State Case Law Rulings on Eminent Domain in California, Non-Competition in Texas

Plus: Rulings on Family Business Share Value in Oklahoma, Expert Witnessing in New Hampshire

The California Appeals Court rules on whether a vineyard’s expectations for future profits for land taken in eminent domain proceedings was a reasonable extrapolation in The People v. Dry Canyon Enterprises, LLC.  Click for more state case law on non-competition agreements, expert witnessing, and family business share value—from Texas, Oklahoma, and New Hampshire.

The People v. Dry Canyon Enterprises, LLC
2012 Cal. App. LEXIS 1217
November 28, 2012
Court of Appeals of California
Judge Hoffstadt

Summary:

Plaintiff, California Department of Transportation (the State), initiated eminent domain proceedings against a strip of defendant vineyard’s land as part of a project to widen the highway, and the vineyard was compensated for the land and vines. A jury heard evidence on lost goodwill, and the Superior Court of San Luis Obispo County, California, granted the state’s motion for judgment on the ground that no goodwill was proven. The vineyard appealed. 

The court of appeal held that under Code Civ. Proc., § 263.510, a business owner was entitled to a jury trial on the amount of goodwill lost by a taking only if he or she first established, as a threshold matter, that the business had goodwill to lose. 

In the current case, the vineyard offered expert testimony, but that evidence was properly excluded based on the methods used. The cost-to-create method was inapplicable. The premium pricing method, which was invented by the vineyard’s expert, did not withstand scrutiny because it was inherently subjective, in that the “premium” that drove the value of the business’s goodwill depended largely on which competitive product was chosen.

At bottom, the method calculated lost future profits on a product that had yet to be profitable and labeled those speculative losses “goodwill.”  The court affirmed the judgment.

Garcia v. Oilfield Mud & Chemical Services, Inc.
2012 Tex. App. LEXIS 9465
November 15, 2012
Court of Appeals of Texas
Judge Wright

Summary:

Appellant, a former employee of appellee employer, sought review of an order from the 358^th District Court, Ector County (Texas), which granted the employer’s request for a temporary injunction in a suit to enforce a non-competition agreement. 

The agreement provided that the employee would not compete with the employer’s business for two years following termination of employment. The agreement stated that the employee had been given access to trade secrets, customers, confidential data, and goodwill.

At the hearing, the employer presented evidence that the employee had solicited its customers and that some customers went with him to a competing business, causing the employer to lose sales. The court held that goodwill was a protectable interest under Tex. Bus. & Com. Code Ann. § 15.50(a) (2011); thus, the agreement was enforceable without any need to prove that the employee had been given confidential information or trade secrets.

Based upon the evidence presented at the hearing, the trial court did not abuse its discretion in determining that the employer had a probable right to recover on its cause of action for breach of a covenant not to compete. The injunction sufficiently set forth under Tex. R. Civ. P. 683 why irreparable harm was likely.

Although the injunction was properly limited as to time and geographic area, it was overbroad in that it included customers with whom the employee had no previous dealings. 

The court affirmed the order as modified to limit its scope to customers with whom the employee had dealt while he worked for the employer.

Colclasure v. Colclasure
2012 Okla. LEXIS 106
November 20, 2012
Supreme Court of Oklahoma
Judge Kauger

Summary:

Plaintiff wife and defendant husband were divorcing. The trial court valued the parties’ flooring business at $ 480,000 and awarded the husband $ 235,200 in the property division. The Oklahoma Court of Civil Appeals affirmed the value, which the trial court placed on the business and the property division awarded to the husband. The wife sought and was granted certiorari.  The wife owned the business prior to the parties’ marriage.

In 2003, just before the marriage, she sold the husband a 49% interest in the business for $ 5,000. Gross receipts for the calendar year 2003 were $ 635,549, and the gross profits totaled $126,431. The property division award of $ 235,200 to the husband was 47 times the amount of his initial investment five years earlier. Additionally, following the parties’ separation, the husband started a competing business using the wife’s business’ showroom and materials, soliciting its customers, and undercutting its bids to which he had access.

The court held that the trial court was not bound by a valuation date set forth in a 2006 agreement between the parties when placing a value on the business for purposes of property division.

To be equitable, the valuation should have taken into account the value at the time the husband bought his share, the proportionate increase in value due to the parties’ industry, and a decrease in value due to the husband’s competing business. The husband also received money from the business, which was not deducted from the property settlement.  The court reversed and remanded the case to the trial court for a valuation of their business with instructions to include any loss in its value due to the husband’s competing business.

Pohlmann v. Pohlmann
2012 Neb. App. LEXIS 217
November 13, 2012
Nebraska Court of Appeals
Judge Irwin

Summary:

The trial court abused its discretion in calculating an ex-husband’s income. The trial court erred in using two numbers it had specifically found to be inherently unreliable to calculate the husband’s income. Because the trial court found neither number to be an accurate reflection of the husband’s income, it was not clear how an average of those numbers would accurately reflect his income. There was no support in the record for the trial court’s calculation, and the decree provided little explanation about why this number was representative of the husband’s income or earning capacity.  The appellate court affirmed the district court’s decision to award custody of the parties’ children to the wife and its division of the parties’ marital estate. However, the matter was remanded to the district court to recalculate the husband’s annual income. In addition, the appellate court reversed the district court’s determinations regarding the husband’s child support obligation and the wife’s alimony award.

In the Matter of Cottrell
2012 N.H. LEXIS 83
June 29, 2012
Supreme Court of New Hampshire
Judge Lynn

Summary:

In a divorce between petitioner wife and respondent husband, the Manchester Family Division (New Hampshire) adopted the appraisal of the wife’s expert in valuing the husband’s dental practice at $1,274,000 for the purposes of the final distribution of property under RSA 458:16-a (2004).

The husband appealed.  The husband’s expert valued the dental practice at $156,000. The court held that the trial court properly adopted the wife’s valuation of the business.

The trial court found that the husband’s expert vastly underestimated the fair market value of the business, especially in light of his concession that he limited his analysis to its net tangible assets. The husband’s expert made no calculation of goodwill.

Both the estimate of $156,000 and the alternative estimate of $400,000 were further undermined by the fact that the husband paid $410,000 for the business in 1996 and had run an unusually successful dental practice ever since. As for the husband’s argument that the trial court failed to subtract the portion attributable to professional goodwill, neither expert assigned a precise value, if any existed, to the professional goodwill of the practice.

Finally, the trial court was entitled to consider that were the husband to sell his practice, the price would likely include an agreement not to compete.

Both experts agreed that non-compete covenants routinely accompanied the sale of professional practices, and New Hampshire law recognized such contracts as long as they were reasonable.

The court affirmed the trial court’s decision. 

Peter H. Agrapides, MBA, AVA, is a Principal at Western Valuation Advisors, which has offices in Salt Lake City, Utah, and Las Vegas, Nevada. Mr. Agrapides’ practice focuses primarily on valuations for gift and estate tax reporting. He has experience valuing companies in a diverse array of industries. These engagements have ranged from small family owned businesses to companies over $1billion.