A former employee of a private company who bought stock in it isn’t considered an owner under a California law and can’t be blocked from a new job with a competitor, a state judge ruled.
California’s notoriously employee-friendly business law prevailed in a California Superior Court hearing Oct. 10 over insurer Woodruff-Sawyer & Co.’s attempt to preliminarily prevent its former employee from working for Lockton Cos. LLC-Pacific Series while its lawsuit is heard. The ruling early in the case, which involves the grant of stock options, comes in a region where high-tech companies frequently issue such options to employees to entice workers to join cash-poor startups.
The Marin County company’s arguments failed under California Business & Professions Code Section 16660, which—with a very slim exception for workers who are considered owners of their employer—prohibits noncompetition agreements that keep individuals from “engaging in a lawful profession, trade, or business of any kind.”
Woodruff-Sawyer argued that its former broker, Christopher Reiter, fell under that exception because he bought shares in the company.
Woodruff-Sawyer’s argument would mean lawyers could “drive a truck through 16600 if I accepted it,” Judge Harold Kahn said during the hearing on the company’s request for a preliminary injunction. “This would be an end run around 16600. Anytime a company wants to enforce a covenant not to compete, they’ll say, ‘OK, we’ll give you some shares.’ And your answer as far as I can tell is the employee doesn’t have to take the shares.”
Reiter “made a choice, a real choice, to become an owner of the company and benefited from that choice,” Sandra Rappaport, a Hanson Bridgett LLP partner representing the privately held insurer, told the court.
Reiter was given stock options “because he was an employee, not because he had an ownership interest,” Kahn said. The judge refused to further block Reiter from working for Lockton while the lawsuit is heard and ordered Reiter’s attorney to draft an order. The harm to Reiter “would be extreme” if he was further prevented from starting his new job, more than the harm to Woodruff in waiting for the case to conclude.
The case will proceed, Rappaport told Bloomberg Law after the hearing. Reiter has been blocked from working for five months, an attorney representing Reiter, Robert Carroll with Arent Fox LLP in San Francisco, told Bloomberg Law.
Buy In, Bye-Bye
Reiter joined Woodruff-Sawyer in 2008 as a broker and became a substantial shareholder, amassing $900,000 worth of stock over a four-year period, the company said. The shareholder agreement when he bought the stock included a restriction on working for the competition for three years if he should resign from the company.
Reiter resigned with no notice on May 17, 2018, and joined Lockton the same day. A client Reiter managed told the company it was switching brokers, and four employees on Reiter’s team resigned to work for Lockton. Woodruff-Sawyer wrote a check for Reiter’s shares as of his termination date, the company’s lawsuit says.
The insurance brokerage sued to prevent Reiter from working for its competitor. Kahn dissolved a temporary restraining order that a California Superior Court, Marin County, judge granted in May preventing him from taking the new job. The case was transferred to San Francisco Superior Court per the employment agreement.
Rappaport and Andrew Giacomini, with Hanson Bridgett LLP, San Francisco, represents Woodruff-Sawyer. Carroll, with Arent Fox, represents Reiter. Mike Margolis, with Blank Rome LLP, Los Angeles, represents Lockton.
The case is Woodruff-Sawyer & Co. v. Reiter, Cal. Super. Ct., No. CGC-18-569053, preliminary injunction hearing 10/10/18.