Swenson v. File

• Decision Date: 29 October 1970
• Citation: 3 Cal.3d 389,90 Cal.Rptr. 580
• Court: California Supreme Court
• Parties: , 475 P.2d 852, 1970 Trade Cases P 73,368 Robert J. SWENSON at al., Plaintiffs and Appellants, v. James S. FILE, Defendant and Respondent. L.A. 29774.

Page 580

90 Cal.Rptr. 580

3 Cal.3d 389, 475 P.2d 852, 1970 Trade Cases P 73,368

Robert J. SWENSON at al., Plaintiffs and Appellants, v. James S. FILE, Defendant and Respondent.

L.A. 29774.

Supreme Court of California In Bank.

Oct. 29, 1970.

Gibson, Dunn & Crutcher and John L. Endicott, Los Angeles, for plaintiffs and appellants.

McCutchen, Doyle, Brown & Enersen and Richard Murray, San Francisco, as amici curiae on behalf of plaintiffs and appellants.

Robert M. Fisk, Pasadena, Richards, Watson & Hemmerling and Glenn R. Watson, Los Angeles, for defendant and respondent.

BURKE, Justice.

Plaintiffs appeal from a judgment in defendant's favor in an action for damages for breach of a covenant not to compete. We have concluded that defendant did not breach the covenant, at least to the extent it is legally enforceable, and that the trial court's judgment should be affirmed.

Plaintiffs and defendant were partners in an accounting firm transacting business from offices in Pasadena and Azusa, in Los Angeles County. Various differences arose between the parties and on October 5, 1961, defendant voluntarily withdrew from the partnership and opened his own accounting practice, with offices in South San Gabriel and Arcadia, also in Los Angeles County. During the five year period from October 5, 1961, to October 5, 1966, defendant performed accounting services in South San Gabriel and Arcadia for several former clients of the partnership, and for several persons having Pasadena addresses. Defendant also rendered services in Pasadena to one client, Engineering Unlimited, whose business defendant had obtained while that company was located in Arcadia, prior to moving its offices to Pasadena, and whose billings during the five year period amounted to no more than 1.2 percent of defendant's total billings. Defendant performed no accounting services in Azusa during this period.

The covenant at issue was contained in subsection J of section 18 of the revised partnership agreement dated October 1, 1960, and provided in pertinent part as follows:

'(J) In consideration of the payments to be made to a retiring partner under the terms of this AGREEMENT, * * * a retiring partner agrees that for a period of five years from the date of his retirement he will enter into the practice of public accountancy only subject to the following restrictions:

'(1) The retired partner will not render service to a client which is or has been a client of the partnership within the last three years prior to the retirement of the retired partner.

'(2) The retired partner will not render service to a client which has its principal office within a radius of twenty miles from any partnership office which existed on the date of his retirement. * * *

'(3) * * * '(4) In the event of breach of this Subsection (J) of this Section Eighteen (18), the offending partner shall be liable to the partnership for the full amount of fees collected or collectible from such prohibited clients.'

The foregoing covenant, which forms the basis for plaintiffs' action herein, was subject to certain provisions of the Business and Professions Code pertaining to restraints of trade. Section 16600, which was enacted in 1941 and was based upon substantially identical language in former Civil Code, section 1673, provides that '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 16602 creates a limited exception in the case of partnerships. As it stood in 1960, when the revised partnership agreement with defendant was executed, section 16602 provided that 'Partners may, upon or in anticipation of a dissolution of the partnership, agree that none of them will carry on a similar business within the same city or town or a specified part thereof, where the partnership business has been transacted.'

Section 16602 was amended effective September 15, 1961, a few weeks prior to defendant's withdrawal from the partnership. As amended, that section provides that 'Any partner may, upon or in anticipation of a dissolution of the partnership, agree that he will not carry on a similar business within a specified county or counties, city or cities, or a part thereof, where the partnership business has been transacted, so long as any other member of the partnership, or any person deriving title to the business or its goodwill from any such other member of the partnership, carries on a like business therein.'

Thus, the 1961 amendment to section 16602 broadened the permissible geographic scope of covenants not to compete from 'the same city or town or a specified part thereof,' to 'a specified county or counties, city or cities, or a part thereof.' ¹ Defendant contends, and the trial court held, that former section 16602 governed the rights of the parties under the revised partnership agreement since the agreement was executed prior to the amendment of that section. We agree with this position. As a general rule, 'all applicable laws in existence when an agreement is made, which laws the parties are presumed to know and to have had in mind, necessarily enter into the contract and form a part of it, without any stipulation to that effect, as if they were expressly referred to and incorporated.' (Alpha Beta Food Markets v. Retail Clerks, 45 Cal.2d 764, 771, 291 P.2d 433, 437.) However, laws enacted subsequent to the execution of an agreement are not ordinarily deemed to become part of the agreement unless its language clearly indicates this to have been the intention of the parties. (See Interinsurance Exchange, etc., v. Ohio Cas. Ins. Co., 58 Cal.2d 142, 148--149, 23 Cal.Rptr. 592, 373 P.2d 640; Equitable B. & L. Assn. v. Wolfangle, 111 Cal.App. 119, 123, 295 P. 388.)

In the Interinsurance case, the insured contended that an exclusionary clause in his automobile liability policy was invalid under the law existing when the policy was issued; the insured argued that an amendment to the Vehicle Code, effective shortly before the collision occurred, had changed the law and validated the clause. We held that, assuming the amendment did change the public policy of this state, nevertheless that amendment would not validate an exclusionary clause which was invalid when the policy was issued. We noted in Interinsurance that 'Corbin states the proper rule as follows: '* * * a bargain that is illegal and void by reason of a statute existing at the time of making is not validated and made enforceable by the subsequent repeal of the statute. Such a rule as this is actually applied, and properly so, if the statute prohibited the making of such a bargain for reasons of public policy as conceived by the legislature.' (6 Corbin, Contracts (1951) p. 1043.) Other outstanding authorities agree (citations).' ² (58 Cal.2d at p. 146, 23 Cal.Rptr. at p. 593, 373 P.2d at p. 641; see also Kaplan v. Nalpak Corp., 158 Cal.App.2d 197, 203, 322 P.2d 226, and Mahlstedt v. Fugit, 79 Cal.App.2d 562, 566, 180 P.2d 777, each involving contracts in restraint of trade.)

Plaintiffs argue that the foregoing rule only applies to 'illegal' contracts, and suggest that covenants not to compete are neither illegal nor against public policy, but are merely voidable or unenforceable to the extent their provisions exceed statutory limits. Initially, any distinction between void and voidable contracts in this regard presumably was laid to rest in the Interinsurance case, wherein this court stated that 'Whether it be the rule in this state that an unlawful contract is void (citation) or only unenforceable (citation) the law here is, and should be, that a contract, or provision in a contract, which contravenes public policy when made is not validated by a later statutory change in that public policy. (Citations.)' (58 Cal.2d at p. 148, 23 Cal.Rptr. at p. 594, 373 P.2d at p. 642.)

Secondly, the opinions in the early cases cited by plaintiffs (City Carpet, etc., Works v. Jones, 102 Cal. 506, 511, 36 P. 841, and Brown v. Kling, 101 Cal. 295, 299, 35 P. 995), no longer stand as authoritative statements regarding the public policy of this state with respect to contracts in restraint of trade. As stated in Pacific Wharf, etc., Co. v. Standard American Dredging Co., 184 Cal. 21, 24--25, 192 P. 847, 849, 'The rule making void contracts in restraint of trade is not based upon any consideration for the party against whom the relief is sought, but upon considerations of sound public policy.' (See also Continental Car-Na-Var Corp. v. Mosely, 24 Cal.2d 104, 110, 148 P.2d 9; Morey v. Paladini, 187 Cal. 727, 736--738, 203 P. 760.) Accordingly, we believe that in making such contracts 'void' to the extent they exceed statutory limitations (Bus. & Prof.Code, § 16600), the Legislature thereby adopted a rule of public policy akin to the statutory provision involved in the Interinsurance case. ³

Plaintiffs further contend that since the covenant not to compete did not come into 'full force and operation' until October 5, 1961, when defendant withdrew from the partnership, therefore amended section 16602 should apply. Plaintiffs argue that the parties could have simply reexecuted the partnership agreement immediately prior to defendant's withdrawal, thereby incorporating the 1961 amendment by operation of law. This argument fails to take into account the rationale underlying the general rule which incorporates into contracts existing, but not subsequent, law. The parties are presumed to have had existing law in mind when they executed their agreement (Alpha Beta Food Markets v. Retail Clerks, Supra, 45 Cal.2d 764, 771, 291 P.2d 433); to hold that subsequent changes in the law which impose greater burdens or responsibilities upon the parties become part of that agreement would result in modifying it without their consent, and would promote uncertainty in commercial transactions. (See Equitable B. & L. Assn....