Merchants' Ad-Sign Co. v. Sterling

California Supreme Court May 18, 1899 No. L. A. No. 588Published

Before: Chipman

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Holding. A contract by a corporate stockholder to refrain from engaging in a competing business is void as an unlawful restraint of trade because a stockholder cannot sell the goodwill of a corporation.

Issues

Whether a contract by a stockholder to refrain from competing with the corporation is valid under California Civil Code sections 1673 and 1674.
Whether a stockholder is estopped from denying the validity of a restrictive covenant when they have accepted consideration for the agreement.

Disposition. affirmed

Quotations verified verbatim against the opinion

“Every contract by which anyone 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.”

“The contract being void as in restraint of trade, and it so appearing from the face of the complaint, the defense is available on demurrer.”

Synopsis

Goodwill—Trading Corporation—Invalid Agreement by Vendor of Stock—Restraint of Trade.—The vendor o£ stock in a trading corporation has no vendible interest in the goodwill of the business, and cannot transfer such goodwill; and an agreement by such vendor not to engage in a similar business in the city where the business of the corporation is carried on so long as the vendee or his successor in interest should carry on a like business therein, not being within any statutory exception, is void, as being in restraint of trade, and cannot be enforced.

Id.—Liberal Construction of Code Provisions—Permitted Exceptions. The rule of liberal construction to be given to the code provisions as to contracts accompanying sales of goodwill is in aid of agreements falling within the permitted exceptions of the code as to contracts in restraint of trade, and does not apply to cases not falling within those exceptions.

Id.—Estoppel of Vendor—Knowledge of Vendee—Presumption.— The vendee must be presumed to have known that the vendor had no vendible interest in the goodwill of the corporation, and the vendor is not estopped from denying the existence of such Interest.

In.-—Maxim—Void Contract—Injunction.—The maxim ex turpi causa non oritur actio applies to prevent' an action to enforce a void contract in restraint of trade by injunction to restrain the defendant from engaging in business contrary to the terms of such void contract.

CHIPMAN, C. Injunction to restrain defendant from engaging in the business of advertising. It is alleged that plaintiff is a corporation engaged in the business of bill posting and other methods of advertising in the city and county of Los Angeles; that about August 20, 1896, defendant owned eighty shares of the capital stock of plaintiff company, and was actively engaged in the management of plaintiff’s said business; about September 15, 1896, he transferred without consideration sixty of said eighty shares to his wife in trust for himself and his sole use and benefit, and for the purpose of concealing the true ownership of said sixty shares; on August 12, 1897, he sold, by written contract, for a good and valuable consideration, to one Wilshire “all his interest, direct -and indirect, in the plaintiff, and his interest in the goodwill of the business of plaintiff, and said defendant in said contract, for a good and valuable consideration to him in hand paid by said Wilshire, agreed to and with said Wilshire that he would not conduct, nor assist in the conduct of, bill posting in said city of Los Angeles so long as said Wilshire, or any person deriving title to said goodwill from him, should carry on a like business therein”; on January 20, 1898, Wilshire transferred the contract of August 12th to plaintiff. The complaint then alleges the formation of the Los Angeles Bill Posting Company, a corporation, about January 17, 1898, in said city and county, its business in part being similar to that of plaintiff’s, and that'since said date it [431]lias been so engaged; that defendant, in violation of his said agreement, helped to form the Los Angeles Bill Posting Company, and became a stockholder therein and conducted, and assisted to conduct, its business, and is its principal manager, and said company has thereby been enabled to enter, and has so entered, into successful competition with plaintiff in the bill posting business in said city, and that without the services of defendant said company could not have been able successfully to compete with plaintiff in its said business. Plaintiff seeks damages and to restrain defendant from conducting or assisting in conducting the business of the Los Angeles Bill Posting Company. A demurrer to the complaint for insufficiency of facts and for ambiguity and uncertainty was sustained, and the court gave judgment for defendant without leave to amend, from which this appeal is prosecuted. Eespondent has filed no brief.

The principal question presented by appellant is as to the validity of the contract between defendant and Wilshire. The allegation of the complaint is that defendant sold his interest in the goodwill of the business of plaintiff corporation, in consideration of which he agreed not to conduct or assist in conducting the business of bill posting in which plaintiff was engaged.

Merchants' Ad-Sign Co. v. Sterling

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