Court Order to U-Haul: Haul Your Non-Compete Clauses Out of California

A California appellate court recently upheld a permanent injunction in Robinson v. U-Haul Company of California barring U-Haul from enforcing its non-compete covenants in California. U-Haul also was required to pay over $800,000 in attorney’s fees to its former dealer.

U-Haul’s Suit: U-Haul sued one of its independent dealers for breach of contract and unfair competition after the dealer’s contract with U-Haul was terminated and the dealer began renting out Budget trucks at the former U-Haul dealership.

Dealer’s Suit: After U-Haul lost its request for a preliminary injunction, the dealer filed a separate action for malicious prosecution, as well as a UCL claim, and prevailed. The trial court issued a permanent injunction prohibiting U-Haul from initiating or threatening to initiate legal proceedings to enforce its non-compete in California. It determined that U-Haul’s non-competition covenant was illegal in California and that U-Haul knew this at the time it included it in its dealer contracts. It criticized U-Haul’s actions: “Their only reason to put a void contract clause in a contract is to mislead people.”

U-Haul’s Appeal: U-Haul appealed, arguing that the trial court erred in issuing the permanent injunction because U-Haul had voluntarily stopped enforcing the non-compete in California. According to U-Haul, the company (1) modified its dealer contracts to make the non-competition clause “void where prohibited”; and (2) has advised its dealers since 2010 of its policy that it “will neither threaten nor bring any action against its independent dealers to enforce the non-competition clause.”

Nonetheless, the court held that U-Haul could not avoid a permanent injunction by undertaking to do what the injunction would require. It found that evidence of U-Haul’s past practice and the “half-measures” it took to avoid eliminating the non-competition covenant from its California contracts supported issuing the injunction. Although U-Haul’s counsel claimed that it had told its California dealers that the covenant would not be enforced against them, it provided no copy of the mass letter sent to those dealers or record of other similar transmissions. To the contrary, evidence showed that U-Haul had continued to argue that the covenant was enforceable under California law until early 2013.

The court listed four reasons in support of affirming the permanent injunction. First, U-Haul had not taken action to bind itself legally to its stated policy. Second, U-Haul had an “ingrained, long-term, knowingly illegal corporate practice” that provided support for a finding of likely repetition in the future. Third, even when U-Haul revised its standard dealer contract in 2010, it “did not purge the offending covenant,” but instead inserted the words “void where prohibited” without demonstrating “across-the-board notification” of current dealers of its policy change. Fourth, U-Haul’s change in policy came only in response to the losses it incurred in litigation, and yet it continued to insist at trial that its non-competition covenant was valid and enforceable.

This decision demonstrates that California law against non-compete provisions remains strong and that the consequences for including them in California contracts are potentially high. Employing language like “void where prohibited” and claiming to have informed those subject to these provisions that they are unenforceable will receive a cold reception from California courts. Employers should follow the simple rule that these covenants do not belong in California contracts.