C2 Educational Systems, Inc. v. Lee et al, No. 3:2018cv02920 - Document 88 (N.D. Cal. 2019)
Court Description: ORDER GRANTING IN PART AND DENYING IN PART DEFENDANTS' MOTION FOR SUMARY JUDGMENT 76 (Illston, Susan) (Filed on 7/17/2019)
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1 2 3 4 UNITED STATES DISTRICT COURT 5 NORTHERN DISTRICT OF CALIFORNIA 6 7 C2 EDUCATIONAL SYSTEMS, INC., Plaintiff, 8 9 10 United States District Court Northern District of California 11 Case No. 18-cv-02920-SI v. SUNNY LEE, et al., Defendants. ORDER GRANTING IN PART AND DENYING IN PART DEFENDANTS' MOTION FOR SUMMARY JUDGMENT Re: Dkt. No. 76 12 13 14 Defendants’ motion for summary judgment came on for hearing on July 12, 2019. Having carefully considered the papers filed and the arguments made, the Court hereby rules as follows. 15 16 BACKGROUND 17 On May 17, 2018, plaintiff C2 Educational Systems, Inc. (“C2”) filed this action based on 18 diversity jurisdiction against defendants Sunny Lee, Kyung Hye Debbie Hong, and So Yeon Jang. 19 Dkt. No. 1. Plaintiff is a company that provides academic tutoring, standardized test preparation, 20 and college admissions counseling at over 180 centers nationwide. Pl.’s Ex. 11, Lobo Decl. ¶ 6. By 21 this lawsuit, plaintiff alleges that defendants, who are former employees of plaintiff, began 22 developing a competing business (called Core Academics, LLC) while they were still employed by 23 plaintiff. Because the parties dispute many of the facts at issue in this case, the Court recites the 24 relevant facts in further detail in the Discussion section below. 25 On April 19, 2019, with the Court’s leave, plaintiff filed its first amended complaint. Dkt. 26 Nos. 65, 66. In it, plaintiff adds Core Academics, LLC (“Core”) as a defendant and brings the 27 following claims for relief: (1) breach of duty of loyalty; (2) violation of the California Computer 28 Data and Access Fraud Act; (3) misappropriation and conversion of property; and (4) tortious 1 interference with customer contracts. A jury trial in this case is set to begin on October 7, 2019. 2 LEGAL STANDARD United States District Court Northern District of California 3 4 Summary judgment is proper if the pleadings, the discovery and disclosure materials on file, 5 and any affidavits show that there is no genuine dispute as to any material fact and that the movant 6 is entitled to judgment as a matter of law. See Fed. R. Civ. P. 56(a). The moving party bears the 7 initial burden of demonstrating the absence of a genuine issue of material fact. Celotex Corp. v. 8 Catrett, 477 U.S. 317, 323 (1986). The moving party, however, has no burden to produce evidence 9 showing the absence of a genuine issue of material fact. Id. at 325. Rather, the burden on the 10 moving party may be discharged by pointing out to the district court that there is an absence of 11 evidence to support the non-moving party’s case. Id. 12 Once the moving party has met its burden, the burden shifts to the non-moving party to 13 “designate ‘specific facts showing that there is a genuine issue for trial.’” Id. at 324 (quoting then 14 Fed. R. Civ. P. 56(e)). To carry this burden, the non-moving party must “do more than simply show 15 that there is some metaphysical doubt as to the material facts.” Matsushita Elec. Indus. Co., Ltd. v. 16 Zenith Radio Corp., 475 U.S. 574, 586 (1986). “The mere existence of a scintilla of evidence . . . 17 will be insufficient; there must be evidence on which the jury could reasonably find for the [non- 18 moving party].” Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 252 (1986). 19 In deciding a summary judgment motion, the evidence of the non-movant is to be believed, 20 and all justifiable inferences are to be drawn in his favor. Id. at 255. “Credibility determinations, 21 the weighing of the evidence, and the drawing of legitimate inferences from the facts are jury 22 functions, not those of a judge . . . ruling on a motion for summary judgment . . . .” Id. However, 23 conclusory, speculative testimony in affidavits and moving papers is insufficient to raise genuine 24 issues of fact and defeat summary judgment. Thornhill Publ’g Co., Inc. v. Gen. Tel. & Elec. Corp., 25 594 F.2d 730, 738 (9th Cir. 1979). The evidence the parties present must be admissible. Fed. R. 26 Civ. P. 56(c)(4). 27 28 The parties agree that in this action based on diversity jurisdiction, the substantive law of the state of California applies. See Erie R. Co. v. Tompkins, 304 U.S. 64 (1938). 2 DISCUSSION United States District Court Northern District of California 1 2 Defendants move for summary judgment on all four of plaintiff’s claims. If the claims 3 survive summary judgment, defendants ask that the Court “grant summary adjudication as to 4 punitive damages because Plaintiff has no evidence that the Defendants acted willfully or 5 maliciously.” Mot. at 1. 6 Both parties agree there are numerous facts in dispute. At the hearing, defendants asserted 7 that those facts are not material, but they forwarded no argument showing this to be the case, whether 8 at the hearing or in their papers. Plaintiff has argued in response that the disputed facts are material 9 to resolution of its claims. Because the Court agrees with plaintiff, the Court will DENY the 10 majority of defendants’ motion for summary judgment, with the exception of GRANTING summary 11 judgment on the claim for breach of the duty of loyalty as to defendant Core Academics LLC only. 12 13 I. Breach of Duty of Loyalty 14 “The elements of a cause of action for breach of a duty of loyalty . . . are as follows: (1) the 15 existence of a relationship giving rise to a duty of loyalty; (2) one or more breaches of that duty; and 16 (3) damage proximately caused by that breach.” Huong Que, Inc. v. Luu, 150 Cal. App. 4th 400, 17 410 (2007) (citation omitted). California courts have held that “[a]n employee does not breach his 18 duty of loyalty by preparing to compete with his employer.” Mamou v. Trendwest Resorts, Inc., 19 165 Cal. App. 4th 686, 719 (2008) (citations omitted). Nevertheless, “while an employee may 20 secretly incorporate a competing business prior to departing, the employee may not use his or her 21 principal’s time, facilities or proprietary secrets to build the competing business[.]” Id. (quoting 22 Chemfab Corp. v. Integrated Linear Techs. Inc., 693 N.Y.S. 2d 752, 754 (1999)). 23 The main thrust of the parties’ dispute here is whether defendants began competing with 24 plaintiff while still employed by plaintiff, which would constitute a breach of their duty of loyalty, 25 or whether defendants merely began lawful preparations to compete. 26 On the present record, the Court finds that disputes of fact remain as to whether defendants 27 breached their duty of loyalty to C2. For instance, plaintiff has pointed to deposition testimony from 28 several C2 teachers stating that defendants recruited them to teach for Core while defendants were 3 1 still employed at C2. It is undisputed that defendants Jang, Hong, and Lee left their employment at 2 C2 on February 3, February 9 or 14,1 and February 14, 2018, respectively. See Pl.’s Ex. 7, Jang 3 Dep. at 21:20-22:7; Defs.’ Ex. J, Hong Dep. at 42:17-43:3; Pl.’s Ex. 8, Lee Dep. at 53:14-17. And 4 yet Mark Cha, a teacher for C2, testified that he received an offer letter to teach at Core on January 5 31, 2018. See Pl.’s Ex. 3, Cha Dep. at 92:23-93:7. Cha’s offer letter gave him a start date of 6 February 12. Id. at 108:1-16. Defendants dispute this, stating in their motion that “Core began 7 hiring staff in late February and March of 2018.” See Mot. at 3. For evidence, defendants cite the 8 April 18, 2019 deposition transcript of defendant Jang (defendants’ Exhibit L) at pages 100:13- 9 101:13 but they do not attach page 101 to Exhibit L, and page 100 contains no testimony regarding United States District Court Northern District of California 10 when defendants began hiring teachers for Core. 11 “The determination of the particular factual circumstances and the application of the ethical 12 standards of fairness and good faith required of a fiduciary in a given situation is for the trier of 13 facts.” Sequoia Vacuum Sys. v. Stransky, 229 Cal. App. 2d 281, 288 (1964) (citing Indus. Indem. 14 Co. v. Golden State Co., 117 Cal. App. 2d 519, 534 (1953)). Here, a reasonable trier of fact could 15 conclude that defendants went beyond mere preparation for competition by hiring plaintiff’s 16 teachers while defendants were still employed by plaintiff. See id. at 287 (an agent “may plan and 17 develop his competitive enterprise during the course of his agency only where the particular activity 18 engaged in is not against the best interests of his principal”); cf. Hung Que, 150 Cal. App. 4th at 417 19 (breach of duty of loyalty may exist where an agent diverts the principal’s customers to the agent’s 20 new business “while ostensibly remaining [the principal’s] employees or agents”). 21 22 Accordingly, the Court DENIES defendants’ motion for summary judgment on the claim for breach of the duty of loyalty.2 23 24 25 26 27 28 1 Hong testified that the last day she actually worked at C2 was February 9, 2018, but that she was subsequently paid four days of “PTO” (paid time off) at the end of her employment. Pl.’s Ex. 5, Hong Dep. at 43:1-6. 2 Defendants make the additional argument that this claim is preempted by the California Uniform Trade Secrets Act. However, as the above allegation regarding recruitment and hiring of C2 teachers illustrates, plaintiff has come forth with disputed material facts beyond those involving trade secrets, and so defendants’ preemption argument is inapplicable. 4 United States District Court Northern District of California 1 II. California Computer Data and Access Fraud Act (Cal. Penal Code § 502) 2 Defendants argue that “Plaintiff makes bold allegations that Defendants misused [their C2] 3 laptops by deleting all C2 emails to which they had access before leaving their employment. . . . At 4 best, when defendant Hong was asked about this issue in her deposition, she testified she deleted 5 some personal emails from her C2 account. She, however[,] denied deleting all emails and she 6 remains prepared to testify that what information she did delete had nothing to do with C2’s 7 operations. Lee testified that she deleted her personal C2 emails because they were not needed by 8 C2 to continue operating the Cupertino Center.” Mot. at 13-14. 9 Defendants’ very motion on this claim thus reveals that there is a dispute between the parties 10 as to whether defendants Lee and Hong deleted all of their C2 emails and whether those emails were 11 needed by C2. In its opposition, plaintiff also points to a broader problem with data deletion. 12 Plaintiff states that “Lee and Hong deleted all of the data from not only their C2 email accounts, but 13 also the entirety of their C2 G Suite accounts, which included documents, spreadsheets, slides and 14 other C2 business documents, on their last day of work for C2, February 14, 2018.” Opp’n at 10. 3 15 Plaintiff states that it expended “time and resources in attempting to recover the emails and data 16 contained in Lee and Hong’s C2 G Suite accounts” but was unable to do so. Dkt. No. 82-41, Urban 17 Decl. ¶ 15. 18 Defendants make the additional argument that plaintiff’s claim must fail due to the scope of 19 employment exception in the California Computer Data and Access Fraud Act (“CDAFA”), 20 California Penal Code Section 502(h). But as plaintiff notes, “[o]rdinarily, the determination 21 whether an employee has acted within the scope of employment presents a question of fact; it 22 becomes a question of law . . . when ‘the facts are undisputed and no conflicting inferences are 23 possible.’” See Mary M. v. City of Los Angeles, 54 Cal. 3d 202, 213 (1991) (quoting Perez v. Van 24 Groningen & Sons, Inc., 41 Cal. 3d 962, 968 (1986)). Because the relevant facts here are not 25 undisputed, the Court declines defendants’ request to determine as a matter of law that defendants 26 were acting within the scope of their employment when they deleted their C2 emails and/or C2 G 27 28 Plaintiff’s brief cites to the declaration of Andrew Lobo, but at the hearing plaintiff clarified that it is actually the declaration of Michael Urban that contains this information. 5 3 United States District Court Northern District of California 1 Suite accounts. 2 Defendants also state that plaintiff has no claim under the CDAFA because it cannot prove 3 damages, citing Mintz v. Mark Barelstein & Assoc. Inc., 906 F. Supp. 2d 1017 (C.D. Cal. 2012).4 4 Yet that case does not support defendants’ position. In explaining that the plaintiff had “experienced 5 sufficient damage to support a private right of action” under the CDAFA, the Mintz court quoted 6 from a decision by Judge Ware of this district: “Section 502 sets no threshold level of damage or 7 loss that must be reached to impart standing to bring suit. Under the plain language of the statute, 8 any amount of damage or loss may be sufficient.” Id. at 1032 (quoting Facebook, Inc. v. Power 9 Ventures, Inc., No. C 08-05780-JW, 2010 WL 3291750, at *4 (N.D. Cal. July 20, 2010)). 10 Accordingly, the plaintiff had proven damages where it was undisputed that he “spent some time 11 restoring his Gmail password and investigating who had hacked the Gmail account.” Id.; see also 12 Power Ventures, 2010 WL 3291750, at *4 (rejecting the defendants’ argument that “a few clicks of 13 a mouse . . . and ten keystrokes” would not constitute sufficient damages for standing under the 14 CDAFA). 15 Here, it is far from undisputed that plaintiff suffered no damage from defendants’ actions in 16 allegedly deleting emails and the contents of their C2 G Suite accounts. Plaintiff has come forward 17 with disputed facts that, if believed, would support a jury’s finding that plaintiff suffered damage 18 within the meaning of the CDAFA. See, e.g., Urban Decl. ¶¶ 14-15. 19 20 III. Misappropriation and Conversion of Property 21 In California, conversion is defined as “the wrongful exercise of dominion over the property 22 of another. The elements of a conversion claim are: (1) the plaintiff’s ownership or right to 23 possession of the property; (2) the defendant’s conversion by a wrongful act or disposition of 24 25 26 27 28 The statute states that “the owner or lessee of the computer, computer system, computer network, computer program, or data who suffers damage or loss by reason of a violation of any of the provisions of subdivision (c) may bring a civil action against the violator for compensatory damages . . . .” Cal. Penal Code § 502(e)(1). “Compensatory damages” is defined to “include any expenditure reasonably and necessarily incurred by the owner or lessee to verify that a computer system, computer network, computer program, or data was or was not altered, damaged, or deleted by the access.” Id. 6 4 United States District Court Northern District of California 1 property rights; and (3) damages[.]” Lee v. Hanley, 61 Cal. 4th 1225, 1240 (2015) (citation omitted). 2 Defendants assert that plaintiff has no claim for conversion, focusing on the allegation that 3 defendants Lee and Jang failed to return C2 company laptops when their employment ended. In its 4 opposition, plaintiff identifies a number of other items besides the laptops that it claims defendants 5 unlawfully converted. This includes the allegation that defendants “delet[ed] data files from the 6 computers C2 permitted them to use during their employment with C2 without C2’s 7 authorization[.]” See Opp’n at 20. Plaintiff has provided a declaration from its Vice President of 8 Information Technology and Development Services that “Lee and Hong deleted . . . the entirety of 9 their C2 G Suite accounts, which included documents, spreadsheets, slides and other C2 business 10 documents, on their last day of work for C2, February 14, 2018.” Urban Decl. ¶ 12. While 11 defendants argue in their motion that plaintiff could still access the “Smart2 database” even without 12 the laptops of Lee and Jang, see Mot. at 19, the G Suite account is distinct from the Smart2 database. 13 The former is an account in which the user could store word files, spreadsheets, PowerPoints, etc., 14 while the latter is a database for entering client leads. See Pl.’s Ex. 8, Lee Dep. at 73:11-74:12, 15 83:19-84:3. Plaintiff’s conversion claim thus involves more than the laptops and Smart2 database, 16 and defendants have failed to point to an absence of evidence supporting this claim. 17 18 IV. Tortious Interference with Customer Contracts 19 In California, the elements of the tort of intentional interference with contractual relations 20 are: “(1) a valid contract between plaintiff and a third party; (2) defendant’s knowledge of this 21 contract; (3) defendant’s intentional acts designed to induce a breach or disruption of the contractual 22 relationship; (4) actual breach or disruption of the contractual relationship; and (5) resulting 23 damage.” Pac. Gas & Elec. Co. v. Bear Stearns & Co., 50 Cal. 3d 1118, 1126 (1990) (citations 24 omitted). As to this claim, the Court again finds that defendants have not shown they are entitled to 25 summary judgment because triable issues of fact remain. 26 For instance, defendant Hong testified that “J.C.”5 was the first customer to enroll at Core, 27 28 5 Because the client is a minor, the Court refers to him by initials only. 7 United States District Court Northern District of California 1 and that she enrolled him there on February 10, 2018. Pl.’s Ex. 5, Hong Dep. at 126:4-13. When 2 asked how his family found out about Core, Hong testified, “I think they walked in.” Id. at 132:3- 3 5. At defendant Lee’s deposition, Lee agreed that they were the first customers to enroll at Core. 4 Pl.’s Ex. 8, Lee Dep. at 156:1-12. Lee further testified that she “knew of” J.C. prior to his enrollment 5 at Core because “he was at C2. They were very picky clients, and they were very reluctant to enroll. 6 So, I don’t offer a money back guarantee, but I offered money back guarantee.”6 Id. at 156:17-24. 7 She testified that J.C. and his family were students at the C2 Cupertino Center, where she was the 8 Center Director, and that she had enrolled them there. Id. at 29:20-30:2, 157:3-8. Lee also testified 9 that she does not recall saying anything to them about Core. Id. at 157:9-15. Plaintiff points to 10 Lee’s testimony in support of its argument that a reasonable jury could find that J.C.’s family learned 11 about Core from Lee, and the Court finds that the evidence is disputed on this point. 12 Additionally, plaintiff has come forward with a declaration from Pam Dhillon, currently a 13 Regional Vice President of C2 who was serving as Regional Director at the time defendants 14 resigned. See Dkt. No. 82-42, Dhillon Decl. ¶ 4. Dhillon declares that C2’s Refund Policies, which 15 students sign when they enroll, limits refunds to a maximum of 70% except in very limited 16 circumstances. Id. ¶¶ 6-7. She states that after defendant Lee “had left her employment with C2, 17 C2 learned that Lee had approved numerous refund requests that requested refunds of 100% of the 18 tuition paid, and left those approved requests at the Cupertino Center.” Id. ¶ 8. She explains that 19 Lee, as Cupertino Center director, was “solely responsible for new enrollments and renewals” and 20 that “[t]he refund dollars issued for students at C2’s Cupertino center in March 2018 [i.e., the month 21 after Lee resigned] were larger than any other month in 2017 or 2018 by a factor of two (2).” Id. 22 ¶¶ 16, 20, 22. 23 24 This evidence is sufficient to show that triable issues of material fact remain on the claim for interference with contractual relations. 25 26 27 28 6 It is unclear from the transcript whether Lee is referring to the client’s enrollment at C2 or at Core. 8 United States District Court Northern District of California 1 V. Core Academics as a Defendant 2 Defendants further argue, without citation to case law, that Core is not an appropriate 3 defendant on any of the claims. See Mot. at 17. The Court agrees with defendants only as to the 4 claim for breach of duty of loyalty. That claim requires proof of the existence of an agent-principal 5 or similar relationship. See Huong Que, 150 Cal. App. 4th at 410 (“The duty of loyalty arises not 6 from a contract but from a relationship . . . .”). “Agency is ‘the fiduciary relationship that arises 7 when one person (a ‘principal’) manifests assent to another person (an ‘agent’) that the agent shall 8 act on the principal’s behalf and subject to the principal’s control, and the agent manifests assent or 9 otherwise consents to so act.’” Id. at 410-11 (quoting Rest. 3d, Agency, § 1.01). Under no 10 construction of the facts could Core, formed as a competing entity to C2, be considered an agent of 11 C2. 12 As to the remaining claims, however, defendants’ arguments turn on the question of when 13 C2 began operating. For instance, defendants state that there can be no claim for violation of the 14 CDAFA because “during the time of the alleged violations of this act (i.e. when Defendants deleted 15 certain emails from their C2 email accounts), Core was not yet in operation.” See Mot. at 17. 16 However, when Core began operating is very much in dispute, as evidenced, for instance, by 17 defendants’ assertion that it did not begin hiring teachers until late February and March 2018, while 18 plaintiff asserts that defendants offered to hire a C2 teacher away from C2 in January 2018. 19 Accordingly, the Court GRANTS defendants’ motion for summary judgment on the breach 20 of duty of loyalty claim as against defendant Core Academics, LLC only and DENIES the motion 21 for summary judgment in Core’s favor on the remaining claims. 22 23 VI. Punitive Damages 24 California Civil Code Section 3294 allows a jury to award exemplary (punitive) damages 25 “[i]n an action for the breach of an obligation not arising from contract, where it is proven by clear 26 and convincing evidence that the defendant has been guilty of oppression, fraud, or malice . . . .” 27 Cal. Civ. Code § 3294(a). Defendants move for summary judgment on plaintiff’s request for 28 punitive damages, arguing that “[t]he undisputed facts in this case make clear that there is no 9 1 evidence, let alone clear and convincing evidence, of malice, oppression, or fraud attributable to 2 Defendants.” Mot. at 22. As the above discussion should make clear, the parties hold widely 3 different views of the facts in this case, which is why the Court finds summary judgment is 4 inappropriate. Plaintiff’s allegations are rife with allegations of malice, oppression, and fraud. 5 Whether the jury will believe these allegations is a matter for another day. At this stage, having 6 found that disputes of fact exist that the jury must resolve, the Court declines to dismiss plaintiff’s 7 request for punitive damages. 8 CONCLUSION United States District Court Northern District of California 9 10 For the foregoing reasons, the Court GRANTS defendants’ motion for summary judgment 11 on the breach of duty of loyalty claim as against defendant Core Academics, LLC only. The balance 12 of the motion is DENIED. The Court will issue a separate order on the parties’ administrative 13 motions to seal. 14 15 16 17 18 IT IS SO ORDERED. Dated: July 17, 2019 ______________________________________ SUSAN ILLSTON United States District Judge 19 20 21 22 23 24 25 26 27 28 10
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