Khan et al v. K2 Pure Solutions, LP, No. 3:2012cv05526 - Document 70 (N.D. Cal. 2013)
Court Description: ORDER GRANTING MOTION FOR PARTIAL SUMMARY JUDGMENT ON NINTH CAUSE OF ACTION by Judge William H. Orrick granting 45 Motion for Partial Summary Judgment. The plaintiffs are entitled to judgment as a matter of law on their Ninth Cause of Action due to the defendants' use of noncompete agreements against the "strong public policy" of the State of California. The Court ORDERS that the agreements in this case shall have no force or effect and ENJOINS the defendants from seeking to enforce the agreements in any manner, whether in this Court or any other adjudicative body. (jmdS, COURT STAFF) (Filed on 10/2/2013)
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1 2 3 4 UNITED STATES DISTRICT COURT 5 NORTHERN DISTRICT OF CALIFORNIA 6 7 IMTIAZ KHAN, et al., Case No. 12-cv-05526-WHO Plaintiffs, 8 v. 9 10 K2 PURE SOLUTIONS, LP, et al., Defendants. ORDER GRANTING MOTION FOR PARTIAL SUMMARY JUDGMENT ON NINTH CAUSE OF ACTION Re: Dkt. No. 45 United States District Court Northern District of California 11 12 13 INTRODUCTION 14 On September 3, 2013, the Court denied the plaintiffs Partial Motion for Summary 15 Judgment on their First and Second Causes of Action and ordered supplemental briefing on the 16 issue of whether attorney s fees accrued in defending the Nevada and Ohio actions constitute an 17 injury in fact sufficient to confer standing on the plaintiffs under California s Unfair Competition 18 Law (“UCL”). Dkt. No. 63. The Court incorporates the factual and procedural discussions from 19 its prior Order here. Based on the supplemental briefing, and the parties earlier briefing and 20 argument, the plaintiffs Motion for Summary Judgment on their Ninth Cause of Action is 21 GRANTED. 22 DISCUSSION 23 The Unfair Competition Law (“UCL”) prohibits “any unlawful, unfair or fraudulent 24 business act or practice.” CAL. BUS. & PROF. CODE § 17200. “Each of these three adjectives 25 captures a separate and distinct theory of liability.” Rubio v. Capital One Bank, 613 F.3d 1195, 26 1203 (9th Cir. 2010) (quotation marks omitted). The UCL s “coverage is sweeping, embracing 27 anything that can properly be called a business practice and that at the same time is forbidden by 28 law.” Wilson v. Hewlett-Packard Co., 668 F.3d 1136, 1140 (9th Cir. 2012). 1 I. STANDING The Court finds that the plaintiffs have standing under the UCL. “[S]tanding is limited to 2 3 any person who has suffered injury in fact and has lost money or property as a result of unfair 4 competition.” Kwikset Corp. v. Super. Ct. of Orange Cnty., 51 Cal. 4th 310, 320-21 (2011) 5 (quotation marks omitted); CAL. BUS. & PROF. CODE § 17204. “There are innumerable ways in 6 which economic injury from unfair competition may be shown. . . . [And the law does not] purport 7 to define or limit the concept of „lost money or property, nor can or need we supply an exhaustive 8 list of the ways in which unfair competition may cause economic harm.” Id. at 323. Attorney s 9 fees accrued in bringing a UCL action are insufficient to establish standing. Cordon v. Wachovia 10 Mortgage, a Div. of Wells Fargo Bank, N.A., 776 F. Supp. 2d 1029, 1039 (N.D. Cal. 2011). However, attorney s fees accrued in past actions brought alleging violation of the UCL are United States District Court Northern District of California 11 12 sufficient to establish standing. Koller v. West Bay Acquisitions, LLC—a case from this district 13 identified by the plaintiffs in their supplemental briefing—is on point. No. 12-cv-117, 2012 WL 14 2862440 (N.D. Cal. July 11, 2012). The plaintiff in Koller argued that the defendants deceptively 15 represented that the plaintiff owed them money, and thus violated the UCL, among other claims. 16 Id. at *7. To defend against the defendants debt collection efforts, the plaintiff hired attorneys to 17 research his matter and to respond to demands sent by the defendants. Id. at *8. The Honorable 18 Charles Breyer held that “Plaintiff s costs, expended to discover whether Plaintiff was required to 19 pay [the alleged debt] and defend himself against Defendants collection efforts, constitute 20 economic injury as defined in Kwikset, as an expense that occurred that would have otherwise 21 been unnecessary.” Id. Judge Breyer explained that “costs expended to defend against litigation 22 are very different than costs expended to file suit.” Id. (emphasis added). Thus, “Plaintiff has 23 sufficiently alleged economic harm . . . [and] injury in fact and he has standing under the UCL.” 24 Id. 25 Similarly, in Janti v. Encore Capital Group, Inc., No. 09-cv-1969-JLS, 2010 WL 3058260, 26 at *7 (S.D. Cal. Aug. 3, 2010), the court held that where “Plaintiff paid a $50.00 filing fee to 27 defend herself in a state court action brought by one of the Defendants for debt collection,” that 28 “definitively identifies money lost sufficient to assert a UCL claim,” as well as injury in fact. 2 1 Likewise, in Tourgeman v. Collins Fin. Servs., Inc., No. 08-cv-1392-JLS, 2009 WL 6527758, *7-8 2 (S.D. Cal. Nov. 23, 2009), the court held that where “the complained-of events caused Plaintiff to 3 incur legal expenses in defense of the collection action filed in state court,” both injury in fact and 4 lost money are met. The principles articulated in Koller, Janti, and Tourgeman apply here. The defendants do not identify any relevant cases to the contrary or sufficiently distinguish 5 6 the cases cited by the plaintiffs from the facts here. Rather than directly address the issue 7 presented by the Court s Order and rebut the plaintiffs arguments, the defendants spend most of 8 their time arguing that the plaintiffs are not entitled to a remedy. In their only attempt to address 9 the issue presented, the defendants state that “Plaintiffs fail to mention . . . [that] the court in Tourgeman invited further briefing from the parties on standing under the UCL and thereafter held 11 United States District Court Northern District of California 10 that the plaintiff lacked standing to bring a UCL claim,” apparently wishing the Court to think 12 that the same complaint was at issue. Def. s Supp. Reply Br. 3 (original emphasis). However, it is 13 the defendants who fail to mention that the passage they cite refers to a completely different 14 complaint. As the court in Tourgeman continued to say, the earlier order “is inapposite to the 15 present issue as it pertains to Plaintiff s Second Amended Complaint, which is not the operative 16 complaint here, and, critically, did not contain” the same allegations; indeed, the two orders were 17 not even decided by the same judge. Tourgeman v. Collins Fin. Servs., Inc., No. 08-cv-1392- 18 CAB, 2012 WL 1327824, at *6 (S.D. Cal. Apr. 17, 2012). The Court finds the reasoning in Koller persuasive and follows its holding. The plaintiffs 19 20 have standing under the UCL to pursue their claim. 21 II. 22 “Unlawful” Prong The “unlawful” prong of the UCL “borrows violations of other laws and treats them as 23 independently actionable.” Daugherty v. Am. Honda Motor Co., Inc., 51 Cal. Rptr. 3d 118, 128 24 (Ct. App. 2006). “An employer s use of an illegal noncompete agreement [] violates the UCL.” 25 Dowell v. Biosense Webster, Inc., 179 Cal. App. 4th 564, 575 (2009). Here, there is no doubt that 26 the defendants noncompete agreements are illegal under California law—indeed, the defendants 27 admitted as much. Opp n 7. Thus, their use of the agreements, by definition, violates the UCL. 28 3 1 III. “Unfair” Prong 2 The “unfair” prong requires proving either (1) a practice that “offends an established 3 public policy or is immoral, unethical, oppressive, unscrupulous or substantially injurious to 4 consumers” and that is “tethered to specific constitutional, statutory or regulatory provisions,” 5 Bardin v. Daimlerchrysler Corp., 39 Cal. Rptr. 3d 634, 642, 645 (Ct. App. 2006) (quotations 6 omitted); or (2) that “the utility of the defendant s conduct [is outweighed by] the gravity of the 7 harm to the alleged victim,” Schnall v. Hertz Corp., 93 Cal. Rptr. 2d 439, 456 (Ct. App. 2000). The Supreme Court of California has affirmed that “section 16600”—the law prohibiting 8 9 noncompete agreements—”represents a strong public policy of the state.” Edwards v. Arthur Andersen LLP, 44 Cal. 4th 937, 949 (2008); see also KGB, Inc. v. Giannoulas, 104 Cal. App. 3d 11 United States District Court Northern District of California 10 844, 848 (Ct. App. 1980); Frame v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 20 Cal. App. 3d 12 668, 673 (Ct. App. 1971). By using noncompete agreements, the defendants engaged in a practice 13 that “offends an established public policy” of California. Again, their use of such agreements 14 violates the UCL. 15 IV. “Fraudulent” Prong The “fraudulent” prong of the UCL “require[s] only a showing that members of the public 16 17 are likely to be deceived.” Daugherty, 51 Cal. Rptr. 3d at 128. Because the plaintiffs have not 18 alleged, nor is there evidence, that the defendants use of noncompete agreements was in any way 19 fraudulent, the plaintiffs have not established that they are entitled to judgment as a matter of law 20 under the “fraudulent” prong of the UCL. 21 V. 22 Whether The Plaintiffs Are Entitled To Relief The UCL only provides for restitution or injunctive relief. Korea Supply Co. v. Lockheed 23 Martin Corp., 29 Cal. 4th 1134, 1144 (2003) (citation omitted). Restitution is the “return [of] 24 money obtained through an unfair business practice to those persons in interest from whom the 25 property was taken, that is, to persons who had an ownership interest in the property or those 26 claiming through that person.” Id. Here, the money that the plaintiffs lost is in the hands of their 27 attorneys, not the defendants. Thus, the plaintiffs are not entitled to restitution from the 28 defendants. Indeed, the plaintiffs Reply to Defendants Supplemental Brief does not argue that 4 1 they are entitled to restitution. Dkt. No. 69. Therefore, the remaining issue is whether the 2 plaintiffs are entitled to injunctive relief. This case presents the unusual situation in which the defendants, by their own admission, 3 4 used an agreement that violates California law, but their CEO declared under penalty of perjury 5 that they will not enforce it any longer, at least with respect to the plaintiffs. Brodie Decl. ¶ 5. As 6 a result, the plaintiffs are arguably no longer in danger of being accused of violating the 7 agreements; however, they have suffered monetary losses due to the defendants attempts to 8 enforce those agreements outside of California and have standing to bring a UCL claim. “Where the state s highest court has not decided an issue, the task of the federal courts is to 9 predict how the state high court would resolve it.” Dimidowich v. Bell & Howell, 803 F.2d 1473, 11 United States District Court Northern District of California 10 1482 (9th Cir. 1986), modified by 810 F.2d 1517 (9th Cir. 1987). “Federal courts are not 12 precluded from affording relief simply because neither the state Supreme Court nor the state 13 legislature has enunciated a clear rule governing a particular type of controversy.” Air-Sea 14 Forwarders, Inc. v. Air Asia Co., Ltd., 880 F.2d 176, 186 (9th Cir. 1989) (citation omitted). The only case of which the Court is aware that appears somewhat analogous is Dowell, a 15 16 Court of Appeal of California case, which this Court referenced in its previous order.1 There, the 17 plaintiff sought declaratory and injunctive relief based on the defendant s use of noncompete 18 agreements. The trial court granted summary adjudication on the plaintiff s cause of action 19 seeking a declaration that the noncompete agreements were unlawful, but struck the plaintiff s 20 request for a “permanent injunction seeking to enjoin [the defendant] from attempting to enforce 21 such clauses against any current or former California employee.” 179 Cal. App. 4th at 570. After 22 additional briefing, “the trial court concluded that [the plaintiff] had no standing to seek a 23 permanent injunction. The court then signed an order denying the requested permanent injunction 24 „in the exercise of its discretion for the following reasons: (1) the noncompete and nonsolicitation 25 clauses . . . had already expired by their terms; (2) „the inherent difficulty in fashioning an 26 injunction of the nature sought ; (3) the injunction sought would „affect agreements with persons 27 1 28 The Court notes that the court of appeal has indicated that portions of its opinion should not be cited as authority. Accordingly, the Court will not rely on those portions here. 5 1 not before the Court and whose interests are not represented in this litigation ; (4) [the plaintiff] 2 lacked standing under section 17203 to obtain an injunction that would affect agreements of 3 persons not before the court; and (5) the injunction sought was inconsistent with the court s prior 4 adjudication that the [declaratory judgment and UCL] causes of action were limited to [the 5 individual employees].” Id. at 573. 6 The court of appeal affirmed, but in doing so held that the noncompete agreements were 7 void as a matter of law due to California s “strong public policy” against them. Id. at 575. It 8 further held that “that their use violates section 17200,” i.e., the UCL. Id. 9 As discussed above, unlike the plaintiffs in Dowell, the plaintiffs here do have standing under the UCL. At least one of the noncompete agreements is still in effect. The current CEO s 11 United States District Court Northern District of California 10 declaration that the defendants will not enforce the agreements may be of limited value because a 12 future officer may decide to reverse course. It is especially telling that the defendants have not 13 simply nullified the agreements despite this lawsuit and the significant motion practice that has 14 occurred. Thus, the plaintiffs here may be entitled to injunctive relief. 15 The Court predicts that the Supreme Court of California would find that the plaintiffs here 16 are entitled to injunctive relief. As noted above, the state and its courts have a “strong public 17 policy” against the use of noncompete agreements. It would be both unjust and perverse for a 18 defendant to use such illegal agreements, cause another party to suffer substantial monetary harm, 19 and then escape liability merely by making a declaration that it would not seek to enforce such an 20 agreement. This is especially true where the defendant has in fact attempted to enforce that 21 agreement in two separate lawsuits, as was the case here. Only after the plaintiffs filed suit in 22 California, where such agreements are illegal, did the defendants submit the declaration (and even 23 then, the declaration did not state that the agreements were void). Despite the apparent lack of “a 24 clear rule governing [this] particular type of controversy,” id., the Court finds that the plaintiffs are 25 entitled to judgment as a matter of law. 26 The defendants point to no cases supporting the argument that the “plaintiffs cannot obtain 27 injunctive relief.” Def. s Supp. Br. at 3. The defendants cite to Hodgers-Durgin v. De La Vina, 28 199 F.3d 1037, 1041 (9th Cir. 1999), for the proposition that “Past injury may entitle the victim to 6 1 relief in the form of damages, but it is simply insufficient to obtain an injunction.” That case 2 contains no such quote. The defendants are apparently quoting Nava v. City of Dublin, 121 F.3d 3 453, 459 (9th Cir. 1997), a case that has been overturned—by Hodgers-Durgin. In any event, both 4 those cases deal with Article III standing, not entitlement to injunctive relief under the UCL. 5 Krzyzanowsky v. Orkin Exterminating Co., Inc., No. 07-cv-05362-SBA, 2009 WL 481267, 6 at *13 (N.D. Cal. Feb. 24, 2009), which the defendants cite, actually supports the plaintiffs. The 7 defendants cite that case for the proposition that the UCL “cannot be used . . . to enjoin an event 8 which has already transpired; a showing of threatened future harm or continuing violation is 9 required[,]” “absent a showing that past violations will probably recur.” Id. (original punctuation). The state court case which Krzyzanowsky cites, People v. Toomey, held that a “trial court [has] 11 United States District Court Northern District of California 10 broad authority to fashion a remedy that will prevent unfair trade practices and will deter the 12 defendant and others from engaging in such practices in the future.” 157 Cal. App. 3d 1, 20 (Ct. 13 App. 1984). Here, while the defendants declared that they would not seek to enforce the 14 noncompete agreements, they did not disavow or void them. Thus there is a “continuing 15 violation” of California s statute prohibiting such agreements. It is worth noting that while the 16 defendants counsel stated that it would not seek to enforce such agreements against the plaintiffs 17 only, counsel did not represent that the defendants would not seek to enforce any outstanding 18 agreements against other parties in the future, that the defendants would void any other such 19 agreements in existence, or that the defendants would no longer enter into such agreements in the 20 future. Thus, neither Krzyzanowsky nor Toomey weigh against injunctive relief under these 21 circumstances. 22 Finally, DeLodder v. Aerotek, Inc., No. 08-cv-6044-CAS, 2009 WL 3770670, at *3 (C.D. 23 Cal. Nov. 9, 2009), is inapposite. There, the court found that the plaintiffs lacked standing to 24 pursue prospective relief because they are not at risk of not being paid overtime wages and 25 benefits since they are no longer employees of the defendant. Here, the nature of the alleged 26 violations is not the same—the plaintiffs are no longer employees of the defendants, but they are 27 still parties to the noncompete agreements. As of this Motion, none of the agreements have been 28 repudiated, and thus there is a “continuing violation.” Furthermore, there is no evidence that the 7 1 defendants will not “engag[e] in such practices in the future.” Toomey, 157 Cal. App. 3d 1, 20 2 (Ct. App. 1984). Injunctive relief is appropriate and the Court is “not precluded from affording 3 relief simply because neither the state Supreme Court nor the state legislature has enunciated a 4 clear rule governing [this] particular type of controversy.” Air-Sea Forwarders, 880 F.2d at 186. CONCLUSION 5 6 For all the reasons above, the plaintiffs are entitled to judgment as a matter of law on their Ninth Cause of Action under the “unlawful” and “unfair” prongs of the UCL due to the 8 defendants use of noncompete agreements against the “strong public policy” of the State of 9 California. While the defendants have declared that they will not seek to enforce the agreements, 10 an injunction will further ensure compliance and demonstrate that a party may not act illegally and 11 United States District Court Northern District of California 7 then escape liability by promising not to do it again. 12 The Court therefore ORDERS that the agreements in this case shall have no force or effect 13 and ENJOINS the defendants from seeking to enforce the agreements in any manner, whether in 14 this Court or any other adjudicative body. 15 16 17 18 IT IS SO ORDERED. Dated: October 2, 2013 ______________________________________ WILLIAM H. ORRICK United States District Judge 19 20 21 22 23 24 25 26 27 28 8
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