Samuelian v. Life Generations Healthcare

• Docket Number: G061911,G062416,G062426
• Decision Date: 20 August 2024
• Citation: 324 Cal.Rptr.3d 596
• Parties: Robert S. SAMUELIAN et al., Plaintiffs and Respondents, v. LIFE GENERATIONS HEALTHCARE, LLC, et al., Defendants and Appellants.
• Court: California Court of Appeals

324 Cal.Rptr.3d 596

Robert S. SAMUELIAN et al., Plaintiffs and Respondents,

v.LIFE GENERATIONS HEALTHCARE, LLC, et al., Defendants and Appellants.

G061911

G062416

G062426

Court of Appeal, Fourth District, Division 3.

Filed August 20, 2024

Appeal from a judgment of the Superior Court of Orange County, Layne H. Melzer, Judge.Reversed.(Super. Ct.No. 30-2021-01194619)

Horvitz & Levy, Robert H, Wright, Burbank, Melissa B. Whalen and Jeremy B. Rosen, Burbank; Wilson, Elser, Moskowitz, Edelman & Dicker and Gary S. Pancer, Los Angeles; Law Offices of Kevin E. Monson, Kevin E. Monson, Costa Mesa, and David A. Sprowl for Defendant and Appellant Life Generations Healthcare.

Doll Amir Eley, Michael Amir, Mary Glarum, Brett Oberst, Los Angeles; Greines, Martin, Stein & Richland, Timothy Coates, Jeffrey E. Raskin, Los Angeles; Tantalo & Adler, Joel M. Tantalo, Beverly Hills, Michael S. Adler, Los Angeles; Murchison & Cumming, William Naeve and Nancy J. DePasquale, Irvine, for Defendants and Appellants.

Payne & Fears, Daniel L. Rasmussen, Benjamin A. Nix, Irvine; Gibson, Dunn & Crutcher, Blaine H. Evanson, Irvine, and Matt Aidan Getz, Los Angeles, for Plaintiffs and Respondents.

OPINION

MOORE, ACTING P. J.

[1, 2] Absent an applicable exception, "every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void."(Bus. & Prof. Code, § 16600, subd. (a).)¹Our Supreme Court recently clarified in Ixchel Pharma, LLC v. Biogen, Inc.(2020)9 Cal.5th 1130, 1159, 266 Cal.Rptr.3d 665, 470 P.3d 571(Ixchel) that one of two standards applies to determine whether noncompetition agreements are void under section 16600.Restraints are either void per se (the per se standard) or evaluated under a reasonableness test (the reasonableness standard).The former standard applies to restraints arising from "termination of employment or the sale of interest in a business," while the latter applies to "agreements limiting commer- cial dealings and business operations."(Ixchel, at p. 1152, 266 Cal.Rptr.3d 665, 470 P.3d 571.)We are not aware of any authority addressing the applicable standard to cases outside these categories.

This case involves a noncompetition restraint following the sale of a portion of a business interest.Respondents Robert and Stephen Samuelian(collectively, the Samuelians)² co-founded appellantLife Generations Healthcare, LLC(the Company) along with appellantThomas Olds, Jr.Initially, the Samuelians owned nearly half the Company together.They later sold a portion of this interest.In connection with this partial sale, the Company adopted a new operating agreement that restrained its members, including the Samuelians, from competing with the Company.

The Samuelians later filed a dispute in arbitration challenging the enforceability of this noncompetition provision.The arbitrator found the provision arose from the sale of a business interest.As such, he concluded it was invalid per se and rejected the Company’s argument for application of the reasonableness standard under Ixchel.However, prior to the arbitration, the parties had signed an agreement barring the arbitrator from making any errors of law.So, when the Samuelians later petitioned for confirmation of the arbitration award, the Company argued the arbitrator had legally erred by applying the per se standard.The trial court reviewed the arbitrator’s ruling de novo, found no error, and confirmed the award.

On appeal, the Company admits that under Ixchel and other precedent, the per se standard applies to noncompetition restraints arising from the sale of an entire business interest.But it argues no case has held that the per se standard applies to restraints arising from the sale of a partial business interest, as is the case here.It asserts the reasonableness standard should apply in such cases.

[3] After reviewing relevant Supreme Court authority and public policy, we agree with the Company.No case has addressed this issue, and nothing in the policy behind section 16600 calls for application of the per se standard to partial sales.A sale of a partial business interest differs drastically from the sale of an entire business interest.Following a partial sale, the seller remains an owner of the company and may still exercise some degree of control over its operations.Given this context, a noncompetition provision arising from a partial sale cannot be deemed inherently anticompetitive and invalidated per se under section 16600.Rather, it must be scrutinized under the reasonableness standard to determine whether it has procompetitive benefits given the nature of the selling owner’s continuing connection to the business.

Due to our conclusion that the arbitrator applied the wrong standard under section 16600, we do not address the other arguments raised by Olds and the other appellants concerning purported errors that occurred later in the arbitration.The trial court’s judgment confirming the arbitrator’s award is reversed.

FACTS AND PROCEDURAL HISTORY

I.The Company

The Company operates numerous skilled nursing and related healthcare facilities in California and Nevada.It was founded by the Samuelians and Olds in 1998.The Company was initially formed as a limited liability company but incorporated a year later Following incorporation, the Samuelians owned a combined 49.4 percent of the Company, with Steven owning 31.3 percent and Robert owing 18.1 percent.The other owners were appellants Olds (34.7 percent), Fred Smith(5.7 percent) and Lois Mastrocola(4 percent), and nonparties Mark Howlett(4.8 percent), and Paul Haider(1.4 percent).³The Samuelians and Olds were on the Company’s board of directors, and Robert was its general counsel.

Tensions allegedly arose over the years between Olds and the Samuelians over the Company’s direction.In 2007, the parties agreed to a partial buyout of the Samuelians’ interest in the Company and to reorganize the Company from a corporation back to a limited liability company.

On October 25, 2007, the shareholders exchanged them shares in the Company for ownership units in the reorganized limited liability company.That same day, a new operating agreement for the Company (the operating agreement) was entered into by its member—Olds, the Samuelians, Howlett, Smith, Haider, and Mastrocola.The operating agreement specified the Company would initially be managed by three managers, but the number of managers could be changed over time.⁴Olds and the Samuelians were elected as the Company’s first managers.Olds was named president and chief executive officer, and Mastrocola was named secretary and chief financial officer.Mastrocola was later appointed as a manager in 2012.

A few days later, on October 29, the Company contracted to buy nearly half of the Samuelians’ total interest for roughly $61 million.It also agreed to purchase all of Howlett and Haider’s interest in the Company.Following these buyouts, Olds owned 59.4 percent of the Company, Smith owned 9.7 percent, Mastrocola owned 7 percent, and the Samuelians owned a combined 23.9 percent (Steven owned 15.1 percent and Robert owned 8.8 percent).

That same day, Robert resigned from all the positions he held at the Company except for general counsel and his membership in a special committee (the LM Compensation Committee) holding approval rights over the terms of Mastrocola’s employment, including her job duties, compensation, benefits, and termination.Stephen also resigned from all positions he held at the Company except for his membership in the LM Compensation Committee.Despite these resignations, the Samuelians still retained certain voting right as owners of the Company, which are described below.

Under the operating agreement, the Samuelians would remain members on the three-person LM Compensation Committee as long as they were owners of the Company (the Chairman of the Board of Managers would be the third member).Changes to the terms of Mastrocola’s employment require approval from two members on the LM Compensation Committee, so no changes to these terms could be made without consent from at least one of the Samuelians.

Likewise, the operating agreement provides that as long as a Samuelian remained an owner, consent from at least one of them was required (1) for any amendments or changes to the operating agreement or the Company’s articles of organization, (2) for any split, combination, or reclassification of any membership interests, (3) for any transaction or agreement between the Company and a unitholder, unitholder’s family member, or entities affiliated with a unitholder or a unitholder’s family, (4) to increase the number of ownership units that could be granted as options, and (5) to engage the Company in a new line of business.

The operating agreement also requires the Company to provide the Samuelians with (1) monthly financial statements (both audited and unaudited), including balance sheets, income statements, and cash flow statements, and (2) notices of any loan defaults or lawsuits filed against the Company (or its subsidiaries) that could exceed its insurance coverage or affect the value of its ownership units.

Section 6.4 of the operating agreement imposes fiduciary duties on all the Company’s members, including the Samuelians (section 6.4).Section 6.4(a) states, "The Unitholders acknowledge and agree that the provisions of this Section 6.4 are expressions of their fiduciary duties (including, without limitation, the duty of loyalty) to the Company as Unitholders …. "Section 6.4(b) provides that "[n]o Unitholder or Manager shall … Engage in the Business within the State of California except on behalf of the Company"(the noncompetition provision).Section 6.4(e)(i) requires "each Unitholder and Manager … to present to the Company any opportunity to Engage in the Business in California that formally comes to his or her attention in writing"(the corporate...