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Newlife Sciences v. Ronald Weinstock et al

July 15, 2011

NEWLIFE SCIENCES, PLAINTIFF, CROSS-DEFENDANT, AND RESPONDENT,
v.
RONALD WEINSTOCK ET AL., DEFENDANTS, CROSS-COMPLAINANTS, AND APPELLANTS; MALTA RESOURCES ET AL., CROSS-COMPLAINANTS AND APPELLANTS; JOHN CROSSON ET AL., CROSS-DEFENDANTS AND RESPONDENTS.



(Los Angeles County Super. Ct. No. BC385465) APPEAL from an order of the Superior Court of Los Angeles County, Charles F. Palmer, Judge. Affirmed.

The opinion of the court was delivered by: Johnson, J.

CERTIFIED FOR PUBLICATION

Ronald Weinstock appeals from the trial court's order granting a preliminary injunction in favor of NewLife Sciences, LLC (NLS), prohibiting Weinstock and other persons and entities from engaging in direct or indirect competition with NLS. We affirm.

BACKGROUND

I. First amended complaint and cross-complaint

NLS filed a first amended complaint against Weinstock*fn1 alleging that as its primary business, NLS manufactures, markets, and leases to physicians a pain relief device or machine called a Therapeutic Magnetic Resonance Device, or TMR. The Food and Drug Administration (FDA) had cleared the use of the device for certain medical purposes after NLS had acquired all the rights to the TMR; the use of the device without the supervision of a physician violated FDA rules.

Weinstock, the purported inventor of the device, obtained three patents related to the device and had another patent pending. Weinstock transferred the patent rights to Medico Enterprises, Inc. (Medico). On December 15, 2006, Weinstock, on behalf of himself and NLS, entered into a Memorandum of Understanding (MOU) with John Crosson. The MOU provided that Weinstock would assign the TMR patents to NLS. In exchange, Crosson agreed to lend NLS $250,000, and if he decided to invest additional money after a due diligence investigation, Crosson would receive an ownership interest in NLS. Weinstock transferred Medico's interest in the patents to NLS, and in return Weinstock received a 30 percent membership interest in NLS.

Malta Resources, LLC, a business owned and controlled by Weinstock which operated a TMR clinic in Beverly Hills, California, transferred its rights to the TMR business and goodwill to NLS in an agreement dated December 28, 2006.*fn2

Crosson subsequently invested an additional $1,250,000 in NLS. NLS, Weinstock, Medico, and Malta entered into an Amended and Restated Operating Agreement (Operating Agreement) effective March 1, 2007, to replace an earlier agreement adopted on December 15, 2006. Pursuant to the Operating Agreement, the members of NLS were Weinstock, Crosson, C. Read McLean, John Markham III, the Crosson family trust, Malta, and Medico.*fn3 NLS's managers were Weinstock, Crosson, and McLean; its officers were Crosson (chief executive officer and president) and McLean.

Also effective March 1, 2007, and as provided for in the Operating Agreement, Crosson and Weinstock each entered into an employment contract with NLS. Weinstock's employment agreement provided that he would serve as NLS's Chief Officer of Science and Technology and board chairman for an initial period of five years, at a salary of $22,000 per month. As consideration, Weinstock agreed to transfer all TMR assets to NLS. Weinstock could be terminated for cause, including "conduct by Weinstock that is fraudulent or unlawful," in which case he would forfeit his board position.

Weinstock's employment contract also provided that during his employment Weinstock would not engage in any activity for any other company which competed directly or indirectly with NLS. Further, the employment contract provided: "Weinstock shall not, during or for a period of five years after termination of this contract (whether for cause or otherwise), accept any other employment, service or consulting contract, or perform any work for any other company, endeavor, or individual which competes directly or indirectly with any activity now or in the future engaged in by NLS, unless NLS agrees in writing to allow Weinstock to do so earlier. Weinstock agrees to submit to the jurisdiction of any state or federal court in Los Angeles County, California having jurisdiction over the matter if NLS seeks injunctive relief to enforce this provision . . . ." (the non-compete clause).*fn4

NLS's complaint alleged that Weinstock maintained possession of TMR devices and technology belonging to NLS, and administered TMR services to patients. On December 14, 2007, NLS terminated Weinstock's employment for cause, including Weinstock's administering of TMR services outside the presence of a physician, in violation of California law, FDA rules, and NLS policies. NLS demanded that Weinstock return NLS property, but Weinstock refused. The complaint continued: "[NLS] has been informed that (a) after his termination on December 14, 2007, and as recently as January 26, 2008, Weinstock has administered TMRD treatments using one or more of [NLS]'s TMRD machines, and (b) Weinstock has sought to obtain devices for his use in continuing to administer TMRD treatments. . . . [¶] [NLS] has been informed and believes that Weinstock (a) has also falsely told others that he owns the rights to the TMRD and is free to use the TMRD, (b) has disparaged [NLS], its officers and agents, and (c) has otherwise engaged in a series of actions with the intent to interrupt and thus damage the business of [NLS] by attempting to cause people and entities not to deal with [NLS]."

The complaint alleged causes of action for claim and delivery, breach of contract, conversion, unjust enrichment, fraudulent transfer, fraud, misappropriation of trade secrets, breach of fiduciary duty, and injunctive relief, including an injunction to enforce the non-compete clause.

Weinstock filed a motion to strike from the complaint the allegations regarding the non-compete clause, arguing that the clause was void and unenforceable under California law, and was not saved by a statutory exception applicable to a non-compete agreement executed upon the dissolution of an individual's interest in a limited liability company.*fn5 In opposition, NLS argued that the non-compete clause was enforceable under Business and Professions Code section 16601,*fn6 as it was executed by Weinstock as part of the transfer of Malta's assets and goodwill to NLS. The trial court denied the motion to strike "on the grounds set forth in the opposition papers."

Weinstock, Malta, Medico, and Svatik filed a first amended cross-complaint against NLS, Crosson, and other individuals, contending (among other causes of action) that the cross-defendants breached the Operating Agreement, breached Weinstock's employment contract, and breached their fiduciary duties by diluting Weinstock's, Malta's, and Medico's interests in NLS.

II. Discovery disputes

In late July 2008, NLS filed an ex parte motion to set dates for Weinstock's deposition, stating that Weinstock had failed to appear for a deposition set for the first week in July. The trial court ordered Weinstock to appear for his deposition no later than the first week of September 2008, and in a further order extended the deadline to September 26, at Weinstock's request. Weinstock eventually appeared for his deposition on October 13, 2008, but the deposition was adjourned when Weinstock's counsel was called away. NLS issued a notice of continued deposition for February 17, 2009, but Weinstock objected and failed to appear. Weinstock also objected to some written discovery requests by ...


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