Opinion
A161054
03-15-2022
GREENLINK FINANCIAL, LLC, Plaintiff and Appellant, v. FREEDOM DEBT RELIEF, LLC, Defendant and Respondent.
NOT TO BE PUBLISHED
San Mateo County Super. Ct. No. 19-CIV-07211
MAYFIELD, J. [*]
Plaintiff GreenLink Financial, LLC (GreenLink) sued defendant Freedom Debt Relief, LLC (Freedom or FDR), seeking to invalidate purported non-compete provisions in a business agreement between the parties. Freedom moved to dismiss the action on the ground of inconvenient forum, as the agreement requires any disputes to be litigated in Arizona under Arizona law.
While the motion was pending, the California Supreme Court decided Ixchel Pharma, LLC v. Biogen, Inc. (2020) 9 Cal.5th 1130 (Ixchel). The trial court subsequently granted Freedom's motion to dismiss, concluding that the parties' choice of law and choice of forum should be enforced because Arizona law (allowing reasonable non-compete provisions) is not contrary to a fundamental policy of California. In so doing, the trial court relied on Ixchel for the proposition that California has "long applied a reasonableness standard to contractual restraints on business operations and commercial dealings." (Id. at p. 1159.)
On appeal, GreenLink argues that the order should be reversed because Ixchel does not apply to the non-compete provisions here. GreenLink contends that these non-compete provisions are void per se under California law and contrary to California's fundamental policy of open competition, and thus the forum selection clause cannot be enforced. We disagree and affirm.
BACKGROUND
Freedom describes itself as a "consumer debt settlement company" that "helps its clients by negotiating with their creditors to obtain debt settlements at significant discounts." According to Freedom, its executive offices are located in San Mateo, California, but its debt relief programs are "predominantly conducted in Tempe and Phoenix, Arizona." While Freedom directly engages with customers, it also enters into wholesale partner agreements to market, offer, and sell Freedom's services. GreenLink, a corporation whose only office is in California, was one such wholesale partner.
Agreement
In March 2014, GreenLink and Freedom entered into an Independent Wholesale Partner Agreement (Agreement) by which GreenLink would refer customers to Freedom's debt resolution programs in exchange for upfront and additional retention-based fees paid by Freedom.
Section 7.2 of the Agreement is titled "Non-Solicitation" and provides, in relevant part: "During the term of this Agreement and for a period of eighteen (18) months thereafter, [GreenLink] agrees not to hire, contract with, or solicit for hire any FDR or Freedom Financial Network ('FFN') employees or employees known to be working for other FDR Wholesale partners."
Section 8 of the Agreement is titled "Non-Compete & Other Items" and contains three subparts. Pursuant to section 8.1, GreenLink "acknowledges and agrees" that "FDR is making large upfront Partner Fee payments in advance of any program fees paid by Clients to FDR for the express purpose of financing the working capital needs of Partner's business." "Accordingly . . . [GreenLink] acknowledges and agrees that neither [GreenLink] nor its employees, affiliates, agents, representations, owners, directors or officers shall, directly or indirectly, offer, sell, provide or otherwise engage in the Business in FDR's permissible geographies (see Exhibit A for a current list which is subject to change) for . . . twelve (12) months following [GreenLink's] election in writing to no longer receive the upfront commission payment option from FDR as described in section 6 above (in which case [GreenLink] would either terminate the Agreement or, elect the pro-rata payment option offered by FDR under the pricing terms in effect at the time of such election.) ('Exclusivity Period')."
Sections 8.2 and 8.3 of the Agreement prohibit GreenLink from soliciting or appropriating Freedom's clients or customers for any other products or services.
The Agreement defines "Business" as "debt settlement, debt negotiation, debt resolution and debt management services." It defines "Clients" as "Customers who are referred by [GreenLink] per the terms of this Agreement" and were either approved for enrollment in Freedom's debt resolution program or referred to a third-party settlement company. The Agreement defines "Customers" to include "consumers residing in the geographies listed on Exhibit A" who satisfy Freedom's enrollment criteria. Exhibit A identifies 34 "Permissible Geographies"-30 states and four territories.
Section 13.2 provides that the Agreement "shall be construed and interpreted in accordance with the laws of the State of Arizona applicable to agreements made in said State. Parties agree that the venue for any dispute will be in Phoenix, Arizona."
In November 2019, GreenLink sent Freedom a notice of termination of the Agreement. It stated that Freedom had "been unable to assist GreenLink on any of its requests," and that GreenLink had "shut its doors and laid off its employees." GreenLink also requested it "be released from Section 8.1's Non-Compete clause in order for GreenLink to seek solution elsewhere." Freedom agreed to an immediate termination of the Agreement, but stated that the non-compete was "of significant value to FDR" and a "significant inducement[] to entering into the agreement." Accordingly, Freedom was open to "appropriate compensation for a release of the non-compete provision."
Complaint
In December 2019, GreenLink filed a complaint in San Mateo County against Freedom asserting causes of action for declaratory relief, rescission, and violation of California's Unfair Competition Law (Bus. & Prof. Code § 17200). It alleged that sections 7.2, 8.1, 8.2, and 8.3 of the Agreement were non-compete provisions. GreenLink sought a judicial determination that these non-compete provisions were void and unenforceable, as well as injunctive relief, restitution, and damages.
All further statutory references are to the Business and Professions Code unless otherwise indicated.
Motion to Dismiss
Freedom moved to dismiss or stay the action on the ground of inconvenient forum. In May 2020, the trial court issued a tentative ruling to deny the motion. It found that GreenLink and Freedom, and their transaction, had a substantial relationship to Arizona and there was a reasonable basis for the parties' choice of law and forum. It determined, however, that Arizona law allowing "reasonable non-compete provisions" was contrary to the policy of California as reflected in section 16600: "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."
The hearing on Freedom's motion was delayed due to COVID-19. In August 2020, Freedom submitted a notice of supplemental authority on Ixchel. In September 2020, the trial court issued its order granting the motion and dismissing Freedom's complaint with prejudice. As in its tentative, the court found that GreenLink and Freedom, and their transaction, had a substantial relationship to Arizona and there was a reasonable basis for the parties' choice of law and forum. It ultimately concluded, however, that there was no conflict between Arizona law and a fundamental policy of California.
Citing Ixchel, the trial court explained that the California Supreme Court has "declined to categorically invalidate all agreements limiting the freedom to engage in trade" under section 16600. (Ixchel, supra, 9 Cal.5th at p. 1151.) Instead, it has "generally invalidated agreements not to compete upon the termination of employment or upon the sale of interest in a business without inquiring into their reasonableness, while invalidating other contractual restraints on businesses operations and commercial dealings only if such restraints were unreasonable." (Ibid.) Finding the non-compete at issue here involved "businesses operations and commercial dealings," the trial court concluded that Arizona law was not contrary to a fundamental policy of California and thus enforced the parties' choice of law and choice of forum.
This appeal followed.
DISCUSSION
I. General Framework
In determining whether to enforce contractual choice-of-law and choice-of-forum provisions, courts apply a three-step approach set forth in section 187 of the Restatement Second of Conflict of Laws. (Nedlloyd Lines B.V. v. Superior Court (1992) 3 Cal.4th 459, 464 (Nedlloyd).) On the first step, the court must determine "(1) whether the chosen state has a substantial relationship to the parties or their transaction, or (2) whether there is any other reasonable basis for the parties' choice of law." (Id. at p. 466.) The party seeking to enforce the provisions bears the burden to show either prong is met. (Washington Mutual Bank v. Superior Court (2001) 24 Cal.4th 906, 917 (Washington Mutual).) Here, the trial court found that both prongs were met: GreenLink and Freedom, and their transaction, had a substantial relationship to Arizona and there was a reasonable basis for their choice of law and forum. GreenLink does not challenge this finding on appeal.
In the introduction to its opening brief, GreenLink claims "Arizona does not have any interest in this lawsuit between two parties headquartered in California concerning a matter of California law." Such a claim, without specific argument or supporting authority, is insufficient to raise an argument on this first step. (Cal. Rules of Court, rule 8.204, subd. (a)(1).)
We thus move to the second step of the analysis: whether the chosen state's law is "contrary to a fundamental policy of California." (Nedlloyd, supra, 3 Cal.4th at p. 466.) If no fundamental conflict is found on this step, that is the end of the inquiry and the choice-of-law and choice-of-forum provisions shall be enforced. (Ibid.) As Nedlloyd recognized, this approach "reflect[s] strong policy considerations favoring the enforcement of freely negotiated choice-of-law clauses." (Id. at p. 462.) If there is a fundamental conflict, however, the court must then proceed to the third step to determine whether California has a" 'materially greater interest than the chosen state in the determination of the particular issue.'" (Id. at p. 466, quoting Rest.2d Conf. of Laws, § 187, subd. (2).) If it does, the provisions shall not be enforced "for the obvious reason that in such circumstance we will decline to enforce a law contrary to this state's fundamental policy." (Nedlloyd, at p. 466.)
The instant appeal focuses on the second step of this analysis. Both parties agree that the state law chosen in the Agreement-Arizona-applies a reasonableness standard to determine whether a non-compete provision is valid or enforceable. (See, e.g., Valley Med. Specialists v. Farber (1999) 194 Ariz. 363, 367.) GreenLink, however, argues that there is a fundamental conflict here because under California law and policy, the non-compete provisions in this Agreement are not subject to any reasonableness test; they are void per se.
Before turning to the merits of the argument, however, we first address who bears the burden on this step. Freedom relies on the general rule that the party challenging enforcement of choice-of-law and choice-of-forum provisions bears the burden. (Washington Mutual, supra, 24 Cal.4th at p. 917.) GreenLink, however, contends that an exception to the general rule applies here: when the underlying claims in an action are based on "unwaivable rights created by California statutes," the burden is reversed. (Verdugo v. Alliantgroup, L.P. (2015) 237 Cal.App.4th 141, 147 (Verdugo).) "In that situation, the party seeking to enforce the forum selection clause bears the burden to show litigating the claims in the contractually-designated forum 'will not diminish in any way the substantive rights afforded . . . under California law.'" (Ibid.)
We are not persuaded that GreenLink meets this exception. In Verdugo, the plaintiff based her claims on unwaivable statutory rights under the Labor Code, as section 219, subdivision (a) of the Labor Code provides such rights cannot" 'in any way be contravened or set aside by a private agreement, whether written, oral, or implied.'" (Verdugo, supra, 237 Cal.App.4th at p. 150.) In Handoush v. Lease Finance Group, LLC (2019) 41 Cal.App.5th 729, the plaintiff's claims implicated his right to a jury trial, which is unwaivable in pre-dispute contracts under California law. (Id. at p. 737.) In America Online, Inc. v. Superior Court (2001) 90 Cal.App.4th 1 (America Online), the plaintiff alleged violations of the California Consumers Legal Remedies Act (CLRA) (Civ. Code, § 1750 et seq.), which contains an anti-waiver provision. (America Online, at p. 10.)
Unlike the rights asserted in these cases, Ixchel makes clear that section 16600 does not afford businesses with an unwaivable right. To the contrary, Ixchel concluded that "section 16600 is best read not to render void per se all contractual restraints on business dealings, but rather to subject such restraints to a rule of reason." (Ixchel, supra, 9 Cal.5th at p. 1150.) In other words, a business may waive its section 16600 rights by agreeing to a contractual provision that reasonably restricts its dealings and operations. Accordingly, we are not persuaded by GreenLink's citations to authority regarding section 16600 rights for individuals. (Weber, Lipshie & Co. v. Christian (1997) 52 Cal.App.4th 645, 659 [individual accountant "could not by agreement waive the benefit afforded" under section 16600]; South Bay Radiology Medical Assoc. v. W.M. Asher, Inc. (1990) 220 Cal.App.3d 1074, 1080-1081 [partnership agreement would be rendered void if individual doctor could establish violation of section 16600].) We thus conclude GreenLink bears the burden to show that Arizona law is contrary to a fundamental policy of California. (Nedlloyd, supra, 3 Cal.4th at p. 466.)
II. Standard of Review
With this framework in mind, we turn next to the standard of review applicable to the enforcement of a forum selection clause. Both parties agree that the majority of courts, including our court, have reviewed such determinations for abuse of discretion. (E.g., America Online, supra, 90 Cal.App.4th at p. 9.) The parties also agree that the minority view, applying a substantial evidence standard of review, does not present "significant"" 'practical differences'" because both standards" 'entail considerable deference to the fact-finding tribunal.'" (Drulias v. 1st Century Bancshares, Inc. (2018) 30 Cal.App.5th 696, 704.)
GreenLink, however, argues that we should review the ruling here de novo because it involves a "pure question of law." To support this position, GreenLink cites to a single case, Investors Equity Life Holding Co. v. Schmidt (2011) 195 Cal.App.4th 1519 (Investors Equity), where the appellate court applied such a standard to review a ruling on a forum non conveniens motion. Investors Equity, however, reviewed the ruling de novo for an entirely different reason. It explained that on a forum non conveniens motion, a trial court must first make a "threshold determination" that the alternate forum is a "suitable place" for trial, meaning there is jurisdiction and the case is not barred by a statute of limitations, and can then proceed with weighing the various factors and interests to determine whether to grant the motion. (Id. at p. 1528; Chong v. Superior Court (1997) 58 Cal.App.4th 1032, 1037.) As this threshold inquiry involves a" 'nondiscretionary determination, '" it is reviewed de novo. (Investors Equity, at p. 1036.) GreenLink's appeal does not concern any such threshold inquiry made by the trial court. Instead, we are tasked with reviewing the same determination we reviewed in America Online for abuse of discretion: whether enforcement of a contractual forum selection clause would violate fundamental California policy. (America Online, supra, 90 Cal.App.4th at p. 18.) We thus apply the abuse of discretion standard here.
III. Ixchel
We now turn to the central issue in this appeal: whether the trial court abused its discretion in concluding, based on Ixchel, that Arizona law was not contrary to a fundamental California policy. In Ixchel, the plaintiff biotechnology company entered into an agreement with Forward Pharma (Forward) for joint development of a drug containing dimethyl fumarate (DMF). (Ixchel, supra, 9 Cal.5th at p. 1138.) While Ixchel and Forward were working together, Forward had a patent dispute with another company, Biogen, Inc. (Biogen). (Ibid.) Forward and Biogen entered into a settlement and license agreement that resolved the dispute, but required Forward to terminate its contract with Ixchel and any other contracts related to the development of drugs containing DMF. (Id. at pp. 1138-1139.) Forward terminated its agreement with Ixchel. (Id. at p. 1139.) Ixchel then sued Biogen in federal court, claiming that the agreement had "restrained Forward from engaging in lawful business with Ixchel and any other entity to develop neurological treatments containing DMF." (Id. at p. 1140.)
The district court dismissed the complaint, concluding that the agreement must be analyzed under a "rule of reason" and that section 16600 does not apply outside the employment context. (Ixchel, supra, 9 Cal.5th at p. 1140.) On appeal, the Ninth Circuit certified the following question to the California Supreme Court: "Does section 16600 . . . void a contract by which a business is restrained from engaging in a lawful trade or business with another business?" (Ibid.) The California Supreme Court confirmed that section 16600 applies to contracts in the business context. (Id. at p. 1149.) Given both parties had already conceded this point, however, the California Supreme Court provided further guidance to the Ninth Circuit by addressing the following question: whether a rule of reason applies "to evaluate whether restraints on trade in business contracts are void under section 16600." (Ibid.)
Ixchel answered yes. It concluded that, despite its plain language suggesting all restraints on trade are "per se invalid unless certain exceptions apply," section 16600 is "best read not to render void per se all contractual restraints on business dealings, but rather to subject such restraints to a rule of reason." (Ixchel, supra, 9 Cal.5th at p. 1150.) It first looked to the statutory history, noting the provision was originally enacted "against the backdrop of well-established common law prohibitions against restraints of trade." (Id. at p. 1151.) The Code Commissioners' Note explained the provision was enacted in response to" 'modern decisions'" that allowed contractual restraints to a" 'dangerous extent, '" suggesting that it was not intended to invalidate all restraints on trade. (Id. at pp. 1151-1152.) Ixchel also considered section 16600 in its"' "broader statutory context," '" "alongside another antitrust statute, the Cartwright Act (§ 16700 et seq.), which we have construed to permit reasonable restraints of trade." (Ixchel, at p. 1151.) Ixchel reasoned that this context "further supports the conclusion that a rule of reason applies to contractual restraints on business operations and commercial dealings under section 16600." (Ibid.)
The California Supreme Court then turned to its own precedent, noting "two discernible categories of holdings" had emerged: (1) generally invalidating all agreements not to compete "upon the termination of employment or upon the sale of interest in a business," and (2) invalidating "other contractual restraints on businesses operations and commercial dealings" only if such restraints were unreasonable. (Ixchel, supra, 9 Cal.5th at p. 1151.) In other words, it had interpreted section 16600 "more strictly" for restraints in the first category. (Ixchel, at p. 1156.) As for the second category, however, case law had "gradually evolved to evaluate contractual restraints on business operations and commercial dealings based on a reasonableness standard." (Ibid.) Ixchel summarized its survey of precedent construing section 16600 to "reveal[] that we have long applied a reasonableness standard to contractual restraints on business operations and commercial dealings." (Ixchel, at p. 1159.)
Finally, Ixchel explained that it was "mindful of the consequences of strictly interpreting the language of section 16600 to invalidate all contracts that limit the freedom to engage in commercial dealing," as such arrangements "can have procompetitive effects since they 'enable long-term planning on the basis of known costs,' 'give protection against price fluctuations, and-of particular advantage to a newcomer to the field to whom it is important to know what capital expenditures are justified-offer the possibility of a predictable market.'" (Ixchel, supra, 9 Cal.5th at pp. 1160-1161.) As for the particular agreement between Forward and Biogen, Ixchel held that "a rule of reason applies to determine the validity of a contractual provision by which a business is restrained from engaging in a lawful trade or business with another business." (Id. at p. 1162.)
GreenLink argues that the trial court abused its discretion in applying Ixchel to the non-compete provisions of the Agreement here for three reasons. First, GreenLink contends that the narrow holding in Ixchel-that the reasonableness standard applies to a restraint of trade "with another business"-does not apply because sections 8.1, 8.2, and 8.3 of the Agreement prohibit GreenLink from doing business with customers in the 34 identified geographies. While we agree that the purported restraints here are not necessarily "with another business," Ixchel reached a far broader conclusion: that section 16600 is "best read not to render void per se all contractual restraints on business dealings, but rather to subject such restraints to a rule of reason," and thus "a rule of reason applies to contractual restraints on business operations and commercial dealings under section 16600." (Ixchel, supra, 9 Cal.5th at p. 1151 .) The purported non-compete provisions in the Agreement do exactly that, restraining GreenLink's "business operations and commercial dealings" by preventing it from engaging in debt settlement, debt negotiation, debt resolution and debt management services in certain geographies. (Ibid.) Moreover, we are not persuaded that such provisions are invalid per se because they restrain GreenLink from engaging with customers. Courts have applied a reasonableness standard to such restraints. (See Martikian v. Hong (1985) 164 Cal.App.3d 1130, 1133 [rule of reason applies to contract between shop owners not to sell certain groceries]; Dayton Time Lock Service, Inc. v. Silent Watchman Corp. (1975) 52 Cal.App.3d 1, 6 (Dayton) [agreement not to compete for customers in particular territories was not necessarily invalid].)
Second, GreenLink argues that Ixchel must be limited to its particular context-an "in-term, exclusive dealing arrangement" like the one between Ixchel and Forward-because post-termination, "forward looking" covenants not to compete have been treated differently as void per se. To support this position, GreenLink cites authority that Ixchel identified in its first category of case law: where section 16600 is interpreted "more strictly" for restraints "upon the termination of employment or upon the sale of interest in a business . . . ." (Ixchel, supra, 9 Cal.5th at pp. 1151, 1156.) In Edwards v. Arthur Andersen, LLP (2008) 44 Cal.4th 937 (Edwards), for example, an individual accountant had signed a noncompetition agreement with his employer that prohibited him for working for or soliciting certain clients following his termination. (Id. at p. 942.) Edwards concluded that the agreement was invalid under section 16600, as the law "protects Californians and ensures 'that every citizen shall retain the right to pursue any lawful employment and enterprise of their choice.'" (Id. at p. 946.) GreenLink's reliance on this authority is misplaced because, as it concedes, the non-compete provisions here do not fall under this first category identified in Ixchel. GreenLink was not Freedom's employee, and there was no sale of interest in a business. Instead, the provisions of the Agreement here fall under the second category: contractual restraints on businesses operations and commercial dealings. (Ixchel, at p. 1156.) Under Ixchel, these provisions are subject to the rule of reason. (Ibid.)
The other cases cited by GreenLink do not alter our conclusion. (Ixchel, supra, 9 Cal.5th at p. 1151.) Dayton did not address any distinction between in-term and post-termination covenants because the defendant conceded its post-franchise anti-competition provision violated section 16600. (Dayton, supra, 52 Cal.App.3d at p. 6.) Martinez v. Martinez (1953) 41 Cal.2d 704 involved the sale of interest in a ship supply business (again, a case in Ixchel's first category), but ultimately upheld a time-restricted version of the non-compete as enforceable under section 16601, a statutory exception to section 16600 coverage. (Id. at p. 706.) Swenson v. File (1970) 3 Cal.3d 389 invalidated a partnership agreement's non-compete based on section 16602, another statutory exception to section 16600 coverage. (Swensen, at p. 395.) None of these cases support GreenLink's position that "post-termination" non-compete provisions should be summarily excluded from the reasonableness standard.
Third, GreenLink argues that the non-compete provisions here are distinguishable from those in Ixchel because they are contrary to California's fundamental policy to promote competition. Specifically, GreenLink contends that the benefits of commercial restraints noted in Ixchel do not apply to these provisions. Again, we are not persuaded. Ixchel explained that contractual limitations on commercial dealings can promote competition in various ways. (Ixchel, supra, 9 Cal.5th at p. 1160.) They can, for example, "help businesses leverage complementary capabilities, ensure stability in supply or demand, and protect their research, development, and marketing efforts from being exploited by contractual partners." (Id. at p. 1161.) Here, the terms of the Agreement show how such effects could be achieved by "post-termination" non-compete provisions. Per section 8.1 of the Agreement, Freedom agreed to make "large upfront Partner Fee payments in advance of any program fees paid by Clients to FDR for the express purpose of financing the working capital needs of Partner's business." "Accordingly," GreenLink agreed to the Exclusivity Period. These terms suggest Freedom negotiated the purported non-compete provisions in exchange for a fee structure that allowed GreenLink to operate its business. Moreover, the circumstances in Ixchel support the conclusion that such "forward looking" contractual restraints on businesses are still subject to the rule of reason. Forward's agreement with Biogen required Forward to terminate its other contracts for development of DMF drugs, thus restricting its business going forward for an indeterminate period of time. (Id. at pp. 1138-1139.)
GreenLink also suggests that the non-compete provisions here are contrary to public policy because section 8 of the Agreement bars not only GreenLink, but its "owners and employees" from engaging in any business in the debt relief industry. GreenLink questions how its employees could "ever do business or work in the industry given this restriction." Nothing in the Agreement, however, prevents GreenLink's owners or employees from doing so after they discontinue their relationship with the company. To invalidate any non-compete provision that encompassed owners and employees would in effect nullify all such provisions, and stand contrary to Ixchel and other precedent applying a reasonableness standard to contractual restraints on business operations and commercial dealings. (Ixchel, supra, 9 Cal.5th at p. 1159.) Finally, GreenLink claims that section 7.2 of the Agreement is contrary to California policy because it restricts Freedom employees from being solicited or hired by GreenLink. To support its position, GreenLink cites to Edwards, where the plaintiff was not allowed to solicit clients after he was terminated. (Edwards, supra, 44 Cal.4th at p. 942.) Unlike Edwards, however, section 7.2 does not restrain Freedom's employees from working for (or being solicited by) GreenLink after their employment at Freedom ends. Section 7.2 is a non-solicitation clause that is also subject to a reasonableness standard. (See Loral Corp. v. Moyes (1985) 174 Cal.App.3d 268, 274, 280 [agreement not to interfere with or raid company's employees was not void on its face under § 16600].)
In sum, we conclude the trial court did not abuse its discretion in determining that there was no conflict between Arizona law and a fundamental policy of California, and that the Agreement's choice of law and choice of forum provisions should be enforced.
DISPOSITION
The September 18, 2020 order granting Freedom's motion to dismiss is affirmed. Costs on appeal are awarded to Freedom.
We concur: Stewart, Acting P.J., Miller, J.
[*]Judge of the Mendocino County Superior Court, assigned by the Chief Justice pursuant to article VI, section 6 of the California Constitution.