Judge Randolph M. Hammock, Case 20STCV19228 2022-10-24 Tentative Ruling

This is a corporate dispute over the management of Freshtech, a food packaging distributor. Joseph Ross, a director and former officer of Freshtech, alleges that he was sidelined and forced out by Nazir Mir and Scott Keller, Freshtech’s other officers and directors, because they were engaging in improper conduct. Mir and Keller allege in their cross-claims that Ross was engaging in improper conduct himself by competing with Freshtech through rPlanet Earth (“RPE”), a separate company he was involved with.

Generally speaking, leave to amend must be allowed where there is a reasonable possibility of successful amendment. (Goodman v. Kennedy (1976) 18 Cal.3d 335, 348.) Cross-Complainants must demonstrate this possibility at the hearing. If they do not, no leave to amend will be given.

The court takes judicial notice of the existence of the exhibits without assuming the truth of the assertions contained therein. (Evid. Code, § 452, subd. (h).) (See Seelig v. Infinity Broad. Corp. (2002) 97 Cal. App. 4th 798, 808.)

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

RPE demurs to the eighth, ninth, tenth, and eleventh causes of action of the Second Amended Cross-Complaint on the grounds that the Freshtech Parties have failed to allege facts sufficient to sustain these four causes of action. Each is addressed in turn.

In ruling on the previous motion for judgment on the pleadings against the First Amended Cross-Complaint, this court noted that there were no allegations in the FACC that Ross’s knowledge or conduct was imputed to RPE. Thus, for purposes of that motion, the court did not deem Cross-Defendant Ross’s conduct or knowledge as imputed to RPE.

The SACC now alleges that Ross’s knowledge and conduct is imputed to RPE because “he was acting within the course and scope of his employment with RPE and knowledge and approval of RPE at all relevant times.” (SACC 12.) In support, it includes the following allegations: “From at least 2015 to 2020, Ross engaged in conduct on behalf of and for the benefit of RPE that was within the scope of his duties as co-CEO. As co-CEO, Ross controlled RPE and had the authority to bind RPE. As explained herein, Ross engaged in extensive conduct on behalf of and for the benefit of RPE within the scope of his duties, including, but not limited to, targeting and contacting Freshtech’s actual and potential customers for the benefit of RPE, selling and attempting to sell RPE’s products to Freshtech’s actual and potential customers, and obtaining Freshtech’s confidential business information and mis-using it for the exclusive benefit of RPE.” (Id.) The SACC also alleges that RPE and RPE’s other co-CEO, Daviduk, were “aware of, encouraged and ratified Ross’s conduct on behalf of RPE because it benefitted RPE.” (Id.)

The SACC also invokes the doctrine of respondeat superior, alleging liability “because Ross committed the intentional torts identified herein within the scope of his employment with RPE. As part of his employment duties, RPE required Ross to sell RPE’s products and utilize customer relationships and knowledge obtained as the CEO of Freshtech to obtain sales for RPE.” (Id. 13.)

Subject to one or more exceptions, it “is settled California law that ‘[k]nowledge of an officer of a corporation within the scope of his duties is imputed to the corporation.’” (Uecker v. Zentil (2016) 244 Cal. App. 4th 789, 797.) And as to conduct, “under the doctrine of respondeat superior, an employer may be held vicariously liable for torts committed by an employee within the scope of employment. [Citation.] (Mary M. v. City of Los Angeles (1991), 54 Cal. 3d 202, 208).

Here, Cross-Complainants have adequately alleged that Ross—in his joint role as officer of Freshtech and co-CEO of RPE—engaged in conduct for the benefit of RPE within the scope of his duties as co-CEO. However, the court agrees with RPE’s point that there are some examples of Ross also acting adverse to RPE’s interests. This only demonstrates the delicate nature of Ross’s role as a high-level officer for two competing entities. However, “a demurrer cannot rightfully be sustained to part of a cause of action.” (Kong v. City of Hawaiian Gardens Redevelopment Agency (2002) 108 Cal. App. 4th 1028, 1047.)

Thus, for pleading purposes, Cross-Complainants have adequately alleged that Ross’s conduct can be imputed to RPE. (See Mary M., supra, 54 Cal.3d at 213 [noting determination of whether an employee has acted within scope of employment is generally a question of fact].)

The Eighth cause of action is based on RPE allegedly induced Ross to breach the Freshtech Shareholder’s Agreement. Likewise, the Tenth cause of action is based on RPE’s alleged interference with the same Freshtech Shareholder’s Agreement.

“The elements which a plaintiff must plead to state the cause of action for intentional interference with contractual relations are (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.” (Pac. Gas & Elec. Co. v. Bear Stearns & Co. (1990) 50 Cal. 3d 1118, 1126.) The defendant's conduct need not be wrongful apart from the interference with the contract. (Quelimane Co. v. Stewart Title Guaranty Co. (1998) 19 Cal.4th 26, 55.)

The tort of inducing breach of contract requires proof of a breach, whereas the tort of interference with contractual relations requires only proof of interference. (See Pacific Gas & Electric Co. v. Bear Stearns & Co. (1990) 50 Cal.3d 1118, 1129 [“[p]laintiff need not allege an actual or inevitable breach of contract in order to state a claim for disruption of contractual relations”].) “To recover damages for inducing a breach of contract, the plaintiff need not establish that the defendant had full knowledge of the contract's terms. ‘[T]he actor must have knowledge of the contract with which he is interfering and of the fact that he is interfering with the performance of the contract.’ ” [Citation.] (See I-CA Enterprises, Inc. v. Palram Americas, Inc. (2015) 235 Cal.App.4th 257, 290, 185 Cal.Rptr.3d 24 [knowledge of a contractual relationship is sufficient to show knowledge for the tort of inducing breach of contract].)” (Jenni Rivera Enterprises, LLC v. Latin World Ent. Holdings, Inc. (2019) 36 Cal. App. 5th 766, 783.)

The court finds that the Second Amended Cross-Complaint has addressed the deficiencies in the previous pleading. As noted above, the court finds that for pleadings purposes, Cross-Complainants have adequately alleged that facts showing Ross’s knowledge is imputed to RPE. In addition, the SACC adds allegation that “RPE’s co-CEO, Daviduk, pressured Ross to try to sell Freshtech and/or amend the Shareholders’ Agreement, so that Ross could continue to work for RPE without a conflict.” (SACC 117, 135.) The SACC also alleges that “Ross’s employment agreement with RPE LA explicitly identifies Ross’s role as a manager and owner of Freshtech.” (Id.)

Cross-Defendants’ arguments, such as the assertion that “rPlanet would have no reason to believe breaches were occurring because [Freshtech] never raised it with rPlanet when they had every opportunity to do so,” largely demonstrates a factual dispute. (Dem. 11: 10-12.)

The Ninth cause of action is based on RPE’s alleged interference with Freshtech’s contractual relations with its customers and suppliers. As noted above, the court finds that for pleadings purposes, Cross-Complainants have adequately alleged that facts showing Ross’s knowledge is imputed to RPE.

Cross-Defendants argue the SACC still has not sufficiently alleged the existence of customer contracts. The SACC alleges only that “[t]here exists certain contractual relations between Freshtech and various of its customers.” The customers “include the Oregon Customer…as well as a Salinas Customer.” (Id. at 125.) Notably, although Freshtech had done business with the Oregon and Salinas customers at some unspecified time in the past, there are no allegations that any specific contracts existed.

To state a claim for intentional interference with contractual relations, the threshold element is “a valid contract between plaintiff and a third party.” (Pac. Gas & Elec. Co., supra, 50 Cal. 3d at 1126.) Cross-Complainants conclusory allegations do not give the Court or Cross-Defendants notice of the “valid contracts” that purportedly existed and were interfered with. The court does not mean to suggest that Cross-Complainants must allege “all of the terms of its contracts” (Opp. 13: 16-17)—only that they should be able to allege with some specificity which contracts existed. The court noted this same issue when ruling on the MJOP, explaining that the First Amended Cross-Complaint “fail[ed] to specifically identify any existing contracts.” (05/20/22 Ruling, p. 7.) The same is true again.

Accordingly, the Demurrer to the Ninth Cause of Action is SUSTAINED. Generally speaking, leave to amend must be allowed where there is a reasonable possibility of successful amendment. (Goodman v. Kennedy (1976) 18 Cal.3d 335, 348.) Cross-Complainants must demonstrate this possibility at the hearing. If they do not, no leave to amend will be given.

The elements of a claim for intentional interference with prospective economic relations are “(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) intentional acts on the part of the defendant designed to disrupt the relationship; (4) actual disruption of the relationship; and (5) economic harm to the plaintiff proximately caused by the acts of the defendant.” ’ [Citations.]” (Marsh v. Anesthesia Servs. Med. Grp., Inc. (2011) 200 Cal. App. 4th 480, 504.)

Unlike interference with contract, which requires a valid contract, interference with prospective economic relations requires only “an economic relationship between the plaintiff and some third party.” (Id.) The tort “is considerably more inclusive than actions based on contract or interference with contract, and thus is not dependent on the existence of a valid contract.” (Korea Supply Co. v. Lockheed Martin Corp., (2003) 29 Cal. 4th 1134, 1157.)

As an initial matter, the court denied RPE’s motion for judgment on the pleadings as to this cause of action on May 20, 2022. RPE, however, now demurs to this cause of action, invoking most of the same arguments it made in the motion for judgment on the pleadings. Generally, a party may not re-demurrer to a cause of action after a demurrer is overruled. In this case, however, Cross-Complainants have added new allegations to the Cross-Complaint that impact the cause of action for interference with prospective economic relations. Therefore, the court will address the demurrer on its merits.

The SACC alleges that “Freshtech and certain customers and potential customers were in an economic relationship that probably would have resulted in an economic benefit to Freshtech.” (SACC 144.) Cross-Defendants knew of these relationships, and intended to and ultimately did disrupt the relationships, resulting in harm to Freshtech. (Id. 144-150.)

The only specific example cited in the SACC is the “Oregon Customer.” (Id. 57.) Cross-Complainants allege that the Oregon Customer, a Freshtech client since 2017, was scheduled to meet Mir and Ross in Oregon for a meeting in June of 2019 to discuss a “potential multi-million dollar deal” with Freshtech. (Id.) Before the meeting, Ross informed Mir that he could not make the meeting because his dog was sick. (Id.) Mir later learned that in actuality, Ross had met with the Oregon Customer later that day, but in his role as co-CEO of RPE. As a result of the meeting, the Oregon Customer became the first and single largest customer of RPE at that time and RPE became a food packaging supplier to the Oregon Customer.” (Id.)

RPE first argues that the SACC does not allege that RPE had “knowledge of the relationship” between the Oregon customer and Freshtech. However, the SACC alleges that “Cross-Defendants knew of these relationships.” (Id. 145.) Moreover, the SACC specifically alleges that the Oregon Customer had been a customer of Freshtech since 2017, well before the 2019 meeting. (Id. at 57.) In Ross’s dual-role as an officer of both entities, he was allegedly aware of the existing relationship between the Oregon Customer and Freshtech, and used this knowledge to land a meeting on behalf of RPE. This imputes that knowledge to RPE.

RPE next argues that the economic benefit to be derived from the Oregon Customer is too speculative. They rely on the California Supreme Court’s decision in Roy Allan Slurry Seal, Inc. v. Am. Asphalt S., Inc. (2017) 2 Cal. 5th 505, 518.

In opposition, Cross-Complainants counter that the Oregon Customer was already a Freshtech customer at the time of interference, and that “the meeting interfered with was the very definition of the probability of future economic value – Mir planned to travel to Oregon to meet with a Freshtech customer about a “potential multi-million dollar deal.” (Opp 9: 8-12 [citing SACC at ¶ 57].) Under Cross-Defendants’ interpretation, Cross-Complaints contend that “claims for interference with contract would swallow those for interference with prospective economic advantage.” (Opp. 9: 12-14.)

Cross-Defendants’ reliance on Roy Allen is misplaced. That case addressed interference in the unique context of public works claims. The court noted that “the public works bidding process differs from the types of commercial transactions that traditionally have formed the basis for tort liability.” (Roy Allan Slurry Seal, Inc., supra, 2 Cal. 5th at 519–20.) Going further, it recognized that in “ordinary commercial transactions,” “there is a background of business experience on the basis of which it is possible to estimate with some fair amount of success both the value of what has been lost and the likelihood that the plaintiff would have received it if the defendant had not interfered.” (Id. at 520.) The instant case—in which a previous customer relationship exists—more closely resembles the “ordinary commercial transaction” in which courts have recognized a “lessened” pleading requirement than it does the public bidding process. (See Korea Supply, supra, 29 Cal.4th.)

Based on the existing customer relationship, the court finds Cross-Complainants have alleged facts showing Freshtech had a reasonably probable basis to receive the expected economic benefit. (See Korea Supply, supra, 29 Cal.4th at p. 1164 [plaintiff must “demonstrate an economic relationship with a probable future economic benefit”]; Youst v. Longo, 43 Cal. 3d 64, 77 (1987) (“Although varying language has been used to express this threshold requirement, the cases generally agree that it must be reasonably probable the prospective economic advantage would have been realized but for defendant’s interference”].)

Cross-Defendants next argue that the SACC does not plead “intentional acts of disruption nor actual disruption.” The court disagrees, and agrees with Cross-Complainants that the pleading adequately alleges that “Ross concocted an excuse to avoid his obligations to Freshtech to get business from the very same Oregon Customer – but on behalf of RPE. (Opp. 9: 19-23 [citing SACC at ¶ 57].) This resulted in RPE signing a deal with the Oregon Client. (Id.)

Cross-Defendants next argue that the SACC does not allege “independently wrongful conduct.” Unlike interference with contract, interference with prospective relations “requires pleading that the defendant committed an independently wrongful act.” (Ixchel Pharma, LLC v. Biogen, Inc. (2020) 9 Cal. 5th 1130, 1141.) “The independently wrongful act must be the act of interference itself, but such act must itself be independently wrongful. That is, ‘[a] plaintiff need not allege the interference and a second act independent of the interference. Instead, a plaintiff must plead and prove that the conduct alleged to constitute the interference was independently wrongful, i.e., unlawful for reasons other than that it interfered with a prospective economic advantage. [Citations.]’” (Crown Imports, LLC v. Superior Ct. (2014) 223 Cal. App. 4th 1395, 1404.)

Just as the court found when ruling on the MJOP, the SACC alleges that Cross-Defendants used Freshtech’s confidential and proprietary information to disrupt Freshtech’s economic relationship with customers. The use of the confidential information, combined with Ross working on behalf of Freshtech, demonstrates an independent wrong.

Finally, Cross-Defendants argue that the claim is preempted by the California Uniform Trade Secrets Act (“CUTSA”). “At least as to common law trade secret misappropriation claims, ‘UTSA occupies the field in California.’” (K.C. Multimedia, Inc. v. Bank of Am. Tech. & Operations, Inc. (2009) 171 Cal. App. 4th 939, 954 [citing AccuImage Diagnostics Corp v. Terarecon, Inc., at p. 954].)

In K.C. Multimedia, the Court held that the CUTSA “preempts common law claims that are ‘based on the same nucleus of facts as the misappropriation of trade secrets claim for relief.’” (Id. at 958.) Because the Court there found that “each and every cause of action hinge[d] upon the factual allegation that [defendants] misappropriated [appellant's] trade secrets,” the claims were preempted by CUTSA. Notably, the trial court’s dismissal of the claims came immediately before trial. (Id. at 959.) The Court also noted that “the determination of whether a claim is based on trade secret misappropriation is largely factual.” (Id. at 954.)

Here, because the determination is largely factual, the court cannot decide the issue on demurrer. Moreover, Cross-Complainants have alleged means aside from the misappropriation of trade secrets that may constitute an independent wrong. As noted in the MJOP, this may include the alleged aiding and abetting a breach of fiduciary duty, incorporated by reference into the Eleventh cause of action. (SACC 143.) If, at a later date, the evidence shows that the independent wrong is entirely based on misappropriated trade secrets, this claim may be susceptible to attack by a motion for summary adjudication or other pretrial motion based on CUTSA preemption.

A motion to strike lies either (1) to strike any irrelevant, false or improper matter inserted in any pleading; or (2) to strike any pleading or part thereof not drawn or filed in conformity with the laws of this state, a court rule or order of court. (CCP § 436.)

Cross-Defendants argue the vicarious liability allegations in these paragraphs are irrelevant and should be stricken from the SACC. Because the demurrer is sustained to the ninth cause of action (which includes paragraph 126), that point is MOOT.

As to Paragraph 13, Cross-Complainants have demonstrated that their theory of secondary vicarious liability, at the very least, is relevant to the UCL claim (Sixth Cause of Action.) Whether Cross-Defendants engaged in “unlawful, fraudulent, or unfair business practices” to support the UCL claim is a separate issue that need not be resolved now.

Civil Code section 3294, subdivision (a) permits an award of punitive damages “for the breach of an obligation not arising from contract, where it is proven by clear and convincing evidence that the defendant has been guilty of oppression, fraud, or malice.”

Further, the SACC does plead facts sufficient to maintain each cause of action, and it does state sufficient facts, that if true and proven at trial, are sufficient to support a potential finding that Cross-Defendants acted with malice, oppression, or fraud in their alleged attempts to harm Freshtech.

FN 1 - They previously brought a motion for judgment on the pleadings as to the First Amended Cross-Complaint. (See 5/20/22 Ruling.)

FN 2 - Although Cross-Defendants’ cited authority is a federal district court case not binding on this court, the court finds it persuasive. (See AlterG, Inc. v. Boost Treadmills LLC, 388 F. Supp. 3d 1133, 1150 (N.D. Cal. 2019) [dismissing claim where complaint stated only that “[c]ontracts existed between [plaintiff] ... and [plaintiff’s] vendors, suppliers, and customers” but failed to provide any details about the contracts with which defendants allegedly interfered].)