Judge: Mark C. Kim, Case: NC061639, Date: 2023-04-06 Tentative Ruling

Case Number: NC061639    Hearing Date: April 6, 2023    Dept: S27

1.       Background Facts

Gary Erlandson (“Defendant”) was employed as a senior salesperson with Eversoft, Inc., d.b.a. HD Chem (“Plaintiff”) from December 2012 through his resignation on January 2, 2018. (Second Amended Complaint, hereinafter, “SAC”, ¶ 2). After leaving Plaintiff for a rival company, Plaintiff alleges that Defendant then used trade secrets to solicit Plaintiff’s customers from Plaintiff over to Defendant’s new employer Butler Chemicals, Inc., (“Butler”). (SAC, ¶ 23).

Plaintiff filed their initial Complaint on February 20, 2018. The operative complaint here is the SAC, filed on January 12, 2023. The SAC has nine causes of action:

1.       Breach of Written Contract;

2.       Breach of Fiduciary Duties and Obligations;

3.       Interference with Contractual Relations;

4.       Interference with Prospective Economic Advantage;

5.       Fraud and Deceit;

6.       Conversion;

7.       Misappropriation of Trade Secrets;

8.       Breach of Undivided Loyalty;

9.       Unfair Competition for Violation of Business and Professions Code Section 17200.

 Defendant then filed a demurrer to the SAC on January 23, 2023, demurring to the second and eighth cause of action. Plaintiff filed their opposition papers on March 23, 2023. Defendant filed reply papers on March 29, 2023.

2.       Demurrer

(A) Meet and Confer Requirement

a.       Legal Standard for Meet and Confer

“Before filing a demurrer…the demurring party shall meet and confer in person or by telephone with the party who filed the pleading that is subject to demurrer for the purpose of determining whether an agreement can be reached that would resolve the objections to be raised in the demurrer.”  (CCP § 430.41(a); see also CCP § 435.5 (imposing similar requirements for a motion to strike).) However, per CCP § 430.41(a)(4), “A determination by the court that the meet and confer process was insufficient shall not be grounds to overrule or sustain a demurrer.”  

b.       Analysis for Meet and Confer

                Defendant traveled to Long Beach, California on January 13, 2023 to meet in-person with Plaintiff (Declaration of Todd R. Haas, hereinafter, “Haas Dec.”, ¶ 4). Additionally, both parties conferred over telephone on January 20, 2023. (Haas Dec, ¶ 7).  

c.        Conclusion for Meet and Confer

Although no agreement was reached, the meet and confer agreement per CCP § 430.41(a) has been satisfied.

(B) Demurrer

a.                    Legal Standard for Demurrer

                “[A] demurrer tests the legal sufficiency of the allegations in a complaint.” (Lewis v. Safeway, Inc. (2015) 235 Cal.App.4th 385, 388.) A demurrer can be used only to challenge defects that appear on the face of the pleading under attack or from matters outside the pleading that are judicially noticeable. (See Donabedian v. Mercury Ins. Co. (2004) 116 Cal.App.4th 968, 994 [in ruling on a demurrer, a court may not consider declarations, matters not subject to judicial notice, or documents not accepted for the truth of their contents].) For purposes of ruling on a demurrer, all facts pleaded in a complaint are assumed to be true, but the reviewing court does not assume the truth of conclusions of law. (Aubry v. Tri-City Hosp. Dist. (1992) 2 Cal.4th 962, 967.)

 

b.                   Analysis for Demurrer

                                                         i.            Second Cause of Action – Breach of Fiduciary Duties and Obligations

                “The elements of a cause of action for breach of fiduciary duty are the existence of a fiduciary relationship, breach of fiduciary duty, and damages.” (Oasis West Realty, LLC v. Goldman (2011) 51 Cal.4th 811, 820.)

Defendant’s main contention to the second cause of action is that Defendant was not a managerial employee, therefore,  Defendant was not a fiduciary, and ultimately, that no fiduciary relationship existed. (Demurrer, 5:2-9). This contention, would eliminate the second element of this cause of action, thereby prohibiting survival of a demurrer.

                Plaintiff argues against the demurrer, contending that whether “Erlandson undertook a fiduciary relationship by his Contract with Eversoft” is a question of fact for the jury to decide. (Opposition Papers, 11:2-4). Plaintiff cites GAB Business Services, Inc. v. Lindsey & Newsom Claim Services, Inc. (2000) 83 Cal.App.4th 409. GAB

                Defendant’s main contention in demurring relies on Bancroft-Whitney Co. v. Glen (1966) 64 Cal.2d 327, and summarizes their point as follows: “Even if all employees owe a duty of loyalty to their employer, only "[c]orporate officers and director or employees who otherwise "participate[ ] in [the] management of the corporatio by "exercising some discretion[]" to "'manage [its] day-to-day operations'" owe a fiduciary duty to their employer.” (Demurrer, 5:2-5). Defendant further argues that because he was never employed at a management level, “his conduct did not, as a matter of law, constitute any breach of fiduciary duties…” (Demurrer, 6:21-22). However, this Court disagrees because GAB counsels to the contrary.

                The GAB Court was far more concerned with the employee’s level of participation in management then their title or position. (GAB, supra, 83 Cal.App.4th at p. 421 [“Whether a particular officer participates in management is a question of fact.”]) As Defendant points out, GAB instructs that an officer who participates in management of the corporation and exercises some discretionary authority is a fiduciary of the corporation. Additionally, a nominal officer is not a fiduciary. (Ibid.). However, in turning to the instant case, not only must the participation of Defendant be determined to answer the question of whether a fiduciary duty was owed, but the contractual obligation of fiduciary duties that was explicitly undertaken by Defendant must also be considered. Even if Defendant is determined to be a “nominal” officer, Plaintiff has sufficiently shown that the fiduciary duties were explicitly part of the employment contract. (SAC, ¶ 10). To conclude, the demurrer to the second cause of action is overruled.  

                                                       ii.            Eighth Cause of Action - Breach of Undivided Loyalty

                “The duty of loyalty is breached, and may give rise to a cause of action in the employer, when the employee takes action which is inimical to the best interests of the employer.” (Stokes v. Dole Nut Co., (1995) 41 Cal.App.4th 285). Plaintiff makes clear in their SAC that Defendant took several actions counter to the best interests of their employer. (SAC, ¶ 23).

                Defendant’s argument in demurring to the eighth cause of action is two-fold. First, Defendant contends that imposing fiduciary duties upon all employees, including non-managerial employees, ignores safeguards upon employee mobility and the freedom to work in the state of California. (Demurrer, 8:6-10). Second, Defendant argues that the cause of action is barred by the statute of limitations and does not relate back. (Demurrer, 8:26-27 and 9:7-10). The Court disagrees on both counts and will take them in turn.   

                Defendant relies on California Business and Professions Code section 16600, arguing that a fiduciary duty on a non-managerial employee somehow restricts their mobility and freedom to work. Section 16600 reads: “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.” We fail to see how a fiduciary duty would impact this section, especially given that, as noted in GAB, an officer or employee can resign from their office, thereby divesting themselves of that fiduciary duty. (GAB supra, at 421).

                In regard to the statute of limitations, we agree with Defendant that the statute of limitations is four years. (See CCP § 343). However, we disagree that the relation back doctrine does not apply. “The relation-back doctrine requires that the amended complaint must (1) rest on the same general set of facts, (2) involve the same injury, and (3) refer to the same instrumentality, as the original one.” (Norgart v. Upjohn Co. (1999) 21 Cal.4th 383, 409).

                Here, Plaintiff fulfills the first element because Plaintiff uses the same general set of facts: Defendant was employed by Plaintiff (SAC, ¶ 2), Defendant acquired confidential trade information (SAC, ¶ 17), and Defendant used said information to solicit new clients for competitor Butler, that Defendant then went to work for (SAC, ¶ 23).

                Next, Plaintiff fulfills the second element because Plaintiff shows a substantially similar injury, the breach of loyalty. It is well established that the duty of loyalty is one of several fiduciary duties and is owed to the employer. (Fowler v. Varian Associates, Inc. (1987) 196 Cal.App.3d 34, 41, 241 Cal.Rptr. 539.) Plaintiff alleges that while entrusted with confidential trade secrets, Defendant obtained a job with Butler, solicited clients to leave Plaintiff’s business and receive services from Butler, and caused damages to Plaintiff in the form of lost revenue. (SAC, ¶ 106-114).

                Finally, the same instrumentality, Plaintiff’s trade secrets, was the original instrumentality in the first Complaint and is the same in the SAC. To conclude, the eighth cause of action relates back and is not time-barred.

                                                     iii.            CUTSA Preemption

                The Court will address one final point, in the Demurrer: whether the California Uniform Trade Secrets Act (“CUTSA”) preempts claims based on misappropriation of proprietary information. The Court overruled the first demurrer on this point and will overrule this demurrer on the same point as well.

                 In doing so, the Court relies on the Act itself as codified in sections 3426 through 3426.11 of the Civil Code and will distinguish the instant case from Silvaco Data Systems v. Intel Corporation (2010) 184 Cal.App.4th 210. In Silvaco, a marketer brough an action against a manufacturer of integrated circuits for the misappropriation of trade secretes under the Uniform Trade Secrets Act (UTSA). Importantly, the Court held that non-UTSA claims were preempted by UTSA. (Silvaco supra, at 210). Defendant argues that the instant case is similar in that CUTSA should displace the breach of fiduciary duty claim here. The Court disagrees.

                The key element that differentiates the instant case from Silvaco is that, here, there was a contractual agreement of fiduciary duties. (SAC, ¶ 10). CUTSA § 3426.7(b)(1) reads in pertinent part: “This title does not affect (1) contractual remedies, whether or not based upon misappropriation of a trade secret…”

                Both the second and eighth causes of action in this matter are based on an employment contract signed by Defendant. (SAC, Exh. 2, ¶ 4, subd. (j)). CUTSA does not preempt those causes of action, regardless of whether they were based upon misappropriation of a trade secret.  

 

3.       Conclusion

                Accordingly, Defendant Gary Erlandson’s Demurrer to the Second Amended Complaint is DENIED in its entirety.

Defendant is ordered to give notice.

 

Parties who intend to submit on this tentative must send an email to the court at gdcdepts27@lacourt.org indicating intention to submit on the tentative as directed by the instructions provided on the court website at www.lacourt.org.  If the department does not receive an email indicating the parties are submitting on the tentative and there are no appearances at the hearing, the motion may be placed off calendar.  If a party submits on the tentative, the party’s email must include the case number and must identify the party submitting on the tentative.