Judge: Lee W. Tsao, Case: 21NWCV00865, Date: 2023-02-07 Tentative Ruling

Case Number: 21NWCV00865    Hearing Date: February 7, 2023    Dept: C

SK ENTERPRISES TAX, LLC v. MANAN K PATEL, et al.

CASE NO.:  21NWCV00865

HEARING:  2/7/23 @ 10:30 AM

#2

TENTATIVE RULING

I.             Defendants M. Patel, Gavini, R. Patel, Lee, and PGP Consulting, LLC’s demurrer is SUSTAINED without leave to amend as to the 4^th and 7^th – 8^th causes of action against Defendant Lee, as to 5^th cause of action against Defendant Patel, and as to the 10^th – 11^th causes of action.  The demurrer is SUSTAINED with 10 days leave to amend as to the 4^th – 5^th and 7^th - 8^th causes of action against the remaining Defendants, and as to 6^th, 9^th, and 12^th causes of action against all Defendants.  The demurrer is OVERRULED as to the 4^th cause of action against the remaining Defendants.

II.            Defendants M. Patel, Gavini, R. Patel, Lee, and PGP Consulting, LLC’s motion to strike is MOOT.

Moving Parties to give NOTICE.

I.             Demurrer

Defendants M. Patel, Gavini, R. Patel, Lee, and PGP Consulting, LLC demur to the 4^th – 12^th causes of action in the First Amended Complaint (“FAC”) filed by SK Enterprises Tax, LLC (“SKE”) on the grounds that they fail to state facts sufficient to constitute a cause of action.

Plaintiff SK Enterprises Tax, LLC’s operative FAC alleges that Defendants conspired to take proprietary, confidential and trade secret information while they were employed by SK Enterprises for the purposes of gaining a business advantage for their newly created competing business enterprise PGP Consulting. (FAC, ¶ 13-50).  The FAC asserts causes of action for:

1.        Threatened Misappropriation Of Trade Secrets (Cal. Civ Code § 3426)

2.        Misappropriation of Trade Secrets

3.        Unauthorized Use Of Computers, Computer Systems And Data (Cal. Pen. Code § 502)

4.        Breach of Fiduciary Duty

5.        Breach of Good Faith And Fair Dealing

6.        Unfair Business Practices (Cal. Bus & Prof § 17200)

7.        Intentional Interference with Contractual Relations

8.        Intentional Interference with Prospective Economic Relations

9.        Fraud (Concealment)

10.    Conversion

11.    Trespass to Chattels

12.    Fraud (Misrepresentation)

13.    Violation of Pen. Code § 496

4^th CAUSE OF ACTION

BREACH OF FIDUCIARY DUTY:  The elements are:  1) existence of a fiduciary duty; 2) breach of the duty; and 3) damage caused by the breach.  (Charnay v. Cobert (2006) 145 Cal.App.4^th 170, 182; Stanley v. Richmond (1995) 35 Cal.App.4^th 1070, 1086.)

Initially, Defendants contend that the 4^th cause of action is based on the misappropriation of trade secrets claims, and are therefore preempted.

Cal. Civ. Code § 3426.7(b) “preempts common law claims that are ‘based on the same nucleus of facts as the misappropriation of trade secrets claim for relief.’” (K.C. Multimedia, Inc. v. Bank of Am. Techn. & Ops., Inc. (2009) 171 Cal.App.4th 939, 954.)

The court finds that the breach of fiduciary duty claim is not based on the same nucleus of facts as the misappropriation of trade secrets claim.  ¶¶ 80 – 88 allege that Defendants breached their fiduciary duties by reducing their work hours and work output, failed to come into the office when promised, and performed inferior work while taking full pay.  Therefore, Plaintiff adequately alleged breaches that are independent of the misappropriation of trade secrets claims. 

Defendants alternatively argue that as employees, and “employment type relationships are not fiduciary relationships.”  (O’Byrne v. Santa Monica-UCLA Med. Ctr. (2001) 94 Cal.App.4th 797, 811; accord Amid v. Hawthorne
Cmty. Med. Group, Inc. (1989) 212 Cal.App.3d 1383, 1391.) “Before a person can be charged with a fiduciary obligation, he must either knowingly undertake to act on behalf and for the benefit of another, or must enter into a relationship which imposes that undertaking as a matter of law.”  (City of Hope Nat’l Med. Ctr. v. Genetech, Inc. (2008) 43 Cal.4th 375, 386.)

Plaintiff, in its Opposition, indicates that it will dismiss Defendant Lee from the 4^th cause of action because she is not a high-level supervisor.

¶ 75 alleges that Defendants were “each entrusted with access to sensitive and confidential information based upon the positions of trust they had with the Company.”

Defendants cite to federal District court cases to argue that allegations of trust are insufficient to create a fiduciary relationship.  However Defendants’ citations are not binding on this court.  Defendants failed to cite to any California appellate court case that holds that employees in positions of trust cannot owe a fiduciary duty.

Accordingly, the demurrer to the 4^th cause of action is SUSTAINED without leave to amend as to Defendant Lee, and is OVERRULED as to the remaining Defendants.

5^th CAUSE OF ACTION

BREACH OF IMPLIED COVENANT OF GOOD FAITH AND FAIR DEALING:  The elements are:  1) existence of contractual relationship; 2) implied duty; 3) breach; and 4) causation of damages.  (E.g., Smith v. San Francisco (1990) 225 Cal.App.3d 38, 49; 1 Witkin Sum. Cal. Law (10^th ed. 2005) Contracts § 800.)

Initially, Defendants contend that the 5^th cause of action is based on the misappropriation of trade secrets claims, and are therefore preempted.

Cal. Civ. Code § 3426.7(b) “preempts common law claims that are ‘based on the same nucleus of facts as the misappropriation of trade secrets claim for relief.’” (K.C. Multimedia, Inc. v. Bank of Am. Techn. & Ops., Inc. (2009) 171 Cal.App.4th 939, 954.)

The court finds that the bad faith claim is not based on the same nucleus of facts as the misappropriation of trade secrets claim.  ¶¶ 97-103 allege that Defendants breached their implied duties by reducing their work hours and work output, failed to come into the office when promised, and performed inferior work while taking full pay.  Therefore, Plaintiff adequately alleged breaches that are independent of the misappropriation of trade secrets claims. 

In its Opposition, Plaintiff agrees to dismiss the 5^th cause of action against Defendant Patel.

As to the remaining Defendants, Plaintiff argues that this cause of action is based on the implied covenant, and not on a contract.  However, this assertion is not supported by any legal authority.  An essential element of pleading a breach of the implied covenant of good faith and fair dealing claim is pleading facts sufficient to establish the existence of a contract. (Jenkins v. Family Health Program (1989) 214 Cal.App.3d 440, 447.)

Accordingly, the demurrer to the 5^th cause of action is SUSTAINED without leave to amend as to Defendant Patel, and is SUSTAINED with 10 days leave to amend as to the remaining Defendants.

7^th – 8^th CAUSES OF ACTION

INTENTIONAL INTERFERENCE WITH CONTRACTUAL RELATIONSHIP:  The elements are:  Plaintiff had a valid and existing contract with a third party; defendant had knowledge of the contract; defendant committed intentional and unjustified acts designed to interfere with or disrupt the contract; actual interference with or disruption of the relationship; and resulting damages.  (Shamblin v. Berge (1985) 166 Cal. App. 3d 118, 123.)

INTENTIONAL INTERFERENCE WITH PROSPECTIVE ECONOMIC ADVANTAGE:  To prevail on a cause of action for intentional interference with prospective economic advantage in California, a plaintiff must plead and prove (1) an economic relationship between the plaintiff and some third party, with the probability of future economic benefit to the plaintiff; (2) the defendant's knowledge of the relationship; (3) the defendant's intentional acts designed to disrupt the relationship; (4) actual disruption of the relationship; and (5) economic harm to the plaintiff proximately caused by the defendant's acts. (Reeves v. Hanlon (2004) 33 Cal.4th 1140, 1152 n. 6.)  A plaintiff that chooses to bring a claim for interference with prospective economic advantage has a more rigorous pleading burden since it must show that the defendant's conduct was independently wrongful other than the fact of interference itself.  (Korea Supply Co. v. Lockheed Martin Corp. (2003) 29 Cal.4^th 1134; Della Penna v. Toyota Motor Sales, U.S.A., Inc. (1995) 11 Cal.4th 376, 393.) 

Cal. Civ. Code § 3426.7(b) “preempts common law claims that are ‘based on the same nucleus of facts as the misappropriation of trade secrets claim for relief.’” (K.C. Multimedia, Inc. v. Bank of Am. Techn. & Ops., Inc. (2009) 171 Cal.App.4th 939, 954.)

The court finds that the interference claims are not based on the same nucleus of facts as the misappropriation of trade secrets claim.  ¶¶ 127-128, and 136-137 allege that Defendants Patel and Gavini “intentionally delay[ed] and deliberately perform[ed] inferior work on behalf of SKE’s customers and potential customers so as to weaken SKE’s relationship with those customers and potential customers.”  Therefore, Plaintiff adequately alleged interference claims that are independent of the misappropriation of trade secrets claims.

Defendants additionally argue that the interference with contract claim fails to allege any actual interference with or disruption of the relationship.  Indeed, the 7^th – 8^th causes of action fail to allege any “actual” disruption.

As there are no interference allegations against Defendant Lee, the demurrer to the 7^th – 8^th causes of action is SUSTAINED without leave to amend as to Defendant Lee, and is SUSTAINED with 10 days leave to amend as to the remaining Defendants.

9^th and 12^th CAUSES OF ACTION

FRAUD (CONCEALMENT), FRAUD (MISREPRESENTATION): 

The elements are:  1) misrepresentation (false representation, concealment, or nondisclosure); 2) knowledge of falsity (scienter); 3) intent to defraud or induce reliance; 4) justifiable reliance; and 5) damages.  (See CC § 1709.)  Fraud actions are subject to strict requirements of particularity in pleading.  (Committee on Children’s Television, Inc. v. General Foods Corp. (1983) 35 Cal. 3d 197, 216.)  A plaintiff must allege what was said, by whom, in what manner (i.e. oral or in writing), when, and, in the case of a corporate defendant, under what authority to bind the corporation.  (See Goldrich v. Natural Y Surgical Specialties, Inc. (1994) 25 Cal.App.4th 772, 782.)

¶ 144 alleges that Defendants concealed the taking of the SKE Stolen Confidential Information. 

Plaintiff argues that the basis of the allegations against Defendants Patel, Gavini and Lee are that the three of them concealed their scheme to resign together.  However, Defendants owed no duty to reveal their intent to resign from a company.  Stripped of the facts supporting trade secret misappropriation, the remaining facts do not support any fraudulent concealment. Intentionally delaying and deliberately performing inferior work does not support a fraud claims.  Plaintiff failed to allege what exactly Defendants concealed.

Further, as to the Fraudulent Misrepresentation claim against Defendant Lee only, Plaintiff failed to allege any detrimental reliance on Defendant Lee’s promise to bring in her personal computer, and her decision to not bring in the computer for Plaintiff’s examination.  ¶ 173 alleges that SKE was “induced to delay its investigation.”  However, Plaintiff failed to allege how the delay caused any additional damages.

Accordingly, the demurrer to the 9^th and 12^th causes of action is SUSTAINED with 10 days leave to amend.

10^th and 11^th CAUSES OF ACTION

CONVERSION, TRESPASS TO CHATTELS:

Cal. Civ. Code § 3426.7(b) “preempts common law claims that are ‘based on the same nucleus of facts as the misappropriation of trade secrets claim for relief.’” (K.C. Multimedia, Inc. v. Bank of Am. Techn. & Ops., Inc. (2009) 171 Cal.App.4th 939, 954.)

The court finds that the above common law causes of action are based on the same nucleus of facts as the misappropriation of trade secrets claims.  The FAC alleges that Defendants worked in concert to steal Plaintiff’s confidential information or trade secrets.  As such, the allegations are based on the misappropriation of trade secrets allegations in the 1^st – 2^nd causes of action.

Demurrer to the 10^th – 11^th causes of action is SUSTAINED without leave to amend.

6^th CAUSE OF ACTION

UNFAIR BUSINESS PRACTICES:  “Unfair competition shall mean and include any unlawful, unfair or fraudulent business act or practice.”  (Cal. Bus. & Prof. § 17200).

“[T]he avowed purpose of CUTSA is ‘to make uniform the law with respect to the subject of this title among states enacting it.’ (§ 3426.8.) This purpose would hardly be served by preserving whatever local remedies might be recognized under a general statute like the UCL. No basis appears to attribute such an intention to the Legislature. It follows that CUTSA bars UCL claims sounding in misappropriation of trade secrets.  (Silvaco Data Systems v. Intel Corp. (2010) 184 Cal.App.4th 210, 240-241.)

¶ 115 alleges that Defendants edited and revised the Excel spreadsheet on SKE computers and used SKE’s computer systems during paid time, and
using other SKE resources.  It is unclear to this court how editing the Excel spreadsheet would constitute an unfair business practice.  Did Defendants place fraudulent information in the Excel spreadsheet?  It is unclear to this court how accessing work software during work hours constitutes an unfair business practice.

Further, because the Fraud claims are inadequate, the B&P Code § 17200 claim cannot be based on fraud.

What remains is the allegation that Defendants stole confidential information.  (FAC, ¶ 111.)  It would be antithetical to the stated purpose of the statute to permit local remedies such as UCL to stand.  As such, CUTSA bars UCL claims based on misappropriation of trade secrets.

Accordingly, the demurrer to the 6^th cause of action is SUSTAINED with 10 days leave to amend.

II.            Motion to Strike

Defendants’ accompanying motion to strike is MOOT in light of the court’s grant of leave to amend.