Judge: Daniel S. Murphy, Case: 23STCV26715, Date: 2024-05-20 Tentative Ruling

Case Number: 23STCV26715    Hearing Date: May 20, 2024    Dept: 32

BACKGROUND

            On November 1, 2023, Plaintiff Eric Garcia initiated this action against Defendants JT Legal Group and Crestview Solutions, Inc. Plaintiff filed the operative First Amended Complaint (FAC) on April 8, 2024, asserting causes of action for (1) breach of contract, (2) breach of implied contract, (3) restitution, (4) failure to pay wages, (5) waiting time penalties, (6) misclassification, (7) unfair competition, and (8) whistleblower retaliation.

            Plaintiff alleges that he entered into an employment contract with JT Legal in October 2020 to be JT Legal’s Chief Marketing Officer. The contract allegedly provided for an annual salary plus bonuses, and guaranteed employment for one year, after which the employment would be at-will under the same terms. Plaintiff alleges that JT Legal failed to fully pay him his wages and bonuses and falsely accused him of sexual harassment as retaliation for complaining. Plaintiff alleges that these circumstances forced him to resign in October 2022. Plaintiff alleges that Crestview directed him to perform work under the contract with JT Legal and that Crestview partially compensated him for such work, thereby impliedly agreeing to pay Plaintiff on the same terms as provided for in the JT Legal agreement.  

            On April 17 and 22, 2024, JT Legal and Crestview filed their respective demurrers to the FAC. Plaintiff filed his oppositions on May 7, 2024. Defendants filed their replies on May 10, 2024.

LEGAL STANDARD

A demurrer for sufficiency tests whether the complaint states a cause of action. (Hahn v. Mirda (2007) 147 Cal.App.4th 740, 747.) When considering demurrers, courts read the allegations liberally and in context. (Taylor v. City of Los Angeles Dept. of Water and Power (2006) 144 Cal.App.4th 1216, 1228.) In a demurrer proceeding, the defects must be apparent on the face of the pleading or by proper judicial notice. (Code Civ. Proc., § 430.30, subd. (a).) A demurrer tests the pleadings alone and not the evidence or other extrinsic matters. (SKF Farms v. Superior Court (1984) 153 Cal.App.3d 902, 905.) Therefore, it lies only where the defects appear on the face of the pleading or are judicially noticed. (Ibid.) The only issue involved in a demurrer hearing is whether the complaint, as it stands, unconnected with extraneous matters, states a cause of action. (Hahn, supra, 147 Cal.App.4th at 747.)

MEET AND CONFER

Before filing a demurrer or a motion to strike, the demurring or moving party is required to meet and confer with the party who filed the pleading demurred to or the pleading that is subject to the motion to strike for the purposes of determining whether an agreement can be reached through a filing of an amended pleading that would resolve the objections to be raised in the demurrer. (Code Civ. Proc., §§ 430.41, 435.5.) The Court notes that Defendants have complied with the meet and confer requirement. (See Philips Decl.)

DISCUSSION

I. Illegality

            Defendants’ central argument is that the contract is void in violation of public policy and therefore unenforceable. Defendants rely on the California Rules of Professional Conduct (CRPC), which prohibit fee-sharing with nonlawyers. Plaintiff alleges that the contract entitled him to a percentage of JT Legal’s revenue (FAC ¶ 9), which naturally derives from legal fees. Plaintiff is indisputably not a lawyer. Therefore, Defendants argue that the alleged contract is an illegal fee-sharing agreement.   

            However, “[t]he rule denying recovery to a party to an illegal contract is subject to a wide range of exceptions. Where, by applying the rule, the public cannot be protected because the transaction has been completed, where no serious moral turpitude is involved, where the defendant is the one guilty of the greatest moral fault, and where to apply the rule will be to permit the defendant to be unjustly enriched at the expense of the plaintiff, the rule should not be applied.” (Emmons, Williams, Mires & Leech v. State Bar (1970) 6 Cal.App.3d 565, 569, internal citations omitted.)

In Emmons, a law firm similarly argued that “payment of the one-third forwarding fee would constitute fee-splitting with an unlicensed person . . . in violation of rules 2 and 3 of the Rules of Professional Conduct of the State Bar of California.” (Emmons, supra, 6 Cal.App.3d at pp. 568-69.) The court rejected this argument, holding that “whatever the contract's illegality, the bar association is not in pari delicto and may therefore enforce its claim to the one-third forwarding fee.” (Id. at p. 569.) The parties were not in pari delicto because the prohibition on fee-sharing applied only to the law firm. (Id. at p. 570.) The law firm could not use its own wrongdoing to escape liability for a contract that was otherwise completed. (Ibid.) The firm had received the benefit of the services and would have been unjustly enriched had it not been required to pay. (Ibid.)    

Here, JT Legal’s entry into the alleged fee-sharing agreement in violation of its own ethical obligations similarly does not absolve it from breach of contract. Plaintiff, as a nonlawyer, did not share JT Legal’s obligations pertaining to fee-sharing agreements. Thus, Plaintiff was not in pari delicto with JT Legal. The allegations establish that JT Legal received the benefits of Plaintiff’s services. (See FAC ¶¶ 11-12.) JT Legal would be unjustly enriched if it could escape liability through its own alleged wrongful conduct. Therefore, like in Emmons, the illegality of the fee-sharing contract does not render the contract unenforceable.

a. Two Elements

Relying on Cain v. Burns (1955) 131 Cal.App.2d 439, JT Legal argues in reply that the illegality exception requires two elements: (1) the law in question must be intended for the benefit of the person invoking the exception; and (2) the parties must not be in pari delicto. The court in Cain stated the following: “Where parties to an illegal contract are in pari delicto, neither may recover from the other property or money transferred in the course of the illegal transaction. But a member of a class for whose protection a statute was enacted is ordinarily not considered in pari delicto with those who violate the statute. The statute being for his benefit and he not being in pari delicto, he is entitled to relief and may resort to the courts to recover.” (Id. at p. 442.)

This does not impose a dual requirement as JT Legal contends. It merely rephrases the principle, discussed above, that where a statute is directed at one party, and only that party is considered to have violated the law by entering into a transaction, the innocent party is still entitled to recovery. In holding that an insurance investigator was entitled to enforce a fee agreement with a lawyer, the court reasoned that “the statute prohibiting fee-splitting prohibits only the attorney, not the layman.” (Cain, supra, 131 Cal.App.2d at p. 443.) “[W]henever the statute imposes a penalty upon one party and none upon the other, they are not to be regarded as par delictum.” (Ibid.) The court did not analyze whether the rule against fee-splitting was meant for the benefit of the insurance investigator, much less impose a requirement on the investigator to prove so. Therefore, there is no requirement for Plaintiff to prove that the CRPC was designed for his benefit.

b. Whether Plaintiff is In Pari Delicto

Relying on McIntosh v. Mills (2004) 121 Cal.App.4th 333, JT Legal argues that the Court should find Plaintiff in pari delicto because Plaintiff was acting as its agent. First, McIntosh acknowledged that “a determination of whether the parties are in pari delicto involves an analysis of the relative culpability of each.” (Id. at p. 349.) This is a factual matter not suited for resolution on demurrer. McIntosh was decided on summary judgment. (Id. at pp. 336-37.) For the same reason, the fact that the referral service in Emmons served a commendable public purpose is not a dispositive distinction. The question of culpability is relative and dependent on the facts of each case. Even if Plaintiff here is not as commendable as the referral service in Emmons, that does not necessarily mean Plaintiff is culpable in relation to JT Legal under the particular facts of this case. There can be no finding of the relative culpability of each party based on the complaint alone. Emmons was also decided on summary judgment. (Emmons, supra, 6 Cal.App.3d at p. 567.)     

Second, in McIntosh, “Anton not only provided legal representation for McIntosh, but also actually entered into the agreement on his behalf as McIntosh's agent. Anton, of course, was directly bound by the CPRC” as a member of the bar himself. (McIntosh, supra, 121 Cal.App.4th at pp. 349-50.) “Under these facts, the parties are indeed in pari delicto, and McIntosh is barred from enforcing his agreement with Mills.” (Id. at p. 350.) No such facts appear in the complaint in this case. JT Legal provides no legal support for its theory that Plaintiff could act as JT Legal’s agent and enter into a fee arrangement with himself. Furthermore, unlike Anton, Plaintiff is not a member of the bar and is not directly bound by the CRPC. Plaintiff is more akin to the nonlawyer investigator in Cain, who was “presumably unaware of the illegal nature of the fee-sharing agreement.” (Ibid.) Therefore, in terms of the “relative culpability” of the parties, it may be reasonably inferred for pleading purposes that JT Legal is more culpable. In other words, the complaint sufficiently establishes that Plaintiff was not in pari delicto with JT Legal in entering the contract and may therefore enforce the contract.   

c. Outdated Rules

JT Legal argues that both Cain and Emmons involved the older version of the CRPC and therefore the principles articulated in those cases do not allow Plaintiff to enforce the contract at issue here, which violates the updated CRPC, including Rule 1.5.1, which prohibits fee sharing between lawyers without client consent. However, Cain and Emmons are sufficiently analogous in that they both concerned the potential illegality of fee-sharing agreements. That those cases discussed an older version of the rule against fee-sharing does not negate the general principle expressed by the Court of Appeal—i.e., where a law applies only to one party (lawyer) but not the other (layman), the parties are not in pari delicto, and the contract may be enforced. The CRPC, old or new, still only applies to lawyers and not laymen. JT Legal cites no authority suggesting otherwise.

Therefore, the first cause of action for breach of contract against JT Legal survives. JT Legal’s arguments regarding the remaining claims derive from the same premise that the contract is unenforceable. As such, those claims also survive the demurrer.

II. Consideration

            Defendants argue that the alleged contract lacks consideration because its illegality meant that JT Legal was free to withdraw from it at any time, thus rendering it illusory. However, as discussed above, the contract’s illegality does not absolve JT Legal from the obligations therein.

            Defendants also argue that the contract lacks consideration because it premised Plaintiff’s compensation on revenue from future clients and lawsuits which did not yet exist. Defendants cite no authority for this proposition. “Consideration consists of a benefit bestowed or a detriment suffered as bargained for by the parties.” (A. J. Industries, Inc. v. Ver Halen (1977) 75 Cal.App.3d 751, 761.) Forgoing a portion of revenue, whether earned or to be earned, sufficiently satisfies this definition. “[C]ourts do not weigh the quantum of the consideration as long as it has some value.” (Ibid.) Therefore, the alleged contract does not fail for want of consideration.

III. Uncertainty

            Defendants argue that the complaint is uncertain as to whether the contracts were oral, written, or implied. The FAC clearly alleges that “Garcia entered into a written agreement with JTLegal” and that “Crestview created an implied contract to pay Garcia for the work furnished by Garcia on the terms negotiated with JTLegal.” (FAC ¶¶ 28, 37.) Therefore, the complaint is not uncertain. 

IV. Crestview’s Liability

Crestview argues that it has no liability under the FAC because the allegations are directed at JT Legal. Crestview contends that: it has no obligation to pay Plaintiff, under a contract or otherwise; it did not receive a benefit from Plaintiff; and it did not take any action affecting Plaintiff’s employment.

a. Breach of Implied Contract

“A cause of action for breach of implied contract has the same elements as does a cause of action for breach of contract, except that the promise is not expressed in words but is implied from the promisor's conduct.” (Yari v. Producers Guild of America, Inc. (2008) 161 Cal.App.4th 172, 182.) The existence of an implied contract is a question of fact. (Unilab Corp. v. Angeles-IPA (2016) 244 Cal.App.4th 622, 636.)

            Plaintiff alleges that “[d]uring Garcia’s employment, Crestview directed Garcia to perform work pursuant to the contract and made partial payments pursuant to that contract.” (FAC ¶ 33.) “Crestview knew and intended that by doing so it was agreeing to pay Garcia for his work on the same terms as JTLegal agreed.” (Id., ¶ 34.) Beginning in February 2022, JT Legal ceased paying Plaintiff, and Crestview paid Plaintiff instead. (Id., ¶¶ 17-18.) “By its conduct, Crestview created an implied contract to pay Garcia for the work furnished by Garcia on the terms negotiated with JTLegal.” (Id., ¶ 37.) This sufficiently alleges an implied contract wherein Crestview agreed to pay Plaintiff for services that Plaintiff provided to JT Legal. Whether Crestview’s conduct created an implied contract is a question of fact. (See Unilab, supra, 244 Cal.App.4th at p. 636.) Therefore, the demurrer is OVERRULED as to the second cause of action.

            b. Employment Claims

However, this does not mean Crestview employed Plaintiff or obtained a benefit at Plaintiff’s expense. The allegations, even when read as a whole and interpreted liberally, do not support the restitution, wage, and retaliation claims against Crestview. Plaintiff argues that the allegations support the claims against Crestview as a joint employer. In determining whether an entity is an “employer” for purposes of liability for unlawful employment practices, courts “consider the ‘totality of circumstances’ that reflect upon the nature of the work relationship of the parties, with emphasis upon the extent to which the defendant controls the plaintiff’s performance of employment duties.” (Vernon v. State of California (2004) 116 Cal.App.4th 114, 124.) “The ‘right to control’ the employment relationship which is essential to subject the defendant to liability is evaluated by focusing on ‘an examination of defendant’s role with respect to the right to hire, fire, transfer, promote, discipline, set the terms, conditions and privileges of employment, train and pay the plaintiff.’” (Id. at p. 128, quoting Lee v. Mobile County Comm'n (S.D.Ala. 1995) 954 F.Supp. 1540, 1545.)

            Plaintiff’s complaint contains no facts establishing Crestview as a joint employer. As currently pled, it is unclear what Crestview’s relationship is to either Plaintiff or JT Legal. Therefore, Crestview’s demurrer is SUSTAINED with leave to amend as to the third through sixth and eighth causes of action.

CONCLUSION

            Defendant Crestview’s demurrer is SUSTAINED in part as set forth above with leave to amend. JT Legal’s demurrer is OVERRULED.