As part of Wood Robbins’ commercial litigation practice, the firm represents parties in disputes with business associates (partners, members of LLCs, shareholders), sometimes before the venture falls apart, sometimes after. In the particular case we are going to discuss here, the firm represented a partner who formally withdrew from his partnership. The lead partner of the partnership reacted poorly, telling clients that the withdrawing partner/our client was negligent in doing their work, calling a professional association disparaging our client, and refusing to pay our client pursuant to the partnership agreement’s buy-sell provisions.
The first order of business for the firm was to try and stop the negative campaign against our client that threatened his professional reputation. Courts stop people from taking actions via injunctions. The challenge was the law, which flatly prohibits “prior restraints” of speech, that is, preliminary and/or pre-judgment injunctions that prohibit communications of any kind. Courts have repeatedly said that prior restraints violate the 1st Amendment Freedom of Speech clause of the United States Constitution.
The firm researched the issue extensively and found an argument to make. The firm argued that defendants conduct violated the California Unfair Competition Law and specifically the false advertising prohibitions therein. Moreover, we argued defendants’ dissemination of misrepresentations may be enjoined by this Court because the misrepresentations constitute “commercial speech” that is false or misleading:
“[C]ommercial speech receives a lesser degree of constitutional protection than many other forms of expression. Kasky, 27 Cal. 4th at 946; see also Bolger v. Youngs Drug Products Corp., 463 U.S. 60, 64-65 (1983). In fact, “[c]ommercial speech that is false or misleading is not entitled to First Amendment protection and ‘may be prohibited entirely.’” Kasky, 27 Cal. 4th at 953-954; Zauderer v. Office of Disciplinary Counsel 471 U.S. 626, 638 (1985) (“The States and the Federal Government are free to prevent the dissemination of commercial speech that is false, deceptive, or misleading.”); Central Hudson Gas & Elec. v. Public Serv. Comm’n, 447 U.S. 557, 566 (1980) (stating that commercial speech “must . . . not be misleading” for it to be protected by the First Amendment.) Similarly, the California Constitution “does not prohibit the imposition of sanctions for misleading commercial advertisements.” Kasky, 27 Cal. 4th at 939. Thus, regulation of commercial speech in California under to the UCL and FAL has been upheld. Id.
The Court agreed with the firm’s reasoning and issued the injunction, which shut the defendant/lead partner down. The firm then cleverly settled with the defendants’ insurance carrier getting a sizable award for our client, and settled separate litigation we filed against the defendants in federal court, securing an additional award for our client. The effort was a total success.
If you are involved in an entity breakup, give us a call. We can likely help you navigate the withdrawal and aftermath.