Strategix, Ltd. v. Infocrossing West, Inc.

Opinion

IKOLA, J. Matthew Aarsvold, Strategix, Ltd., and ePassage, Inc. (appellants), appeal from an order granting a preliminary injunction to respondents Infocrossing West, Inc., and Infocrossing Services West, Inc. (respondents).1 The court enforced nonsolicitation covenants contained in [1071]agreements by which Strategix, with the consent of its parent company, ePassage, sold its goodwill and substantially all of its assets to Infocrossing’s predecessor, Systems Management Specialists (SMS). The preliminary injunction barred appellants from soliciting Infocrossing’s employees or customers.

The nonsolicitation covenants are unenforceable because they are broader than permitted by the statute that authorizes noncompetition covenants reached in connection with the sale of a business, Business and Professions Code section 16601.2 Section 16601 allows a seller to agree not to compete with the buyer in the geographic location where the seller had carried on business. The permissible scope of the covenant is thus tied to the sold business. The nonsolicitation covenants here wrongly barred appellants from soliciting the buyer’s employees and customers, rather than the former employees and customers of the seller, Strategix. The court thus erred by granting the preliminary injunction.

FACTS

ePassage and Strategix agreed to sell Strategix’s goodwill and substantially all of its assets to Infocrossing’s predecessor, SMS. The parties executed two contracts in connection with the sale: An asset purchase agreement between Strategix and SMS and a consulting services agreement between ePassage and SMS.

The consulting agreement contained two nonsolicitation covenants. One prohibited ePassage from soliciting SMS’s employees for one year after the termination of the consulting relationship. The other prohibited ePassage from soliciting SMS’s customers for the same period.

ePassage and Strategix rescinded the purchase and consulting agreements, and shortly thereafter sued Infocrossing. The complaint alleged Infocrossing breached the consulting agreement and caused a failure of consideration for both agreements.

Infocrossing then filed a complaint against ePassage, Strategix, and Aarsvold. It alleged appellants breached the nonsolicitation covenants, and sought a permanent injunction.