Perry v. Floss Bar, Inc.

Background

Joshua Perry sued Floss Bar, Inc., Eva Sadej, Stuart Allan, and unidentified defendants over alleged violations of California law and several common-law claims. The claims included alleged violations of California’s Corporate Securities Law, California Labor Code section 1102, and the California Fair Housing and Employment Act, as well as alleged promissory fraud, intentional interference with contract and business relations, and defamation.

Perry was hired as Floss Bar’s president in April 2019 as part of Floss Bar’s acquisition of Onsite Service USA Holding, Inc., a subsidiary of Perry’s company. Perry alleged that he was promised stock options representing a 3% equity interest. He and Floss Bar also signed a Non-Competition and Non-Solicitation Agreement. The agreement barred him from competing with Floss Bar during his employment and for two years afterward, and also restricted soliciting Floss Bar’s clients and employees. The agreement separately stated that it would end upon the earlier of its third anniversary or Perry’s termination by Floss Bar without cause.

Perry alleged that he raised concerns about issues including worker classification, tax reporting, employee benefits, professional licensing, business registration, billing, and permits. Floss Bar alleged that Perry violated company policies and that problems existed in the business acquired from him. Floss Bar removed Perry from its board in October 2019 and placed him on paid leave through December 31, 2019. Perry stated that he was later placed on unpaid leave and had not been paid since January 2020. The parties disputed his employment status, but Perry had not received notice of termination, and Floss Bar stated that it continued paying his health-insurance benefits.

Motion and Legal Standard

Perry moved for a preliminary injunction, meaning a temporary order issued before final judgment. He sought to prevent Floss Bar from enforcing the noncompetition agreement. Because the requested injunction would change the existing situation, he had to show a clear or substantial likelihood of success on the merits, along with irreparable harm or the other required preliminary-injunction considerations.

Choice of Law

The agreement selected Delaware law. Because the case had been transferred from the Northern District of California, the court first applied California’s rules for deciding whether to enforce a contractual choice-of-law provision.

The court concluded that Perry was not likely to show that California Labor Code section 925 invalidated the Delaware provision. The available evidence suggested that Perry was represented by counsel in negotiating the agreement, which could bring the agreement within an exception to section 925. Even if that exception did not apply, Perry had not shown that he primarily lived and worked in California. The court noted evidence that he spent limited time working in California and traveled extensively.

Applying California’s choice-of-law test, the court found that Delaware had a substantial relationship to the parties and transaction because Floss Bar was incorporated there. The court determined that New York was likely the default state under the relevant factors, including the location of Floss Bar’s headquarters and the parties’ connections to New York. It further found no conflict between Delaware law and New York’s fundamental policy because both states apply similar reasonableness standards to noncompetition agreements. The court therefore concluded that Delaware law would likely govern.

Whether Perry Had Been Terminated

Perry argued that the agreement had ended because Floss Bar terminated him without cause. The court rejected that argument at the preliminary-injunction stage. Perry agreed that Floss Bar had not told him he was terminated. The court gave greater weight to that fact and to the continued health benefits than to statements allegedly made to third parties that Perry was no longer with Floss Bar. The court also noted that the Floss Bar board had not voted to terminate him.

The court held that the prolonged unpaid leave, by itself, was not enough on the record presented to establish termination under Delaware law. It also rejected Perry’s constructive-discharge argument. Constructive discharge is treated as a termination when an employee resigns because working conditions are so intolerable that a reasonable person would feel compelled to resign. Perry had not shown that he actually resigned. The court did not decide whether he could establish constructive discharge if he later showed that he had resigned.

Fraudulent Inducement

Perry argued that the agreement was voidable because defendants fraudulently induced him to sign it. The court explained that this claim required evidence of a false representation, knowledge or reckless disregard of its falsity, an intent to induce action, justifiable reliance, and resulting damage.

The court stated that Perry could pursue discovery on these allegations, but found that his motion papers did not provide enough evidence to show a likelihood of success on each element. A former employee’s declaration about Sadej and Allan’s alleged desire to take control of Xsite Health and force Perry out did not identify a specific misrepresentation made to Perry about the agreement. The court emphasized that this finding did not mean Perry’s allegations could not ultimately succeed; it meant only that the limited record did not support the requested injunction.

Other Challenges to the Agreement

Perry argued that the agreement was void under California Business and Professions Code section 16600, which restricts noncompetition agreements. Because the court concluded that Perry had not shown California law was likely to govern, it declined to invalidate the agreement on that basis.

Perry also argued that the agreement’s scope, geographic reach, and duration were unconscionably broad. Applying Delaware law, the court found that similar restrictions had been upheld for key employees, including two-year restrictions. Perry’s experience in mobile dental care supported the conclusion that the duration was not likely unreasonable. The court also found that the agreement’s restriction on competition in areas where Floss Bar did business or had done business was not shown to be invalid on the record presented.

The court acknowledged that the geographic language could raise interpretive issues and that some areas might present a weak economic interest for Floss Bar compared with the hardship to Perry. But Perry had not identified a more appropriate geographic area or provided evidence showing how the agreement should be narrowed. The court therefore found that he had not shown a likelihood of success on this challenge.

Disposition

Judge Edgardo Ramos denied Perry’s motion for a preliminary injunction. Because Perry failed to establish a sufficient likelihood of success on the merits, the court did not decide whether enforcing the agreement would cause irreparable harm. The Clerk of Court was directed to terminate docket number 33.