALPAK CORPORATION, a California corporation, and Laz Freedman, Defendants and Respondents.

Civ. 22670.

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

March 5, 1958.

Harry Brody, Los Angeles, for appellant.

J. Jay Shapiro, North Hollywood, and Paul P. Selvin, Los Angeles, for respondents.

HERNDON, Justice.

Appeal from a declaratory judgment which determines the territorial limits within which appellant is legally bound to refrain from competitive business activity under the terms of a covenant contained in a contract whereby appellant Kaplan sold to respondent Freedman all his shares in respondentNalpak Corporation.

The cause was submitted to the trial court upon a stipulated statement of facts.Appellant and respondent Freedman, hereinafter referred to as respondent,' each owned one-half the issued and outstanding shares of respondentNalpak Corporation, hereinafter referred to as the 'corporation.'The corporation was engaged in the manufacture and sale of hand trucks, dollies and other industrial equipment.Pursuant to a written agreement of sale dated March 21, 1956, respondent purchased all of appellant's stock.By the terms of the contract, appellant, the selling shareholder, promised as follows: '5.Kaplan further agrees not to re-establish, reopen, or in any manner become interested, directly or indirectly, either as an employee, owner, partner, agent, stockholder, director or officer of a corporation, or otherwise, in any business, trade, or occupation, the same as, similar or competitive to the business of Nalpak Corporation, within California and/or Arizona, for a term of Five (5) years from the date of this Agreement [continuing with exceptions not in issue] * * *.'

It appears from the stipulation that both parties were represented by counsel in the negotiation of this agreement.In August of 1956, five months later, appellant filed his complaint for declaratory relief alleging the existence of several controversial issues.During the trial, however, the dispute was narrowed to the single issue as to the extent of the territory within which the noncompetition covenant was valid and enforceable.

With respect to the geographical extent of Nalpak's operations, the parties stipulated as follows: '* * * that the defendantNalpak Corporation has and prior to March 21, 1956, has had customers and sells and has sold to these customers in substantial amounts in the following counties of the State of California: Alameda, Contra Costa, Fresno, Humbolt, Imperial, Inyo, Kern, Kings, Los Angeles, Marin, Mendocino, Merced, Monterey, Orange, Riverside, Sacramento, San Bernardino, San Diego, San Francisco, San Joaquin, San Louis [sic] Obispo, San Mateo, Santa Barbara, Santa Clara, Santa Cruz, Solano, Sonoma, Stanislaus, Tulare, and Ventura.The defendants concede that they had no plant physical structure, or other place of business from which it either manufactured, or shipped merchandise other than in Los Angeles at the time of the agreement, March 21, 1956; and that since the agreement the defendant NALPAK has a warehouse in San Francisco for which they pay $75.00 a month and have one employee, which warehouse was opened in April, 1956.'

The applicable statutory provisions were enacted in 1941 as sections 16600and16601 of the Business and Professions Code:

' § 16600.Contracts void.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.'

' § 16601.Exceptions: Sale of good will or corporate shares.Any person who sells the good will 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 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, or any person deriving title to the good will or shares from him, carries on a like business therein.'¹

The trial court agreed with respondents' contention that appellant's agreement to refrain from competition is valid in all of the thirty specified counties of California in which, according to the stipulation, the corporation had customers to whom it was making sales 'in substantial amounts' at the date of the contract.

Appellant contended below, and now contends here, that his promise is not valid or enforceable beyond the limits of Los Angeles County.The essence of his argument is that the expression contained in section 16601, supra, 'county or counties * * * in which the business * * * has been carried on * * *' must be construed to mean 'where the business is located,' that is to say, in the county or counties in which the corporation 'had a plant, physical structure or other place of business.'

Stated in another way, it is appellant's contention that under the stipulated facts it must be held as a matter of law that, although the corporation 'had customers' and 'sold to these customers in substantial amounts' in the several specified counties other than Los Angeles, its business had not been 'carried on' in those other counties because it 'had no plant, physical structure, or other place of business from which it either manufactured or shipped merchandise other than in Los Angeles at the time of the agreement.'

We have concluded, after a review of the authorities hereinafter discussed that appellant's contention is untenable.The cities or counties in which a corporation's business 'has been carried on' within the meaning of section 16601 of the Business and Professions Code are not necessarily limited to those in which it has maintained plants, warehouses, stores or other physical structures.

At common law a contractuar restriction upon competition, where its imposition was incident to the sale of a business, was valid and enforceable if the restriction was found reasonable in its duration and territorial scope.There was recognition of a logical relationship between the permissible territorial scope of the restriction and the limits of the area in which the good will of the business had been established.It was the policy of the law, within reasonable limits, to protect the purchaser in the enjoyment of the good will which he had purchased and paid for.City Carpet Beating, etc., Works v. Jones, 102 Cal. 506, 36 P. 841;33 Cal.Jur.2d 377, § 35;58 C.J.S.Monopolies§ 84, p. 1098.

Prior to the enactment in 1941 of sections 16600 et seq. of the Business and Professions Code, the statutory law of California applicable to this type of contractual restraint was found in now-repealed sections 1673and1674 of the Civil Code reading as follows:

' § 1673.Every contract by which any one is restrained from exercising a lawful profession, trade, or business of any kind, otherwise than is provided by the next two sections, is to that extent void.'

' § 1674.One who sells the good will of a business may agree with the buyer to refrain from carrying on a similar business within a specified county, city, or a part thereof, so long as the buyer, or any one deriving title to the goodwill from him, carries on a like business therein.'

It is immediately obvious that former Civil Code section 1674 was substantially more restrictive than is the presently effective statute.Whereas the former limited the permissible scope of the restraint to 'a specified county, city, or part thereof,' the present statute extends it to 'a specified county or counties, city or cities, or a part thereof, in which the business * * * has been carried on.'The policy implicit in section 16601 of the Business and Professions Code seems more nearly consistent with the common law rule under which the territorial limits for permissible operation of covenants in restraint of competition were co-extensive with the area...