Professional Documents
Culture Documents
9
SUPERIOR COURT OF THE STATE OF CALIFORNIA
10
12
20
21
22
23
24
25
26
27
28
D OC U ME NT P RE PA R ED 136210208.2 -1-
ON R E C YC LED P A PE R
COMPLAINT FOR DECLARATORY RELIEF
12005-00001/14109616.1
1 KSFB Management, LLC (a Delaware limited liability company) (“Plaintiff”) hereby
2 alleges as follows:
3 INTRODUCTION AND SUMMARY
4 1. This controversy is set against the backdrop of 150 years of California
5 jurisprudence prohibiting the threatened attempt by Defendant Focus Financial Partners, LLC
6 (“Focus”) to prevent the highly skilled principals of Plaintiff—the nation’s largest business
7 management firm—from practicing their profession and earning a living. Defendant’s effort to
8 enforce a ten-year minimum contractual non-competition provision against Plaintiff is improper
9 and unenforceable.
10 2. California has consistently and vigorously fostered protecting the right of its
11 citizens to pursue engagement in the profession, business, or trade of their choice. “[I]n 1872
12 California settled public policy in favor of open competition[.]” Edwards v. Arthur Andersen
13 LLP, 44 Cal.4th 937, 945 (2008). California Business and Professions Code Section 16600
14 provides: “Except as provided in this chapter, every contract by which anyone is restrained from
15 engaging in a lawful profession, trade, or business of any kind is to that extent void.”
16 3. Section 16600 protects “the important legal right of persons to engage in
17 businesses and occupations of their choosing.” Morlife, Inc. v. Perry, 56 Cal.App.4th 1514, 1520
18 (1997). Historically, any restraint on that ability is per se unlawful and unenforceable.
19 4. “Today in California, covenants not to compete are void, subject to several
20 exceptions” not applicable here. See Edwards, 44 Cal.4th at 945.
21 5. Attempts by parties to use choice-of-law provisions to avoid California law and
22 public policy with regard to services in California are unenforceable. “[T]here has been a long
23 developing trend among California courts of finding that § 16600 represents a fundamental public
24 policy interest in California that overrides contractual choice of law provisions[.]” Roadrunner
25 Intermodal Servs., LLC v. T.G.S. Trans., Inc., 2019 WL 1400093, at *6 (E.D. Cal. Mar. 28,
26 2019). As such, courts have regularly found that such out-of-state choice-of-law provisions that
27 conflict with Section 16600 are unenforceable because they are contrary to both California law
28 and public policy. See id. (concluding that “California’s interests are materially greater than
D OC U ME NT P RE PA R ED 136210208.2 -2-
ON R E C YC LED P A PE R
COMPLAINT FOR DECLARATORY RELIEF
1 those of Delaware and that California would be more seriously impaired if its laws were not
2 applied,” and holding that “the court will disregard the Delaware choice of law provision in
3 analyzing the enforceability of the non-competition provisions [of the contract] and will instead
4 apply California law”); Ascension Ins. Holdings, LLC v. Underworld, 2015 WL 356002, at *5-6
5 (Del. Ch. Jan. 28, 2015) (California law applies notwithstanding Delaware choice-of-law
6 provision); Application Grp., Inc. v. Hunter Grp., Inc., 61 Cal. App.4th 881, 902 (1998) (out-of-
7 state choice-of-law provision may be ignored to preserve California’s fundamental public policy
8 in voiding non-competition covenants).
9 6. In March 2018, Focus acquired the business assets of several related entities of
10 Nigro Karlin Segal Feldstein & Bolno (the “Transaction”). At that time, the parties (including
11 certain Nigro Karlin Principals1) entered into a Contribution and Purchase Agreement with a five-
12 year non-competition restriction, with which Plaintiff complied. In connection with the
13 Transaction, the parties also entered a Management Agreement (the “Transaction Management
14 Agreement”) pursuant to which the Principals of Nigro Karlin Segal Feldstein & Bolno agreed to
15 provide services through KSFB Management, LLC (the “Management Company”). The
16 Transaction Management Agreement contained a six-year non-compete covenant, which (i) for
17 KSFB Management, LLC, ran through the second anniversary of the termination of the
18 Transaction Management Agreement, unless the Transaction Management Agreement were
19 terminated by the Plaintiff for a breach by Focus, and (ii) for the Principals, ran through the
20 second anniversary of the earlier of the termination of the Transaction Management Agreement or
21 the termination of such Principal’s relationship with the Management Company. The stated
22 consideration was Focus’s acquisition of Nigro Karlin Segal Feldstein & Bolno and compensation
23 to be paid to the Management Company.
24 7. In July 2022, four years after the Transaction Management Agreement was entered
25 into, the parties (including additional parties that were not party to the Transaction Management
26 Agreement) entered into an Amended and Restated Management Agreement (the “ARMA”),
27
1
The “Nigro Karlin Principals” or “Principals” are principals of Nigro Karlin Segal Feldstein &
28 Bolno.
D OC U ME NT P RE PA R ED 136210208.2 -3-
ON R E C YC LED P A PE R
COMPLAINT FOR DECLARATORY RELIEF
1 which amended, restated, and superseded the Transaction Management Agreement. As the
2 parties, purposes, and consideration of the ARMA were distinct from those in the Transaction
3 Management Agreement, rather than enter into an amendment to the Transaction Management
4 Agreement signaling the continuation of such agreement, the parties entered into the ARMA,
5 which was materially different from the Transaction Management Agreement, and further
6 evidence that the ARMA should be viewed as a de novo agreement. For example, the Transaction
7 Management Agreement contains 26 pages of text, while the ARMA contains 41 pages. The
8 ARMA included new parties, new terms, new consideration for the non-compete provision (i.e.
9 unlike in the Transaction Management Agreement, the Transaction was no longer referenced as,
10 and was not in fact, consideration), references to acquisitions by Focus, which were subsequent
11 and unrelated to the Transaction, a new 8 year and 3 month term, and a clear statement that the
12 ARMA would govern the relationship among the parties. Additionally, the non-compete
13 provision in the ARMA imposed (i) for KSFB Management, LLC, a two-year competition
14 prohibition post-termination of the ARMA, unless the ARMA were terminated by the Plaintiff for
15 a breach by Focus, and (ii) for the Principals, a two-year competition prohibition based on the
16 earlier of the termination of the ARMA and the termination of such Principal’s relationship with
17 the Management Company.2 The non-compete provision in the ARMA expressly states that it is
18 being entered into “[i]n consideration of the compensation to be paid to the Management
19 Company” (but not Focus’s acquisition of Nigro Karlin Segal Feldstein & Bolno). As the
20 original five-year non-competition restriction contained in the Contribution and Purchase
21 Agreement has expired, the new non-compete provision in the ARMA is the sole non-compete
22 provision that Plaintiff is challenging.
23 8. In this action, Plaintiff seeks a declaratory relief in the form of a judgment
24 proclaiming that (a) the Delaware choice-of-law provision in the ARMA is not enforceable
25 because it attempts to avoid California law and public policy favoring open competition for
26
27 2
Practically speaking, regardless of how long a Principal is actually working, an additional 2 year
noncompete is added to that term.—however long it may be. The effect is that the noncompete as
28 drafted is potentially for the rest of a person’s career.
D OC U ME NT P RE PA R ED 136210208.2 -4-
ON R E C YC LED P A PE R
COMPLAINT FOR DECLARATORY RELIEF
1 services rendered in California, and (b) the contractual restraints in the ARMA on Plaintiff’s
2 ability to pursue their professional and business interests are per se unlawful under California
3 Business and Professions Code Section 16600. Plaintiff also requests a preliminary and
4 permanent injunction to enforce the Court’s declaration of its rights.
5 THE PARTIES
6 9. KSFB Management, LLC is a Delaware limited liability company that conducts
7 business in Los Angeles County.
8 10. Focus Financial Partners, LLC is a Delaware limited liability company that
9 conducts business in Los Angeles County.
10 11. Plaintiff is unaware of the true names and capacities of the remaining defendants
11 sued herein as Does 1 through 20, and Plaintiff therefore sues these defendants by their fictitious
12 names. Plaintiff will amend the Complaint to allege the true names and capacities when they
13 have been ascertained. Plaintiff is informed and believes, and on that basis alleges, that each
14 defendant designated as a Doe is responsible in some manner, negligently, contractually, or
15 otherwise, for the events and happenings referred to herein, and proximately caused the damages
16 and injuries to Plaintiff as herein alleged. As Plaintiff is presently unaware of the true names and
17 capacities of the Doe defendants named herein as Does 1 through 20, Plaintiff will seek leave of
18 Court to amend this Complaint when the identities of such fictitiously named Doe defendants
19 become known.
20 12. Whenever and wherever reference is made in this Complaint to any act or failure
21 to act by a defendant or co-defendant, such allegations and references shall also be deemed to
22 mean the acts and/or failures to act by each defendant acting individually, jointly, and severally.
23 JURISDICTION AND VENUE
24 13. The contracts at issue were entered in Los Angeles County, the contracts were
25 largely performed in Los Angeles County, and Plaintiff does business in Los Angeles County.
26 Venue in this Court is proper because Section 8.3 of the ARMA expressly identifies the courts of
27 the County of Los Angeles and the State of California as the proper venue for disputes arising out
28 of, under, or in connection with the ARMA.
D OC U ME NT P RE PA R ED 136210208.2 -5-
ON R E C YC LED P A PE R
COMPLAINT FOR DECLARATORY RELIEF
1 BACKGROUND FACTS
2 14. This case involves a multi-party transaction by which the nation’s premier and
3 largest business management firm—Nigro Karlin Segal Feldstein & Bolno—was acquired in
4 March 2018 by Focus.
5 15. The sellers were three related entities owned by the Principals (the “Selling
6 Entities”).
7 16. The Contribution and Purchase Agreement, dated March 15, 2018, memorialized
8 the sale of “substantially all of the assets” of the “Business” (the family office, business
9 management, consulting, tax and related services of the Selling Entities).
10 17. The Principals formed the Management Company and entered into the Transaction
11 Management Agreement with Focus, dated April 1, 2018, for the purpose of providing
12 supervision, management oversight, determining Principals’ compensation, financial reporting,
13 and other services after sale of the Business.
14 18. As a condition to the Principals providing services to the Management Company,
15 Focus insisted that the Principals abide by covenants restricting their ability to work in California
16 if they were no longer affiliated with the Management Company. Section 2.12 of the Transaction
17 Management Agreement, entitled “Non-Competition Covenant,” specified in subsection (a) that
18 the non-competition covenant was being entered into “[i]n consideration of the Acquisition and
19 the compensation to be paid to the Management Company.”
20 19. The parties also entered into a Non-Competition and Non-Solicitation Agreement
21 (“Non-Compete Agreement”). Paragraph 1(a) of the Non-Compete Agreement obligated the
22 Principals not to compete, directly or indirectly, with the Business. Paragraph 1(b) prescribed a
23 five-year period for the restriction, which expired on April 1, 2023, and with which Plaintiff and
24 the Principals complied. The enforceability of this provision is not at issue here.
25 20. Over four years after the Transaction, in or around July 1, 2022, the parties—
26 including additional Principals—entered into an Amended and Restated Management Agreement
27 (“ARMA”). As reflected in the ARMA, Focus once again insisted that the Principals agree to
28 covenants restricting their ability to work in California if they were no longer affiliated with the
D OC U ME NT P RE PA R ED 136210208.2 -6-
ON R E C YC LED P A PE R
COMPLAINT FOR DECLARATORY RELIEF
1 Management Company or if the ARMA were terminated. However, the language of the non-
2 competition covenant in the ARMA contract contains a significant change.
3 21. Section 2.12 of the ARMA, entitled “Non-Competition Covenant,” specifies in
4 subsection (a):
5 “The Management Company and the Principals hereby acknowledge and
6 recognize the highly competitive nature of the Business. In consideration of the
7 compensation to be paid to the Management Company hereunder, (i) neither the
8 Management Company nor any Principal shall, within the territory and for the
9 period set forth in Section 2.12(b) below, directly or indirectly, own, manage,
10 operate, control or participate in the ownership, management, operation or control
11 of, or have any interest, financial or otherwise, in, or act as a partner, manager,
12 member, principal, executive, employee, agent, representative, solicitor, consultant
13 or independent contractor of, or licensor to, any business engaged in the provision
14 of family office, business management, consulting, tax, accounting, tax advisory,
15 corporate finance or any similar services that are competitive with any portion of
16 the NKSFB Business or the RBS Business, and (ii) neither the Management
17 Company nor any NKSFB Principal nor any RIA Principal shall, within the
18 territory and for the period set forth in Section 2.12(b) below (but subject to the
19 provisos below in the case of the NKSFB Principals and the UK Principal, as the
20 case may be), directly or indirectly, own, manage, operate, control or participate in
21 the ownership, management, operation or control of, or have any interest, financial
22 or otherwise, in, or act as a partner, manager, member, principal, executive,
23 employee, agent, representative, solicitor, consultant or independent contractor of,
24 or licensor to, any business engaged in the provision of financial planning,
25 investment advisory, investment management or any similar services that are
26 competitive with any portion of the RIA Business . . . .”
27 (Emphasis added.)
28 22. In other words, whereas Section 2.12(a) of the Transaction Management
D OC U ME NT P RE PA R ED 136210208.2 -7-
ON R E C YC LED P A PE R
COMPLAINT FOR DECLARATORY RELIEF
1 Agreement specified that the non-competition covenant was “[i]n consideration of the Acquisition
2 and the compensation to be paid to the Management Company,” the ARMA, which was entered
3 into over four years after the Transaction, made clear that the parties were only agreeing that the
4 non-competition covenant was being entered into “[i]n consideration of the compensation to be
5 paid to the Management Company.” (Emphasis added.) The contracting parties clearly stipulated
6 that consideration for the non-competition covenant in the ARMA was limited to the
7 compensation to be paid to the Management Company.
8 23. The non-competition clause in the ARMA is not uncoupled from the Transaction
9 merely because Plaintiff or the contracting parties say it is so, and it was not a careless omission.
10 The language in the non-competition covenant dealing with consideration in the ARMA is
11 different from the language in the Transaction Management Agreement because the non-
12 competition covenant in the ARMA was not at all linked to the Transaction and contemplated
13 different consideration. In addition, to the ARMA being entered into over four years after the
14 date of the Transaction, further distinguishing it from an agreement entered into in connection
15 with the Transaction, the ARMA included a new term and, there were new Principals added who
16 were parties to the ARMA but not to the prior Contribution and Purchase Agreement of 2018, and
17 these new Principals could not agree to be bound to a non-competition covenant linked to an
18 acquisition that occurred years before they had become Principals.
19 24. The non-competition clause in the ARMA came about several years after the
20 Transaction; and at law, a non-competition agreement made much later in time cannot suffice as
21 consideration for the preceding Transaction and its related non-competition clauses. It is true that
22 California law prescribes that parties may restrict the seller from competing against the purchaser
23 of the interest to protect the value of the goodwill that the purchaser is acquiring, but this is a
24 narrow exception. Hill Med. Corp. v. Wycoff, 86 Cal. App. 4th 895, 903, 103 Cal. Rptr. 2d 779,
25 786 (2001); Monogram Indus., Inc. v. Sar Indus., Inc., 64 Cal. App. 3d 692, 134 Cal. Rptr. 714
26 (Ct. App. 1976). Thus, in analyzing the applicability of Section 16601, courts consider whether
27 the sale agreement is sufficiently related to the restriction as to permit substantial restraints on
28 competition. Where noncompetition agreements were not actually executed in connection with
D OC U ME NT P RE PA R ED 136210208.2 -8-
ON R E C YC LED P A PE R
COMPLAINT FOR DECLARATORY RELIEF
1 the sale transaction, noncompete provisions have been found not to be effective (even if they say
2 otherwise). Thus, the non-competition provision in the ARMA was not, and could not be, made
3 in consideration for the Contribution and Purchase Agreement, as the parties to the ARMA, the
4 timeline, and the facts and circumstances were removed and unrelated to the Transaction.
5 25. Section 2.12(b) of the ARMA attempts to restrain the Management Company and
6 the Principals from competing with regard to the Business for two years after termination of such
7 Principal’s relationship with the Management Company:
8 “The covenant in Section 2.12(a) above shall apply to any activity conducted in or
9 directed at clients or prospective clients in the United States of America, the
10 United Kingdom or any other jurisdiction in which the Business is conducted
11 during the period (the “Non-Compete Restricted Period”) commencing on the date
12 hereof and (i) in the case of the Management Company, (x) ending on the second
13 anniversary of the termination of this Agreement, other than a termination
14 pursuant to Section 5.6(a), and (y) ending on the termination of this Agreement
15 pursuant to Section 5.6(a), and (ii) in the case of any Principal, (x) ending on the
16 second anniversary of the earlier of (1) the termination of this Agreement, other
17 than a termination pursuant to Section 5.6(a), and (2) the termination of such
18 Principal’s employment and/or other service relationship (as applicable) with and
19 ownership in the Management Company . . . .”
20 (Emphasis added.)
21 26. Section 8.1 of the ARMA states that it is governed by Delaware state law.
22 27. Sections 8.2 and 8.3 of the ARMA authorize the filing of this action in any state or
23 federal court in Los Angeles County.
24 28. Section 8.7 of the ARMA states that the agreement “represents the entire
25 agreement” among the parties and that “all prior agreements are superseded hereby.”
26 29. Focus has asserted that it will seek to enforce Sections 2.12(a) and (b) if the
27 Principals terminate their relationship with the Management Company and seek to work in the
28 same line of business as the Management Company. The Principals have stated these provisions
D OC U ME NT P RE PA R ED 136210208.2 -9-
ON R E C YC LED P A PE R
COMPLAINT FOR DECLARATORY RELIEF
1 are violating California law and are unenforceable.
2
16
20
21
22
23
24
25
26
27
28
D OC U ME NT P RE PA R ED 136210208.2 - 13 -
ON R E C YC LED P A PE R
COMPLAINT FOR DECLARATORY RELIEF