Judge Michael Shultz, Case Number: 24STCV31535, Date: 2025-04-01 Tentative Ruling

[TENTATIVE] ORDER SUSTAINING IN PART AND OVERRULING IN PART DEMURRER TO COMPLAINT

The complaint alleges that Plaintiff is a global marketing and public relations agency. The individual defendants were Plaintiff’s former employees. Plaintiff alleges that the former employees collectively schemed to divert Plaintiff’s business to Defendant, 2PM Sharp, LLC (2PM). Plaintiff alleges claims for (1) tortious interference with prospective economic advantage; (2) tortious interference with contract; (3) breach of the duty of loyalty; (4) faithless servant doctrine; (5) aiding and abetting breach of duty of loyalty; and (6) violation of Business & Professions Code § 17200 et seq.

Defendants argue that all claims are barred by the California Uniform Trade Secrets Act (CUTSA). Plaintiff filed a nearly identical lawsuit in New York. During the parties’ required meet and confer held in anticipation of the demurrer, Defendants contend that Plaintiff’s counsel admitted that the detailed factual allegations in the New York lawsuit were not alleged in this lawsuit because Plaintiff’s California claims would be preempted by the CUTSA. The New York complaint alleges that Defendants used material to solicit other clients. That material, by definition, consisted of confidential and proprietary information. All common law claims are barred as Plaintiff’s exclusive remedy is governed by CUTSA.

Alternatively, Defendants argue that Plaintiff failed to state facts sufficient to support each cause of action.

Plaintiff argues that neither the New York action nor this action allege misappropriation of trade secrets. CUTSA expressly excludes from preemption other civil remedies not based on trade secret misappropriation. Whether a claim alleges a misappropriation claim is a factual question. That the claims may relate to information that could conceivably constitute a trade secret is not sufficient to preempt Plaintiff’s independent tort claims. If the court determines otherwise, Plaintiff requests leave to amend.

Defendants argue that the misuse of trade secrets is at the core of Plaintiff’s claims. Defendants suggest that as set forth in its Case Management Conference statement, the court should continue this demurrer, in the interest of efficiency, until after April 28, 2025, when the New York court rules on Defendants’ motion to stay based on forum non conveniens. The granting of the motion will cause Plaintiff to amend this lawsuit to add the New York claims.

A demurrer tests the sufficiency of a complaint as a matter of law and raises only questions of law. (Schmidt v. Foundation Health (1995) 35 Cal.App.4th 1702, 1706.) In testing the complaint’s sufficiency, the court must assume the truth of the properly pleaded factual allegations as well as facts that can be reasonably inferred from those expressly pleaded facts. The court may also consider matters properly subject to judicial notice. (Blank v. Kirwan (1985) 39 Cal.3d 311, 318.)

The court may not consider contentions, deductions, or conclusions of fact or law. (Moore v. Conliffe (1994) 7 Cal.4th 634, 638.) Plaintiff must allege facts sufficient to establish every element of each cause of action. (Rakestraw v. California Physicians Service (2000) 81 Cal.App.4th 39, 43.) Otherwise, demurrer should be sustained. (Code Civ. Proc., § 430.10(e); Zelig v. County of Los Angeles (2002) 27 Cal.4th 1112, 1126.)

Sufficient facts are the essential facts of the case alleged "with reasonable precision and with particularity that is sufficiently specific to acquaint the defendant with the nature, source, and extent of his cause of action.” (Gressley v. Williams (1961) 193 Cal.App.2d 636, 643-644.) Whether the Plaintiff will be able to prove the pleaded facts is irrelevant. (Stevens v. Superior Court (1986) 180 Cal.App.3d 605, 609–610.)

The court grants Defendants’ judicial notice of the complaint filed in this action. (Evid. Code, § 452(d).) The court denies the request to take judicial notice of the complaint in the New York matter as it is irrelevant to the demurrer. A person’s remarks made about the reason for filing claims in two different states are irrelevant to the disposition of this demurrer, and those remarks fall outside the pleading. Contrary to Defendants’ argument, it is not imperative for the court to consider the allegations of the New York case, because the only issue at this stage is whether the pleading in this case states a cause of action, assuming all facts are true. (Dem. 3:23; Blank v. Kirwan (1985) 39 Cal.3d 311, 318.)

Concerning preemption, the statute expressly does not supersede any other statute relating to trade secret misappropriation or any statute otherwise regulating trade secrets. (Civ. Code, § 3426.7.) It does not affect contractual remedies “whether or not based upon misappropriation of a trade secret," or “other civil remedies that are not based upon misappropriation of a trade secret." (Civ. Code, § 3426.7.) The statute 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. at 958.) It can operate to preempt claims for breach of confidence, interference with contract, and unfair competition. (Id. at 958). In determining whether a claim is preempted by the CUTSA, the court considers the gravamen of the complaint. (Id. at 959.)

The complaint alleges that Mark Owens (Owens), while serving as Plaintiff’s CEO, began efforts to take Plaintiff’s business and recruit Plaintiff’s workforce including the former employee defendants. (Complaint, ¶51.) Owens made efforts to recruit Plaintiff’s co-presidents, Jeff Raymond and Lindsay Galin, to leave Plaintiff. (Complaint, ¶ 54.) Owens’s employment with Plaintiff terminated on March 1, 2024, and on May 28, 2024, a domain name was registered for 2PM SHARP, LLC (2PM). (Complaint, ¶¶ 56-57.) While the former employees were still employed with Plaintiff, Defendants collectively schemed to divert the clients that the former employees serviced. (Complaint, ¶ 63.)

In the middle of Defendants’ resignation, Plaintiff allegedly began receiving notices from clients served by the departing employees that terminated the clients’ contracts with Plaintiff. (Complaint, ¶63.)

After the mass resignations, Plaintiff recovered a deleted email showing that while still employed with Plaintiff, an employee messaged co-defendants with a list of Plaintiff’s clients that she would be taking to 2PM. (Complaint, ¶ 66.)

Plaintiff’s claims are based on the allegations that Defendants engaged in unlawful and unethical conduct in mounting a campaign to deliberately disrupt Plaintiff’s business, including solicitation of Plaintiff’s clients and disrupting Plaintiff’s relationships with their clients. (Complaint, ¶ ¶ 74-76.)

To support the argument that Plaintiff’s claims are based on trade secret misappropriation, Defendants rely on allegations in the New York complaint which purportedly are different and more detailed and reveal that the claims alleged here are based on trade secret information. (Dem. 6:11-12.)

The allegations in a case pending in another state, however, is not relevant to this demurrer. Defendants appear to be arguing that because of Plaintiff’s allegations in the New York case, Plaintiff acknowledges that the California claims arise from misappropriation of trade secrets, and therefore, precludes Plaintiff’s claims in this state, as a matter of law. (Dem. ¶ 6:11-13.) Defendants are relying on extrinsic facts to establish that Plaintiff’s claims arise from misappropriation. Plaintiff’s motivations, strategy, or statements fall outside the pleading and thus are irrelevant.

The statute defines a “trade secret” as “information, including a formula, pattern, compilation, program, device, method, technique, or process, that: (1) derives independent economic value, actual or potential, from not being generally known to the public or to other persons who can obtain economic value from its disclosure or use; and (2) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy. (Civ. Code, § 3426.1.)

The allegations do not assert that Defendants relied on trade secret information to accomplish the alleged diversion of the clients they serviced. The wrongful conduct alleged here was the former employees’ “scheme,” while they were employed by Plaintiff, to solicit Plaintiff’s clients, who allegedly went willingly. (Complaint, ¶63 [“In the midst of these resignations, [Plaintiff] immediately began receiving notices from clients served by the departing employees terminating their contracts with [Plaintiff.”].)

The complaint does not allege on Defendants’ use of trade secret information in soliciting clients to join Defendant 2PM.

E. First cause of action for intentional interference with prospective economic advantage

The elements of this claim require plaintiff to prove (1) the existence of an economic relationship containing the probability of future economic benefit to the plaintiff, (2) knowledge by the defendant of the existence of the relationship, (3) intentional acts on the part of the defendant designed to disrupt the relationship, (4) actual disruption of the relationship, (5) damages to the plaintiff proximately caused by the acts of the defendant. (Buckaloo v. Johnson (1975) 14 Cal.3d 815, 827.)

The complaint alleges that Plaintiff “represents more than 400 of the most prominent and influential actors, musicians, producers, directors, content creators, and athletes in the world, and creates distinctive integrated marketing campaigns for some of the largest brands and Fortune 500 companies across the globe. Its business depends on establishing and maintaining client relationship.” (Complaint, ¶2.)

These alleged facts establish an economic relationship that would bring future economic benefit to Plaintiff from the people they represent (“maintaining client relationships.”) (Complaint, ¶ 2.) Defendants’ knowledge of the existence of this relationship is supported by the allegation that Defendants are Plaintiff’s former employees, some of whom serviced existing clients and engaged in marketing campaigns for “notable comedy personalities” and “various talent clients.” (Complaint, ¶ 28, 31.)

The allegation that Defendants recruited Plaintiff’s employees and solicited clients to terminate their contracts with Plaintiff supports the element requiring intentional acts designed to disrupt the relationship. (Complaint, ¶ 67.) Actual disruption occurred when the clients ended their relationships with Plaintiff, allegedly resulting in harm as Plaintiff “[stood] to lose untold revenues from loss of client business” (loss of prospective economic benefit.) (Complaint, ¶ 68.) The allegations adequately support each element of the claim.

This claim requires facts showing (1) a valid contract between plaintiff and a third party; (2) defendant's knowledge of this contract; (3) defendant's intentional acts designed to induce a breach or disruption of the contractual relationship; (4) actual breach or disruption of the contractual relationship; and (5) resulting damage." (Pacific Gas & Electric Co. v. Bear Stearns & Co. (1990) 50 Cal.3d 1118, 1126.)

The difference between a claim for interference with contract and a claim for interference with prospective economic advantage is that the former requires a valid and binding contract between Plaintiff and a third party, while the latter does not. (Coast Hematology-Oncology Associates Medical Group, Inc. v. Long Beach Memorial Medical Center (2020) 58 Cal.App.5th 748, 766.) Additionally, prospective economic advantage requires the plaintiff to plead and prove that the disruption was independently wrongful. (Ixchel Pharma, LLC v. Biogen, Inc. (2020) 9 Cal.5th 1130, 1142 [“[A]n act is independently wrongful if it is unlawful, that is, if it is proscribed by some constitutional, statutory, regulatory, common law, or other determinable legal standard."].)

In any event, the same allegations supporting the first cause of action equally support this claim. The complaint details the various contractual management services Plaintiff provided to their many clients. (Complaint, ¶¶ 27-50.)

A prima facie case requires a plaintiff to prove “(1) the existence of a relationship giving rise to a duty of loyalty; (2) one or more breaches of that duty; and (3) damage proximately caused by that breach." (Huong Que, Inc. v. Luu (2007) 150 Cal.App.4th 400, 410.) Defendants acknowledge that a duty of loyalty arises in a relationship between a principal and agent and that an employee may qualify as an “agent,” defined as one who represents another, the principal, in dealings with third persons. (Dem. 11:20-26.) [1]

Defendants’ contention that Plaintiff has not alleged such facts ignores the allegations that Plaintiff employed Defendants to provide services to Plaintiff’s many clients. (Complaint, ¶¶ 27-50.) Contrary to Defendants’ contention, this cause of action does not require Plaintiff to allege facts to support a claim for breach of contract, only a relationship from which a duty of loyalty arises. The cases on which Defendants rely articulate the required elements for a claim for breach of contract, which Plaintiff does not allege. Both cases did not address claims for breach of duty of loyalty. (Otworth v. Southern Pac. Transportation Co. (1985) 166 Cal.App.3d 452 [involved claims for conversion, breach of contract, civil rights violations, and unjust enrichment]; Gilmore v. Lycoming Fire Ins. Co. (1880) 55 Cal. 123 [claim for breach of contract].)

H. Demurrer to the fourth cause of action for relief under the “faithless servant doctrine.”

Defendants argue that this is not a recognized cause of action in California, only in New York. Defendants content that under New York law, Plaintiff must allege that New York law applies, that Plaintiff is required to allege that Defendants violated a “contract of service,” that the acts rise to the breach of duty of loyalty, and Plaintiff is required to allege the elements for a breach of contract. (Dem. 12:21-28.)

Plaintiff argues that the complaint alleges elements of the claim, which is recognized in California.

Plaintiff’s case authority does not persuasively support a doctrine that permits an employer to recover wages paid to an employee where the employee breaches the duty of loyalty. Rather J. C. Peacock, Inc. v. Hasko (1961) 196 Cal.App.2d 353 affirms the principle that if an employee violates the duty of loyalty, the employee forfeits the right to recover compensation. (Id. at 359.) Plaintiff cites Salahutdin v. Valley of California, Inc. (1994) 24 Cal.App.4th 555, which discusses the proper measure of damages in cases of “fiduciary fraud.” (Salahutdin at 565.) Another case cited by Plaintiff also discusses the proper measure of damages where a person is defrauded by their fiduciary in a real property transaction. (Moore v. Teed (2020) 48 Cal.App.5th 280, 291 ["" where a person has been defrauded by their fiduciary in a real property transaction, the measure of damages available under Civil Code sections 3333 and 1709 may include a benefit-of-the-bargain damages award. Applying this broader measure of damages ensures that a faithless fiduciary is held to account for the full amount of the loss of which his breach of faith is a cause (Pepitone, supra, 64 Cal.App.3rd at p. 688, 134 Cal.Rptr. 709), and that a victim is compensated for any and all detriment proximately caused by their fraudulent behavior.”].)

Insofar as Plaintiff seeks recovery of compensation paid to the fiduciary employee, disgorgement of profits (i.e., bonuses) wrongfully acquired by the fiduciary is a recoverable damage. (Center for Healthcare Education and Research, Inc. v. International Congress for Joint Reconstruction, Inc. (2020) 57 Cal.App.5th 1108, 1125 [“The available relief includes damages or any of a ‘variety of equitable remedies,’ including disgorgement of profits. [Citations omitted] [“The principal has a cause of action either for a breach of contract or for a tort as a remedy for damage caused by the violation of any duty of loyalty on the part of an agent. He may also charge the agent with anything the agent receives as the result of a violation of duty.”].)

None of the cases discuss an independent claim under the “faithless servant” doctrine with a measure of damages that is different from claims from breach of fiduciary duty or loyalty. Accordingly, demurrer is SUSTAINED.

To state a prima facie case, Plaintiff must allege facts showing: (1) a third party's breach of fiduciary duties owed to plaintiff; (2) defendant's actual knowledge of that breach; (3) substantial assistance or encouragement by defendant to the third party's breach; and (4) defendant's conduct was a substantial factor in causing harm to plaintiff. (Nasrawi v. Buck Consultants LLC (2014) 231 Cal.App.4th 328, 343.)

Defendants contend that the complaint does not describe which Defendants allegedly aided and abetted the other. Defendants assert that since the claim is rooted in contract, Plaintiff must allege facts to support a breach of contract. These arguments are without merit.

Both the claims for breach of fiduciary duty and breach of duty of loyalty survive demurrer. Plaintiff alleges CEO Owens recruited other executives and employees to leave Plaintiff’s employ. (Complaint, ¶¶ 53-54.) Plaintiff alleges that the former employees collectively were “scheming” to divert Plaintiff’s business to the new entity, 2PM. (Complaint, ¶ 60.) Defendants allegedly conspired to coordinate the former employees’ resignations. (Complaint, ¶ 62.) Defendant 2PM and the former employees “orchestrated the solicitation and simultaneous departure” of former and other employees to leave Plaintiff and to divert business. (Complaint, ¶ 67.)

J. Sixth cause of action for violation of Bus. & Prof Code § 17200 (“Unfair Competition Law” or “UCL”)

Defendants argue that Plaintiff has not alleged any unlawful, unfair, or fraudulent business act to support recovery of remedies under section 17200. Defendants argue fraud requires a higher pleading standard. None of these arguments have merit.

As defined by statute, “unfair competition” includes “any unlawful, unfair or fraudulent business act or practice.” (Bus. & Prof. Code, § 17200). Its purpose is to protect both consumers and competitors by promoting fair competition in commercial markets for goods and services.” (Gutierrez v. Carmax Auto Superstores California (2018) 19 Cal.App.5th 1234, 1265). A UCL claim “borrows” violations of other laws and treats these violations, when committed pursuant to business activity, as unlawful practices independently actionable under section 17200 et seq. and “subject to the distinct remedies provided thereunder.”(Farmers Ins. Exchange v. Superior Court (1992) 2 Cal.4th 377, 383.)

As the UCL claim is derived from the preceding causes of action that survive demur, the claim is adequately “tethered” to unlawful or unfair practices sufficient to support the claim for unfair competition. (Gutierrez v. Carmax Auto Superstores California (2018) 19 Cal.App.5th 1234, 1265 ["Virtually any statute or regulation (federal or state) can serve as a predicate for a UCL unlawful practice cause of action."].

K. Whether all claims are subject to dismissal because they are predicated on void contracts.

Whether the contracts at issue are “void” cannot be determined at this stage.

Defendants move to strike the claim for attorney’s fees and for punitive damages as neither are supported by the facts. Plaintiff disputes these contentions.

A plaintiff may recover on a claim for exemplary damages where the defendant is guilty of oppression, fraud, or malice. (Civ. Code, § 3294 subd. (a).) The predicate acts to support the claim must be intended to cause injury or must constitute “malicious” or “oppressive” conduct as defined by statute. “Malice” is defined as “conduct which is intended by the defendant to cause injury to the plaintiff or despicable conduct which is carried on by the defendant with a willful and conscious disregard of the rights or safety of others.” (Civ. Code, § 3294 subd. (c)(1); College Hospital Inc. v. Superior Court (1994) 8 Cal.4th 704, 725 ["malice involves awareness of dangerous consequences and a willful and deliberate failure to avoid them"].) "Oppression" is defined as “despicable conduct that subjects a person to cruel and unjust hardship in conscious disregard of that person's rights.” (Civ. Code, § 3294 subd. (a) subd. (c)(2).)

Plaintiff alleges sufficient facts to support a finding that Defendants’ conduct was despicable and in conscious disregard of Plaintiff’s rights: Defendants purposefully engaged in a secret campaign to actively solicit Plaintiff’s clients to divert business to 2PM (Complaint, ¶ 3); Defendants conspired to coordinate the date of the former employees’ resignation to facilitate the diversion of Plaintiff’s clients (Complaint, ¶ 62); (3) the former employees “moved en masse” to 2PM which Defendants intended to do (Complaint, ¶ 65); this intent was discovered in a deleted email showing that an employee messaged other Defendants with a list of clients she would be taking to the new venture (Complaint, ¶ 66); Defendants “orchestrated” this scheme to divert business (Complaint, ¶ 67); and Defendants deliberately intended to injure Plaintiff’s business and improve their own (Complaint, ¶ 95.) These, among other specific allegations of deliberate misconduct in violation of Defendants’ alleged duties to Plaintiff are adequate predicate acts that would support the claim for punitive damages.

Finally, it is not an abuse of discretion to refuse to strike a claim for attorney fees where Plaintiff has not had a full opportunity to determine the basis for such fees. (Camenisch v. Superior Court (1996) 44 Cal.App.4th 1689, 1699; Yassin v. Solis (2010) 184 Cal.App.4th 524, 533) ["There is no requirement that a party plead that it is seeking attorney fees, and there is no requirement that the ground for a fee award be specified in the pleadings."].)

Based on the foregoing, demurrer is SUSTAINED IN PART to the fourth cause of action only. Demurrer to all other claims is OVERRULED. The motion to strike is DENIED. Plaintiff has not shown that California recognizes a claim for “faithless servant doctrine.” Therefore, demurrer is sustained as to that claim without leave to amend.

[1] The duty of loyalty arises where a confidence is “reposed” by one in the integrity of another, creating a duty to avoid taking advantage of that confidential relationship to harm the other person’s interests. (Richelle L. v. Roman Catholic Archbishop (2003) 106 Cal.App.4th 257, 271 ["a confidential relationship may be founded on a moral, social, domestic, or merely personal relationship as well as on a legal relationship.”].) A fiduciary duty arises from a legally recognized relationship. (Id.)