Judge: Margaret L. Oldendorf, Case: 22BBCV00516, Date: 2022-12-12 Tentative Ruling
Case Number: 22BBCV00516 Hearing Date: December 12, 2022 Dept: P
SUPERIOR COURT OF THE STATE OF CALIFORNIA
FOR THE COUNTY OF LOS ANGELES
NORTHEAST DISTRICT
I. INTRODUCTION
Defendant Brian Harstein (Harstein) was employed by Plaintiff HCMC Legal, Inc. (Hire Counsel) for over 21 years. He was hired as a salesperson in 2000; from 2011 on he was a senior manager with a stock ownership interest. Hire Counsel alleges that in June 2022 Harstein quit with no notice and went to work for a competitor, thereafter soliciting its customers to the new company and enticing former co-workers to follow him as well.
Harstein seeks an order compelling Hire Counsel to arbitrate its claims against him. The matter was called for hearing November 30, 2022. However, as Harstein raised new arguments in his reply brief the matter was continued to permit HCMC to respond. Additionally, as Harstein requested a statement of decision the Court asked that he provide a statement of controverted issues. Having read and considered all the briefing, the Court concludes that Harstein failed to meet his evidentiary burden. The petition is on that basis denied. This conclusion moots a number of the controverted issues Harstein identifies. It also moots Harstein’s request for a stay of litigation pending arbitration.
II. LEGAL STANDARD
Code Civ. Proc. §1281.2 provides that upon petition of a party to an arbitration agreement alleging the existence of a written agreement to arbitrate and a party’s refusal to submit to arbitration, the court shall order the parties to arbitrate the controversy if it determines that an agreement exists, unless it determines that the right to arbitrate has been waived, that grounds exist for revocation, or that a party to the agreement is also party to a pending litigation arising out of the same facts and there exists a possibility of conflicting rulings on a common issue of fact or law.
9 U.S.C. §2 contains a similar provision: “A written provision in [] a contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction, or the refusal to perform the whole or any part thereof, or an agreement in writing to submit to arbitration an existing controversy arising out of such a contract, transaction, or refusal, shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract or as otherwise provided in chapter 4 [9 USCS §§ 401 et seq.].” The word “involving” is expansively construed and is equivalent to “affecting.” Allied-Bruce Terminix Companies v. Dobson (1995) 513 U.S. 265, 274.
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III. ANALYSIS
A. The Petition To Compel Arbitration Acts As A Motion In This Case
Petitions are governed by Code Civ. Proc. §1290, et seq. Pursuant to this section, a “proceeding” is “commenced” by filing a petition. Petition proceedings are summary proceedings (§1290.2) entitled to “preference over all other civil actions or proceedings.” Section 1291.2. Responses are due within 10 days of service. Section 1290.6.
Harstein’s petition was filed on September 15, 2022. If it had been a petition commencing a proceeding it would have been given a summary hearing date. Instead, it did not commence a proceeding; it was filed in response to an action initiated by Hire Counsel. Harstein selected a date from the prior court’s law and motion calendar and set the matter for hearing January 13, 2023, over a year later. This procedural posture undercuts Harstein’s position that the petition he filed is governed by the timelines for a summary proceeding.
“The term ‘petition,’ [] has been construed, in practice, to include the term ‘motion’ when, as here, an action is already pending. (Citations.) That appears sound, inasmuch as one may proceed by motion as well as petition under such circumstances (Knight et al., Cal. Practice Guide: Alternative Dispute Resolution (The Rutter Group 1997) ¶ 5:301, p. 5–95).” Mercury Ins. Group v. Superior Court (1998) 19 Cal.4th 332, 349.
Harstein correctly notes that Section 1281.7 permits a “petition” in lieu of an answer. But in circumstances such as these where a petition is filed as a responsive pleading, the petition is fairly treated as a motion. Consequently, Harstein’s objection to the timeliness of Hire Counsel’s opposition brief is overruled.
B. Brief Summary Of Pleading
This litigation concerns claims by an employer against a former high-level employee with access to confidential, proprietary business information, who is alleged to have used that information in violation of his employment agreement after leaving the company.
Hire Counsel is a legal counsel placement firm based in New York. Complaint, ¶10. Harstein was hired as a Salesperson in 2000 and remained employed by Hire Counsel until he abruptly quit on June 17, 2022. ¶11. In August 2011, following a merger, Harstein signed a new employment contract. This agreement defines his role as Senior Managing Director of National Client Relations, a role which allowed him to take part in the company’s Employee Stock Ownership Plan. ¶12. During his employment, Harstein was entrusted with the company’s Confidential Database, which is the property of and a trade secret of Hire Counsel; Harstein contractually agreed not to use this information for his own benefit or the benefit of a competitor. ¶13.
In 2013, Harstein received Hire Counsel’s Mobile Device and Non-Corporate Computer Addendum, wherein he agreed not to use the company’s technology for other than company business purposes. ¶14.
Hire Counsel alleges that just days after resigning (with no notice despite his contractual obligation to provide 30 days’ notice), Harstein began calling, texting, and emailing Hire Counsel’s clients to inform them he was no longer working at Hire Counsel and that he would be getting in touch with them in the coming weeks. Harstein took these steps despite his contention that he no longer had access to the Confidential Database. ¶15. Harstein also began reaching out to select Hire Counsel personnel in an effort to solicit them to join him in working for his new employer, Epiq Systems. ¶18. It is alleged that Harstein took these actions in an effort to cause “chaos” for Hire Counsel. ¶16. It is further alleged that Harstein has refused to comply with his obligation under the IT Addendum to return his computer for inspection and deletion of the Confidential Database. ¶19.
Finally, Hire Counsel alleges that it entered into a separate agreement with Harstein for an advance on his commissions. There are allegations concerning a series of promissory notes and loan agreements which were aggregated into an Agreement Regarding Outstanding Loans in January 2022, with a principal balance of $341,329.94, which Harstein has allegedly failed and refused to pay.
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The complaint alleges the following causes of action:
1. Breach of Contract – Promissory Note
2. Breach of Contract – Employment Agreement (Exhibit 3) and IT Addendum (Exhibit 4)
3. Breach of the Covenant of Good Faith and Fair Dealing
4. Breach of Fiduciary Duty
5. Breach of Duty of Loyalty
6. Breach of Duty of Care
7. Violation of Penal Code §502(c)(2)
8. Conversion.
C. Petitioner Does Not Carry His Burden To Compel Arbitration
“[W]hen a petition to compel arbitration is filed and accompanied by prima facie evidence of a written agreement to arbitrate the controversy, the court itself must determine whether the agreement exists and, if any defense to its enforcement is raised, whether it is enforceable. Because the existence of the agreement is a statutory prerequisite to granting the petition, the petitioner bears the burden of proving its existence by a preponderance of the evidence.” Rosenthal v. Great Western Fin. Securities Corp. (1996) 14 Cal.4th 394, 413, bolding added. A petitioning party meets this burden “by affidavit or declaration and documentary evidence, with oral testimony taken only in the court’s discretion.” Id. at 413-414.
California Rules of Court, rule 3.1330 provides, “A petition to compel arbitration or to stay proceedings pursuant to Code of Civil Procedure sections 1281.2 and 1281.4 must state, in addition to other required allegations, the provisions of the written agreement and the paragraph that provides for arbitration. The provisions must be stated verbatim or a copy must be physically or electronically attached to the petition and incorporated by reference.”
Harstein, as the petitioner, thus bears the burden of establishing the terms of a written agreement to arbitrate so that the Court can determine enforceability. He may present such evidence one of two ways: state the arbitration provision verbatim or attach a copy to the petition and incorporate it by reference. Harstein did not satisfactorily do either.
Petitioner indicates that his employment agreement with HCMC contains an arbitration provision, which he notes is attached as an exhibit to HCMC’s pleading. Petition at 2:23-24. The employment agreement is neither attached as an exhibit nor is it incorporated by reference.
Petitioner goes on to say that the employment agreement contains an arbitration provision at Section 20(a), which “provides in full” certain terms. Petition at 3:8-10. What follows is a quote of Section 20(a), the first sentence of which provides, “Except as provided in Subsection 20(b), any dispute arising out of this Agreement shall be settled before a panel of three (3) arbitrators in Washington D.C., in accordance with the employment arbitration rules then obtaining of the American Arbitration Association or its successor.”[1] This opening sentence clarifies that the arbitration provision is contained in two Subsections: 20(a) and 20(b). Thus, while Harstein has characterized the quoted matter as being a full quote, this is self-evidently not true. Without reference to Subsection 20(b), the Court cannot determine whether Hire Counsel’s claims fall under the arbitration clause.
Harstein thus fails to carry his initial evidentiary burden.
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D. Merits Discussion
Assuming for sake of argument that Harstein satisfied his initial burden, his Petition also fails for substantive reasons.
1. The Employment Agreement
As noted, the Petition is unaccompanied by any evidence. However, the Employment Agreement is attached to the complaint.
Section 20 is captioned “Jurisdiction.” It provides as follows:
(a) Except as provided in Subsection 20(b), any dispute arising out of this Agreement shall be settled by arbitration before a panel of three (3) arbitrators in Washington, D.C., in accordance with the employment arbitration rules then obtaining of the American Arbitration Association or its successor. The parties hereto agree that any judgment, settlement or award rendered pursuant to such arbitration shall be a final and binding determination as to the matters described therein, and a judgment of any federal, state or other court of competent jurisdiction shall be entered upon the award made pursuant to the arbitration. Each of the parties hereto hereby consents to the exclusive jurisdiction of the Superior Court of the District of Columbia and the United States District Court for the District of Columbia for all purposes in connection with any legal proceeding, in connection with any proceeding to enforce or in connection with any such arbitration. Each of the parties hereto waives any objection that it may have to the conduct of any such action or proceeding in any such court based on improper venue or forum non conveniens, waives personal service of any and all process upon it and consents that all service of process may be made by mail or courier service directed to it at the address set forth in this Agreement and that service so made shall be deemed to be completed upon the earlier of actual receipt or four (4) days after the same shall have been posted; provided at least thirty (30) days for appearance is allowed from the date of service of such process or motion. Nothing contained in this Subsection shall affect the right of either party hereto to enforce any judgment obtained in a court of competent jurisdiction in any other court or serve legal process or in any other manner permitted by law.
(b) Employee acknowledges that a breach of Section 6 or 7 of this Agreement would cause irreparable injury to the Company and to the Company’s affiliates. Therefore, Employee agrees that upon a breach or anticipated breach of Section 6 or 7 of this Agreement, the Company shall have the immediate right to secure a court order enjoining any such breach. This covenant shall be independent and severable and shall be enforceable notwithstanding any other rights or remedies that either party may have. The parties consent to the non-exclusive jurisdiction of the Superior Court of the District of Columbia and the United States District Court for the District of Columbia for all purposes in connection with any legal proceeding resulting from any breach or anticipated breach of Section 6 or 7 of this Agreement by Employee. (Emphasis added.)
Section 6 is captioned “Confidential Information and Trade Secrets.” It provides:
(a) During the term of this Agreement EMPLOYEE shall devote his reasonable best efforts and his entire business time and energy to the performance of his duties and shall perform his duties to the best of his abilities.
(b) During and after his employment with the COMPANY, EMPLOYEE agrees that he will neither use, disclose, copy or retain nor remove from the COMPANY’s premises any confidential or proprietary information or trade secrets, including, but not limited to, business and financial information; marketing or strategic plans; lists and information pertaining to clients and client contacts, job applicants, referrals, and employees; information regarding security systems, including any passwords or other access information; all training materials of the COMPANY or its Affiliates, including but not limited to any COMPANY manuals, research documents, templates, sales and recruiting materials existing or under development; and all other ideas, methods, procedures, techniques, written material and other know-how, developed or used in connection with the COMPANY’s business belonging to the COMPANY or any of its Affiliates (collectively, “Confidential Information ”), other than for use in connection with authorized work performed for the COMPANY or such Affiliates. Confidential Information shall also include, but not be limited to, the names, addresses, email addresses, telephone numbers, qualifications, education, accomplishments, experience, availability and resumes of all persons who have applied to or been recruited by the COMPANY or any of its Affiliates for employment or placement and job order specifications and the particular characteristics and requirements of persons generally hired by a client, as well as specific job listings, mailing lists, computer runoffs, financial and other information of the COMPANY and its Affiliates, not generally available to others, including any such information with respect to which EMPLOYEE has remote access. Confidential Information shall also include all information contained or stored in the confidential databases of the COMPANY and its Affiliates containing Confidential Information or other information of the COMPANY or its Affiliates (the “Confidential Database”).
(c) EMPLOYEE agrees that upon request by the COMPANY and in any event upon termination of employment EMPLOYEE shall turn over to the COMPANY all laptops, PDAs, flash drives or other storage devices, presentations, documents, papers or other
material, including all copies thereof, in EMPLOYEE’s possession or under his control which may constitute, contain or be derived from Confidential Information, together with all documents, notes or other work product which is connected with or derived from EMPLOYEE’s services to the COMPANY whether or not such material is at the date hereof in EMPLOYEE’s possession. (d) The Confidential Database is the property of and a trade secret of the COMPANY and its Affiliates and represents valuable, special and unique assets of the COMPANY, access to and knowledge of which are essential to EMPLOYEE’s duties hereunder. EMPLOYEE shall take all precautions necessary to safeguard all Confidential Information and/or information contained in or derived from the Confidential Database against unauthorized use or reproduction by third parties. Neither anything contained in this Section 6 nor EMPLOYEE’s being given permission to access the Confidential Database from inside or outside the COMPANY’s premises shall be deemed a waiver by the COMPANY of any of the restrictions and provisions contained herein. For the avoidance of doubt, EMPLOYEE may not at any time during or after the termination of EMPLOYEE’s relationship with the COMPANY, for any reason whatsoever, reveal, divulge or make known to any person, or use for EMPLOYEE’s own benefit or purposes, or for the benefit of any other person, the Confidential Database, provided that this Agreement does not prohibit EMPLOYEE from disclosing such information to the COMPANY’s officers, employees or agents who have a need to know such information to perform their duties or in connection with any judicial or administrative proceeding, provided that EMPLOYEE promptly and timely notifies COMPANY of any such disclosure in order to allow the COMPANY the opportunity to object and restrain such disclosure.
Section 7 is captioned “Restrictive Covenants; Non-Disparagement.” It is lengthy but as pertinent here, it prohibits Employee, for a period of 36 months after ceasing to be an employee, from soliciting or attempting to solicit or diverting to any other attorney placement service or competing business any persons or clients of the Company that the employee worked with in the 24- month period before termination of employment. This section further provides that Employee understands this is reasonable and necessary to protect business and that Company shall be entitled to temporary and permanent injunctions to prevent breach of any employee covenant and to seek damages for resulting financial loss.
2. The FAA Applies In This Case
The Federal Arbitration Act (FAA) applies to an arbitration provision in a written agreement involving interstate commerce unless the parties agree otherwise. 9 U.S.C. §§1, 2. “Insofar as the FAA applies, the FAA preempts conflicting state law. (Citation.) The FAA’s substantive provisions are applicable in state as well as federal court, while the FAA’s procedural provisions apply only to proceedings in federal court. (Citation.)” Swissmex-Rapid S.A. de C.V. v. SP Systems, LLC (2012) 212 Cal.App.4th 539, 544.
The petition fails to mention the FAA and makes no arguments about its applicability. In opposition, Hire Counsel argues persuasively, by citation to the Complaint and through the Declaration of Joan Davidson, that the Employment Agreement involves interstate commerce. Based on this evidence, it is clear that the FAA applies to the Employment Agreement. As a consequence, any conflicting state law is preempted and the FAA’s substantive provisions, but not its procedural provisions, apply. In this case, it does not appear that there are any meaningful differences in the substantive provisions between the FAA and California law.
3. Subsection 20(b)’s Carve Out
Harstein urges that Subsection 20(b) is “irrelevant” as, in his view, it only pertains to provisional remedies. Petition at 3:22-23. Subsection 20(b) does not use the term “provisional.” Rather, it speaks to enjoining a breach, which could involve either a preliminary or permanent injunction. As the Complaint here prays for injunctive relief (Complaint at 14:13-16; 15:13-16; 16:11-14; 18:17), Subsection 20(b) is not irrelevant. The Complaint is obviously a “legal proceeding” resulting from alleged breaches of Sections 6 and 7 of the Employment Agreement; and it seeks an order enjoining such breaches, as well as other relief.
A fair reading of the last sentence of Subsection 20(b) (“The parties consent to the non-exclusive jurisdiction of [the court] for all purposes in connection with any legal proceeding resulting from any breach or anticipated breach of Section 6 or 7 of this Agreement by Employee”) is that alleged breaches of Section 6 or Section 7 are specifically exempted from Subsection 20(a)’s arbitration provision.
Harstein’s reply brief (captioned as an “objection”) urges a different interpretation of Subsection 20(b). He argues that this sentence means that the remedy for irreparable harm (injunction) can be obtained either in arbitration or in court. Reply at 10:17-11:4. This argument makes no sense, as arbitrators may only issue awards. While an arbitration award is enforceable once confirmed as a judgment, court confirmation is still required. Additionally (and because of this fact), Code Civ. Proc. §1281.8(b) provides for courts to issue provisional remedies to parties who are in arbitration, where irreparable harm can be shown. The interpretation Harstein urges is not adopted by the Court. Instead, the Court concludes that the plain language of Subsection 20(b), when viewed in its entirety and in the proper context, means that alleged breaches of Section 6 or 7 of the Employment Agreement (such as those alleged in the Complaint at issue here) are not subject to arbitration.
4. Unconscionability Is Not Established
Harstein also argues in his reply that, to the extent Hire Counsel’s claims fall under Subsection 20(b), the provision is unconscionable in that it requires an employee such as himself to arbitrate claims, while employers like Hire Counsel are permitted to litigate them. This is an unusual argument, since normally it is the party resisting arbitration who argues unconscionability. Nevertheless, under both California and federal law, arbitration agreements are presumed valid and enforceable except where grounds exist for revocation (Armendariz v. Foundation Health Psychare Services, Inc. (2000) 24 Cal.4th 83, 98). Unconscionability is a ground for revocation.
Here, however, rather than argue revocation due to unconscionability, Harstein argues that Subsection 20(b) could be severed to the extent it is unconscionable. Lack of mutuality can serve as a basis for a finding of unconscionability where an employer is not able to show a “legitimate commercial need.” Stirlen v. Supercuts, Inc. (1997) 51 Cal.App.4th 1519, 1536. Harstein has not shown or attempted to show that Hire Counsel has no legitimate commercial need for a provision allowing it to seek injunctive relief for breaches of Sections 6 and 7, relief that only it would seek. Further, this subsection cannot be severed because it contains the very definition of arbitrable claims -- which, according to Subsection 20(a), are any disputes arising out of the Employment Agreement except those set forth in 20(b).
5. Harstein Has Waived Any Argument Regarding Delegation
Finally, Harstein’s reply argues for the first time that the underlying issue of arbitrability must be determined by the arbitrator because the AAA rules so provide, and Section 20 provides that arbitration is pursuant to the AAA Employment rules. This argument fails for two interrelated reasons. First, Harstein argued arbitrability on the merits and failed to raise the delegation clause until his reply. It is a basic principle of law and motion practice that new evidence is not permitted with reply papers. Jay v. Mahaffey (2013) 218 Cal.App.4th 1522, 1537. Harstein’s Petition urges this Court to determine arbitrability. Harstein advances arguments as to how certain contested terms should be interpreted. It is only in the reply brief that Harstein first raises the issue of a delegation clause; and where evidence (the Declaration of Frank Busch attaching AAA Employment rules) is first provided. By making arguments about the arbitrability of the claims in both the petition and reply (i.e., that Subsection 20(b) is irrelevant and/or unconscionable), Harstein has waived any right he may have had to claim that the scope of the arbitration agreement must be decided by an arbitrator. Pulli v. Pony Internat., LLC (2012) 206 Cal.App.4th 1507, 1515-1516; Shade Foods, Inc. v. Innovative Products Sales & Marketing, Inc. (2000) 78 Cal.App.4th 847, 894, (fn. 10), citing Neighbours v. Buzz Oates Enterprises (1990) 217 Cal.App.3d 325, 335, (fn. 8).
Second, even if the Court considered the late-filed evidence submitted with the reply, it does not compel a different result. The law is clear that the question of arbitrability is determined by the Court unless the parties to an agreement “clearly and unambiguously” agree otherwise. “Because the parties are the masters of their collective fate, they can agree to arbitrate almost any dispute—even a dispute over whether the underlying dispute is subject to arbitration. However, there is a presumption that they have not agreed to this. ‘The question whether the parties have submitted a particular dispute to arbitration, i.e., the ‘question of arbitrability,’ is ‘an issue for judicial determination [u]nless the parties clearly and unmistakably provide otherwise.’ [Citations.]’ (Citations.)” Bruni v. Didion (2008) 160 Cal.App.4th 1272, 1286, italics in original. The arbitration clause at Section 20 in this case does not clearly and unambiguously delegate the issue of arbitrability to an arbitrator.
“Again, we must be mindful of what the United States Supreme Court has emphasized unflinchingly for decades: notwithstanding the public policy favoring arbitration, arbitration can be imposed only as to issues the parties agreed to arbitrate; given the slim likelihood that the parties actually contemplated who would determine threshold enforceability issues, as well as the default presumption that such issues would be determined by the court, those threshold issues must be decided by the court absent clear and unmistakable proof to the contrary. This is a ‘heightened standard,’ higher than the evidentiary standard applicable to other matters of interpreting an arbitration agreement. (Rent–A–Center, supra, 130 S.Ct. at p. 2777, fn. 1; First Options, supra, 514 U.S. at p. 944, 115 S.Ct. 1920 [contrasting ‘ordinary state-law principles that govern the formation of contracts’ with the clear and unmistakable rule].)” Ajamian v. Cantor CO2e, L.P. (2012) 203 Cal.App.4th 771, 790-791. See also Lamps Plus, Inc. v. Varela (2019) 139 S.Ct. 1407, 1416-1417 [“we presume that parties have not authorized arbitrators to resolve certain ‘gateway’ questions, such as ‘whether the parties have a valid arbitration agreement at all or whether a concededly binding arbitration clause applies to a certain type of controversy.’ (Citation.)”].
In light of this heightened standard and given the scant evidence of the conditions under which the parties entered into the contract here, the Court declines to find that the Employment Agreement contains a delegation clause with respect to Section 20(b) .
6. The Claims Alleged In The Complaint Are Not Covered By Section 20(a)
The first cause of action is for breach of the promissory note. The note is attached as an exhibit to the pleading. This is a standalone contract, separate from the Employment Agreement, and it contains a merger provision. It does not contain any arbitration provision. Thus, while the claim is arguably related to Harstein’s employment it is clearly subject to its own contractual terms.
The balance of the causes of action fall under Sections 6 and 7 and are therefore subject to Subsection 20(b)’s carve out.
G. Harsteins’ List Of Principal Controverted Issues
The Court responds to Harstein’s principal controverted issues as follows:
Issue number one: No. Harstein has failed to meet his burden.
Issue number two: Yes. Per Labor Code §925 the venue provision is void.
Issue number three: Yes.
Issue number four (a): No. Harstein waived the right to so argue.
Issue number four (b): The FAA applies but does not change the analysis.
Issue number four (c): The 1st cause of action for breach of the note does not arise out of the employment agreement.
Issue number four (d): Section 20(b) carves out the remaining claims in the complaint.
Issue number four (e): No, it just voids the venue provision.
Issue number four (f): Not necessarily, since protection of trade secrets by way of provisional remedies may be commercially reasonable.
Issue number five: No; the petition acts a motion here and Hire Counsel’s response was timely.
H. Harstein’s Motion For Stay Is Denied As Moot
Harstein filed a companion motion to stay this matter pending outcome of the arbitration, pursuant to Code Civ. Proc. §1281.4. Since arbitration is not being compelled the motion is moot.
IV. ORDER
For the foregoing reasons, Harstein’s petition to compel arbitration is denied, and his request for a stay is denied. Hire Counsel is ordered to give notice.
Dated: ____________ ___________________________________
MARGARET L. OLDENDORF
JUDGE OF THE SUPERIOR COURT
[1] Petition at ¶¶18-19 states that Harstein voids the forum selection provision pursuant to Labor Code §925.
SUPERIOR COURT OF THE STATE OF CALIFORNIA
FOR THE COUNTY OF LOS ANGELES
NORTHEAST DISTRICT
I. INTRODUCTION
Defendant Brian Hartstein (Hartstein) was employed by
Plaintiff HCMC Legal, Inc. (Hire Counsel) for over 21 years. He was hired as a
salesperson in 2000; from 2011 on he was a senior manager with a stock
ownership interest. Hire Counsel alleges that in June 2022 Hartstein quit with
no notice and went to work for a competitor, thereafter soliciting its customers
to the new company and enticing former co-workers to follow him as well.
Hire Counsel initiated litigation against Hartstein on
July 15, 2022, by filing this lawsuit. The Complaint alleges Harstein breached
his employment agreement as well as duties owed against Hire Counsel when he
began soliciting its customers after leaving the company. Hartstein responded
to the pleading on September 15, 2022, by filing a petition to compel
arbitration. On October 27, 2022, he filed a motion to stay litigation pending
hearing of the arbitration petition. On November 10, 2022, Harstein’s ex parte
application for temporary restraining order in aid of arbitration and for an
order to show cause was heard. The request for ex parte relief was denied, and
the request was set for a noticed hearing, to be heard along with the petition
to compel arbitration and motion for stay. The parties were given a briefing
schedule for supplemental briefs, which they filed.
Hartstein seeks an injunction preventing Hire Counsel
from enforcing certain provisions of the Employment Agreement that prohibit him
from soliciting its customers after leaving employment with the company. Relief
is sought on the basis that the provisions are illegal, and that Hire Counsel’s
conduct in attempting to enforce them has caused Hartstein to suffer severe
financial consequences.
Having
read and considered the moving, opposing, supplemental, and reply briefs, as
well as all evidence offered in support of and against the requested
injunction, the application is denied.
II. LEGAL
STANDARD
A.
Law Governing Injunctions
Code
Civ. Proc. §526 (a) provides grounds on which an injunction may issue:
(1)
When it appears by the complaint that the plaintiff is entitled to the relief
demanded, and the relief, or any part thereof, consists in restraining the
commission or continuance of the act complained of, either for a limited period
or perpetually.
(2)
When it appears by the complaint or affidavits that the commission or
continuance of some act during the litigation would produce waste, or great or
irreparable injury, to a party to the action.
(3)
When it appears, during the litigation, that a party to the action is doing, or
threatens, or is about to do, or is procuring or suffering to be done, some act
in violation of the rights of another party to the action respecting the
subject of the action, and tending to render the judgment ineffectual.
(4)
When pecuniary compensation would not afford adequate relief.
(5)
Where it would be extremely difficult to ascertain the amount of compensation
which would afford adequate relief.
(6)
Where the restraint is necessary to prevent a multiplicity of judicial
proceedings.
(7)
Where the obligation arises from a trust.
B.
Law Governing Covenants Not To Compete
Bus.
& Prof. Code §1600 provides, “Except as provided in this chapter, every
contract by which anyone is restrained from engaging in a lawful profession,
trade, or business of any kind is to that extent void.”
This
means that in California, covenants not to compete are void. The exceptions concern
events not at issue here, such as the sale of goodwill of a business.
“Under
the statute’s plain meaning, therefore, an employer cannot by contract restrain
a former employee from engaging in his or her profession, trade, or business
unless the agreement falls within one of the exceptions to the rule. (§ 16600.)”
Edwards v. Arthur Andersen LLP (2008) 44 Cal.4th 937, 946-947 (Edwards),
invalidating provision in employment agreement prohibiting employees, for a
period of 18 months after leaving the firm, from providing professional
services for any client for whom the employee had provided services in the
prior18 months and from soliciting any client to whom the employee had been
assigned in the prior 18 months.
“We
conclude that Andersen’s noncompetition agreement was invalid. As the Court of
Appeal observed, ‘The first challenged clause prohibited Edwards, for an
18–month period, from performing professional services of the type he had
provided while at Andersen, for any client on whose account he had worked
during 18 months prior to his termination. The second challenged clause
prohibited Edwards, for a year after termination, from “soliciting,” defined by
the agreement as providing professional services to any client of Andersen’s
Los Angeles office.’ The agreement restricted Edwards from performing work for
Andersen’s Los Angeles clients and therefore restricted his ability to practice
his accounting profession. (See Thompson v. Impaxx, Inc. (2003) 113
Cal.App.4th 1425, 1429, 7 Cal.Rptr.3d 427 [distinguishing ‘trade route’ and
solicitation cases that protect trade secrets or confidential proprietary
information].) The noncompetition agreement that Edwards was required to sign
before commencing employment with Andersen was therefore invalid because it
restrained his ability to practice his profession. (See Muggill, supra,
62 Cal.2d at pp. 242–243, 42 Cal.Rptr. 107, 398 P.2d 147.)” Id. at 948.
While
employers may not bar former employees from competing or from soliciting its
customer/clients, employers can prevent them from doing so using their trade
secrets. The Retirement Group v. Galante (2009) 176 Cal.App.4th 1226 (Galante)
discusses this distinction.
“To
determine this issue, we are required to examine and resolve the tension
between two competing strands of legal principles in California. The first
strand [] provides that California courts refuse to enforce most ‘noncompetition’
agreements as violative of a strong public policy, embodied in Business and
Professions Code section 16600 (section 16600), favoring free competition. The
competing strand [] provides that California courts will protect an employer
from the misappropriation of its trade secrets by anyone, including its former
employees.” Id. at 1233.
“Although
Edwards reaffirmed the broad California rule that invalidates
noncompetition agreements falling outside of statutorily-prescribed exceptions,
Edwards expressly stated it was not ‘address[ing] the applicability of
the so-called trade secret exception to section 16600 [.]’ (Edwards, supra,
44 Cal.4th at p. 946, fn. 4, 81 Cal.Rptr.3d 282, 189 P.3d 285.) . . . [¶] An
equally lengthy line of cases has consistently held former employees may not
misappropriate the former employer’s trade secrets to unfairly compete with the
former employer.” Id. at 1236-1237.
“In
accordance with these principles, the courts have repeatedly held a former
employee may be barred from soliciting existing customers to redirect their
business away from the former employer and to the employee’s new business if
the employee is utilizing trade secret information to solicit those
customers. (See American Credit Indemnity Co. v. Sacks (1989) 213
Cal.App.3d 622, 634, 262 Cal.Rptr. 92 [‘in the absence of a protectable trade
secret, the right to compete fairly outweighs the employer's right to protect
[customers] against competition from former employees’]; accord, Aetna Bldg.
Maintenance Co. v. West (1952) 39 Cal.2d 198, 204–206, 246 P.2d 11.) Thus,
it is not the solicitation of the former employer’s customers, but is
instead the misuse of trade secret information, that may be enjoined.
(Cf. Southern Cal. Disinfecting Co. v. Lomkin (1960) 183 Cal.App.2d 431,
442–448, 7 Cal.Rptr. 43; accord, Hollingsworth Solderless Terminal Co. v.
Turley (9th Cir.1980) 622 F.2d 1324, 1338 [‘We think the applicable
California law is that “the employer will be able to restrain by contract only
that conduct of the former employee that would have been subject to judicial
restraint under the law of unfair competition, absent the contract.”’].)” Id.
at 1237-1238, emphasis in original.
Galante also notes that numerous courts have held that
customer lists can qualify for trade secret protection.
III. FACTS
ALLEGED
Hire Counsel is a legal counsel placement firm based in
New York. Complaint, ¶10. Hartstein was hired as a Salesperson in 2000 and
remained employed by Hire Counsel until he abruptly quit June 17, 2022. ¶11. In
August 2011, following a merger, Hartstein signed a new employment contract.
This Employment Agreement, a signed copy of which is attached to the Complaint
as Exhibit 3, defines his role as Senior Managing Director of National Client
Relations, a role which allowed him to take part in the company’s Employee
Stock Ownership Plan. ¶12. During his employment, Hartstein was entrusted with
the company’s Confidential Database, which is the property of and a trade
secret of Hire Counsel; Hartstein contractually agreed not to use this
information for his own benefit or the benefit of a competitor. ¶13.
In 2013, Hartstein received Hire Counsel’s Mobile Device
and Non-Corporate Computer Addendum, wherein he agreed not to use the company’s
technology for other than company business purposes. ¶14. Exhibit 4 to
Complaint is an unsigned copy.
Hire Counsel alleges that just days after resigning, with
no notice despite his contractual obligation to provide 30 days’ notice, Hartstein
began calling, texting, and emailing Hire Counsel’s clients to inform them he
was no longer working at Hire Counsel and that he would be getting in touch
with them in the coming weeks, this despite his contention that he no longer
had access to the Confidential Database. ¶15. Hartstein also began reaching out
to select Hire Counsel personnel in an effort to solicit them to join him in
working for his new employer, Epiq Systems. ¶18. It is alleged that Hartstein
took these actions in an effort to cause chaos for Hire Counsel. ¶16. It is
further alleged that Hartstein has refused to comply with his obligation under
the IT Addendum to return his computer for inspection and deletion of the
Confidential Database. ¶19.
Finally, Hire Counsel alleges that it entered into a
separate agreement with Hartstein for an advance on commissions. There are
allegations concerning a series of promissory notes and loan agreements which
were aggregated into an Agreement Regarding Outstanding Loans in January 2022,
with a principal balance of $341,329.94, which he has failed and refuses to
pay.
The complaint alleges the following causes of action:
1. Breach of Contract –
Promissory Note
2. Breach of Contract –
Employment Agreement (Exhibit 3) and IT Addendum (Exhibit 4)
3. Breach of the Covenant of
Good Faith and Fair Dealing
4. Breach of Fiduciary Duty
5. Breach of Duty of Loyalty
6. Breach of Duty of Care
7. Violation of Penal Code
§502(c)(2)
8. Conversion.
IV. EVIDENCE
In support of his application, Hartstein offers his own
declaration and that of his attorney, Frank Busch.
Harstein
Hartstein’s declaration is unsigned. The Court assumes
that a signed copy can and will be provided. A summary of his averments are as
follows:
Hartstein was an extraordinarily good employee for Hire
Counsel, where he worked for 22 years. In recent years, under the new
leadership of CEO Joan Davidson, who did not like him and repeatedly threatened
to fire him, Hartstein became receptive to inquiries by headhunters and therefore
resigned from Hire Counsel and took a job with Epiq Systems on June 17, 2022.
His agreement with Epiq guarantees him first year compensation of $525,000,
which drops to $150,000 if he is subject to a non-compete clause. Hartstein
avers that he agreed to these terms “on the expectation that Hire Counsel would
not violate fundamental public policies by purporting to enforce the Challenged
Restraints against me.” Hartstein further avers that he is “mindful of his
obligations to Hire Counsel” and that he does not “have or use Hire Counsel’s
trade secrets, or Hire Counsel’s customer list, in performing work for Epiq.” Hartstein
attaches letters from Hire Counsel’s former attorney to him and to Epiq
regarding Hartstein’s use of its trade secrets and Confidential Database. Hartstein
declares that because of these threatening letters he has not been able to
develop his business at Epiq and has not attempted to sell Epiq’s products to
any of his former customers unless they contact him first, which has resulted
in lost opportunities. Hartstein outlines the financial situation he faces
because of his greatly reduced income and because of the legal fees he has been
forced to expend in defense of this litigation. He declares that if his full
Epiq salary is not “secured immediately,” he will have to make radical changes
to his life such as moving, pulling his older daughter out of college and
younger daughter out of private school, and risks failing to be able to cover
other obligations. Hartstein further declares that his credit is already being
strained and given his large litigation expenses, he cannot wait three months
for his income.
Busch
The essence of the Busch Declaration is that since being
retained by Hartstein, he has attempted informal solution of this matter with
counsel for Hire Counsel but that in late October 2022, it became clear these
efforts were in vain and he therefore filed a demand for arbitration with AAA
on November 4, 2022. He attaches a copy of Hartstein’s arbitration demand. Busch
declares that he has also attempted to negotiate with Epiq’s counsel to discuss
Hartstein receiving his full salary. He says Epiq’s counsel has informed him
that Hartstein will be eligible to receive the full amount of his guaranteed
payment as soon as he receives a provisional order restraining Hire Counsel
from enforcing the Challenged Restraints.
In opposition, Hire Counsel proffers the following
evidence.
Joan Davidson
Davidson is Hire Counsel’s CEO. She provides information
in support of Hire Counsel’s position that it has protectable trade secret
information. She declares that Hire Counsel’s confidential and trade secret
information “includes but is not limited to the following: “names of clients,
information pertaining to specific client contacts, ongoing and potential
projects, sales personnel notes pertaining to client outreach and next steps,
open client positions, position requirements, temporary employee pay rates,
client bill rates, candidate names, addresses and contact information,
candidate and temporary employee credentials, client data security
requirements, and contract information.” She further declares that this
information is not generally known to the public or to any competitor in the
legal staffing industry, but is instead highly individualized and obtained
through decades of work. She states that client contact information includes a
specific point of contact, client preferences, and the types of legal work the
client usually engages in. Davidson explains that this confidential information
also includes specific credentials and performance levels. Davidson declares
that Hire Counsel protects this information via a secured database with access
allowed only via a secured connection and login with unique username and
password, known only to the user. Finally, Davidson avers that should this
confidential information be obtained by a competitor, it would provide that
competitor with a distinct economic advantage.
Diane Lewis-Dwarica
Ms. Lewis-Dwarica is Hire Counsel’s payroll and billing
manager. The purpose of her declaration is to outline how much Hire Counsel has
paid Hartstein in the past three years, as a way of countering his contention
that he will be in dire financial straits right away if a restraining order
does not issue. In brief, she provides evidence that Hire Counsel paid Hartstein
over $1.6 million during the 36-month period prior to his resignation, in
addition to paying other expenses such as for the lease of his car.
Gregory Duenow
Mr. Duenow is a system’s manager for Hire Counsel. He has
access to the company’s email system and provides evidence regarding its login
history. The purpose of his declaration is to provide evidence that Hartstein
used Hire Counsel’s computer network on four occasions following his
resignation, and that the system he accessed contains Hire Counsel’s confidential
and trade secret information. He also attaches two June 17, 2022, emails from
Hartstein, apparently to a client.
V. DISCUSSION
A. Unusual Procedural Posture
Hartstein’s
Memorandum of Points and Authorities correctly cites the law governing requests
for a temporary restraining order and/or preliminary injunction. At page 12 he
cites Code Civ. Proc. §526(a)(1), which provides that an injunction may issue
where it appears by complaint that the plaintiff is entitled to the
relief demanded. But, of course, Hartstein is not the plaintiff here; he is the
defendant. Hartstein also cites cases describing the required weighing process;
trial courts are required to evaluate the likelihood the plaintiff will
prevail at trial and harm the plaintiff is likely to suffer if an injunction is
denied as compared to the harm the defendant will suffer if it is granted.
Again, here these roles are reversed.
Additionally,
in this case the Court declined to issue a temporary restraining order on an ex
parte basis, and instead set the matter for a hearing that tracked Hartstein’s Petition
to Compel arbitration.
As Hartstein
clarifies on page 15 of his initial brief, he relies on his demand for
arbitration in which he is the demanding party/plaintiff. There, he has made
claims that include a request for injunctive relief. And on pages 18-19, he
cites Code Civ. Proc. §1281.8, which permits trial courts to issue a
provisional remedy to a party to an arbitration proceeding. Here, no proceeding
has yet commenced despite Harstein having made a demand. (And Harstein’s
petition to compel arbitration, which is being heard concurrently with this
application, is likely going to be denied.)
Despite
these somewhat unusual circumstances, it is assumed for purposes of this analysis
that an arbitration is pending, and that Hartstein is now requesting that a
preliminary injunction issue in aid of arbitration. The question then becomes whether Hartstein
will prevail on the merits. The gist of Hartstein’s application for a
provisional remedy is that Hire Counsel is suing him (at least in part) for the
purpose of enforcing Section 7 of the Employment Agreement; and even if he
succeeds in this litigation in establishing that this section is void and
unenforceable, he will in the meantime have suffered irreparable harm.
B. The Challenged Restraints
Hartstein challenges and seeks to
prevent Hire Counsel from enforcing certain provisions of his Employment
Agreement. The provisions are contained in Section 7 of the Employment
Agreement.
7.
Restrictive Covenants; Non-Disparagement.
(a)
EMPLOYEE agrees that during the term of this Agreement and for a period of
thirty-six (36) months following his ceasing to be an employee of the
COMPANY (the “Restricted Period”), EMPLOYEE will not, without the prior written
consent of the COMPANY, either directly or indirectly, on his own behalf or in
the service or on behalf of others:
(i)
Solicit, divert or appropriate, or attempt to solicit, divert or
appropriate, to any business which is engaged in (A) attorney placement
services, including services relating to partner placement, lateral partner
transfers, associate placement, entire practice or partner group transfers, and
law firm mergers, (B) legal review management services and temporary attorney
staffing services, including contract attorneys for legal review management,
and litigation support services, or (C) any other business in which the COMPANY
or any of its Affiliates is engaged or has taken substantial steps to engage (a
“Competing Business ”), any person or entity who was a client of the COMPANY
or any of its Affiliates and with whom EMPLOYEE worked or had any contact while
employed by the COMPANY or any of its Affiliates at any time during the
twenty-four (24) month period preceding the termination of this
Agreement or of EMPLOYEE’s ceasing to be an employee of the COMPANY or
any of its Affiliates, or fill or attempt to fill a job order or assignment
which was obtained and pending with the COMPANY or any of its Affiliates at the
time of EMPLOYEE’s ceasing to be an employee of the COMPANY or any of its
Affiliates;
(ii)
Solicit, divert or hire away for or on behalf of any Competing Business, or
attempt to solicit, divert or hire away for or on behalf of any Competing
Business, including, without limitation, hiring or engaging as an employee
or independent contractor any person employed by the COMPANY or any of its
Affiliates, at any time during the twenty-four (24) months preceding his
ceasing to be an employee of the COMPANY or any of its Affiliates, whether
as a temporary or permanent employee of the COMPANY or any of its Affiliates
and whether or not such employment by the COMPANY or any of its Affiliates is
or was pursuant to a written agreement and whether or not such employment by
the COMPANY or any of its Affiliates is or was for a determined period or is or
was at will.
C. Balancing
the Equities
“ ‘[A] preliminary injunction is an order that is
sought by a plaintiff prior to a full adjudication of the merits of its claim.’
(White
v. Davis
(2003) 30 Cal.4th 528, 554, 133 Cal.Rptr.2d 648, 68 P.3d 74, italics omitted.) ‘To
obtain a preliminary injunction, a plaintiff ordinarily is required to present
evidence of the irreparable injury or interim harm that it will suffer if an
injunction is not issued pending an adjudication of the merits.’ (Ibid.)
“Trial courts ‘ “ ‘evaluate two interrelated
factors when deciding whether or not to issue a preliminary injunction. The
first is the likelihood that the plaintiff will prevail on the merits at trial.
The second is the interim harm that the plaintiff is likely to sustain if the
injunction were denied as compared to the harm that the defendant is likely to
suffer if the preliminary injunction were issued.’ ” ’ (ITV Gurney
Holding Inc. v. Gurney (2017) 18 Cal.App.5th 22, 28–29, 226 Cal.Rptr.3d 496 (ITV Gurney).)” Amgen, Inc.
v. Health Care Services (2020) 47 Cal.App.5th 716, 731.
1.
Likelihood of Prevailing on the Merits
On
the question whether the Challenged Restraints are void, Hartstein has a strong
argument as to Paragraph 7. The language he seeks to prevent Hire Counsel from
enforcing nowhere contain the terms “trade secret” or even “customer list.” Instead,
it is similar to the unenforceable language in Edwards.
However,
Hire Counsel has presented evidence in support of the contention that its
customer list is a trade secret. Hartstein has not objected to the Davidson
Declaration. For purposes of this analysis, then, it is assumed that Hire
Counsel’s customer list/confidential database is a protectable as a trade
secret. Morlife, Inc. v. Perry (1997) 56 Cal.App.4th 1514.
As
Hire Counsel has pointed out, Section 6 of the Employment Agreement contains the
provisions prohibiting Hartstein from using this information other than in
connection with his authorized work for Hire Counsel; that at any time during
his employment upon request and at termination of his employment he will turn
over all laptops, flash drives, etc., containing copies of the Confidential
Information; and, as most relevant here, that “EMPLOYEE may not at any time
during or after the termination of EMPLOYEE’s relationship with the COMPANY,
for any reason whatsoever, reveal, divulge or make known to any person, or use
for EMPLOYEE’s own benefit or purposes, or for the benefit of any other person,
the Confidential Database.”
Hartstein
does not seek to prohibit Hire Counsel from enforcing Section 6. His
application is aimed solely at the bolded portions of Section 7 quoted above. This
language appears to violate Bus. & Prof. Code §1600 -- but it cannot be
analyzed in isolation.
In
this case, these two aspects of the Employment Agreement are intertwined. While an injunction might properly restrain
Hire Counsel from enforcing portions of Section 7, it could not be prohibited
from enforcing Section 6. That is, Hartstein may not be prohibited from soliciting
Hire Counsel’s prior clients, but he can be restrained from doing so using
information from the Confidential Database/Customer List. It is impossible
to determine at this juncture whether or not he did so.
2.
Interim Harm
The
harm to Hartstein if an injunction does not issue is that he will be restrained
from engaging in his chosen profession, and his compensation is delayed. The
harm to Hire Counsel if the injunction does issue is that it may lose business
as Hartstein begins to solicit its customers. Here, while the harm Hartstein has
described is not trivial, the limited record that is available at this stage of
the case favors Hire Counsel.
E. Undertaking
An injunction cannot issue without an undertaking.
As no injunction is issued, no bond is necessary here.
VI. ORDER
Hartstein’s motion
for an injunction is denied. Hire
counsel is ordered to give notice.
Dated:
____________ ___________________________________
MARGARET L. OLDENDORF
JUDGE OF THE SUPERIOR COURT