Surprisingly, 2024 saw few opinions governing businesses, in general. However, the courts of appeal published opinions relating to policies and procedures for meetings of limited liability companies and the liability of a prime contractor for wrongful conduct by a subcontractor. In addition, one court of appeal issued an opinion relating to non-compete clauses in buy-sell transactions.

Court of Appeal holds that under former Labor Code section 1777.7, a prime contractor’s knowledge of a subcontractor’s noncompliance with apprenticeship hiring requirements was sufficient to support penalizing the prime contractor for the noncompliance

Lusardi Construction Co. v. Department of Industrial Relations involved Lusardi Construction Company (“Lusardi”), a prime contractor, and its subcontractor, Pro Works Contracting Inc. (“Pro Works”). Pro Works violated certain Labor Code provisions (particularly former Labor Code section 1777.5) by failing to hire apprentices for a construction project. The Department of Industrial Relations and the Division of Labor Standards Enforcement (“DLSE”) cited Pro Works for these violations and ordered Lusardi to pay penalties in the amount of $30,800, consisting of $200 per each of 154 days, pursuant to former Labor Code section 1777.7(d). (It was established that the 2014 version of the relevant Labor Code provisions and regulations would apply, based on the Project’s bid advertisement date.)

Lusardi filed an administrative appeal of the DLSE order which was unsuccessful.

Lusardi then filed a petition for writ of administrative mandamus which was denied by the trial court. In essence, the trial court affirmed the DLSE’s decision, concluding that Lusardi had knowledge of Pro Works’ violations and was thus liable for the penalties based on joint and several liability. The court also found that substantial evidence supported the findings relating to the amount of the penalty assessment. The court rejected Lusardi’s claim of due process violations, stating that Lusardi was put on notice of the potential for being held jointly and severally liable for Pro Works’ apprentice hiring violations. Lusardi appealed.

The Court of Appeal affirmed holding that the trial court did not err in interpreting the statute, which provides two inclusive and alternative ways for imposing liability on a prime contractor for penalties resulting from the subcontractor’s violations. The Court also found that substantial evidence supported the penalty imposed. The Court further held that Lusardi was not denied due process when it refused to enforce its subpoena or ask for a continuance to secure a key witness’ attendance.

Court of Appeal upholds decisions made by LLC at a 2022 meeting despite improper notice of a 2021 meeting

In Camden Systems v. 409 North Camden Camden Systems, a member of a limited liability company called 409 North Camden (“LLC”), filed a lawsuit against the LLC alleging breach of fiduciary duty, breach of contract, and declaratory relief on the grounds that certain actions taken by LLC’s members, including distributions to members, were invalid due to defective notice of a 2021 meeting and sought the return of distributed funds. LLC argued that a 2022 meeting ratified the prior actions, curing any defects. The trial court agreed and granted summary judgment for LLC. Camden Systems appealed.

The Court of Appeal held that the 2022 ratification of the 2021 actions was valid under the California Revised Uniform Limited Liability Company Act, which allows limited liability companies to ratify actions similarly to natural persons. The Court also found that Camden Systems lacked standing to challenge distributions made before it became a member and that the indemnification resolution was valid under the operating agreement.

Court of Appeal holds that where owners sell only partial interest in company the “reasonableness standard” rather than the “void per se” must be applied to determine whether noncompete clause is valid

Samuelian v. Life Generations Healthcare, LLC involved a dispute over the enforceability of a noncompetition provision in an operating agreement following the partial sale of a business interest. Robert and Stephen Samuelian co-founded Life Generations Healthcare, LLC (“Company”), and later sold a portion of their interest in the Company. The new operating agreement included a noncompetition clause against the Samuelians that the Samuelians later challenged in arbitration. The arbitrator found the provision invalid per se under California Business and Professions Code section 16600, which generally voids contracts restraining lawful professions, trades, or businesses. The Samuelians then petitioned the trial court to confirm the arbitration award.

The trial court confirmed the award, agreeing that the noncompetition provision was invalid per se. The court also found that the Samuelians did not owe fiduciary duties to the Company as minority members in a manager-managed limited liability company. The Company and individual defendants appealed, arguing that the arbitrator applied the wrong legal standard and that the reasonableness standard should apply instead.

The Court of Appeal reversed, concluding that the arbitrator had indeed applied the wrong standard. The Court held that noncompetition agreements arising from the partial sale of a business interest should be evaluated under the reasonableness standard, not the per se standard. The Court reasoned that partial sales differ significantly from the sale of an entire business interest, as the seller remains an owner and may still have some control over the company. Therefore, such noncompetition provisions must be scrutinized for their procompetitive benefits.