Opinion
B284989 c/w B289486
01-21-2020
TECHNO LITE, INC., Plaintiff, Cross-Defendant and Respondent, v. EMCOD, LLC, et al., Defendants, Cross-Complainants and Appellants.
Schwartz & Asiedu and Kwasi A. Asiedu ; Law Offices of Stephen K. Lubega and Stephen K. Lubega for Defendants, Cross-complainants and Appellants. Reed & Reed and Darren G. Reed for Plaintiff, Cross-defendant and Respondent.
Certified for Partial Publication.
Pursuant to California Rules of Court, rules 8.1100 and 8.1110, this opinion is certified for publication with the exception of parts A.2. through and including D. of the Discussion.
Schwartz & Asiedu and Kwasi A. Asiedu ; Law Offices of Stephen K. Lubega and Stephen K. Lubega for Defendants, Cross-complainants and Appellants.
Reed & Reed and Darren G. Reed for Plaintiff, Cross-defendant and Respondent.
MANELLA, P. J. INTRODUCTION
Appellants Scott Drucker and Arik Nirenberg worked for respondent Techno Lite, a company engaged in selling lighting transformers that was previously owned by Neil Olshan and respondents Stefan Poenitz and David Tour. While Drucker and Nirenberg worked for Techno Lite, they also ran their own company, appellant Emcod, LLC. Though Emcod also sold transformers, Techno Lite consented to Drucker’s and Nirenberg’s operating Emcod while working for Techno Lite, based on their promise that they would run Emcod on their own time, and that Emcod would not compete with Techno Lite.
In 2013, after Olshan died, Poenitz and Tour offered to gift Olshan’s shares in Techno Lite to Drucker. Drucker refused the shares and instead offered to purchase Techno Lite from Poenitz and Tour. Although the parties negotiated, no purchase was consummated, and Drucker and Nirenberg resigned from Techno Lite in mid-December 2013. Shortly thereafter, Techno Lite accused Drucker, Nirenberg, and appellant Joseph Frole -- an outside salesperson who sold products on behalf of both Techno Lite and Emcod -- of stealing its customers and misappropriating its trade secrets.
On January 29, 2014, Techno Lite filed a complaint against Emcod, Drucker, Nirenberg, and Frole for breach of fiduciary duty, misappropriation of trade secrets, interference with contractual relationships, intentional and negligent interference with prospective economic advantage, conversion, injunctive relief, and constructive trust. Emcod, Drucker, and Nirenberg, in turn, cross-complained against Techno Lite, its owners, its operations manager respondent Rodney Davis, and several others for intentional interference with contract, intentional and negligent interference with prospective economic relations, violation of the California unfair competition law, violation of the Cartwright Act, violation of the unfair business practices act, defamation, and injunctive relief. Techno Lite subsequently filed two amended complaints, adding causes of action for fraud and unfair business practices.
Appellants secured summary adjudication of Techno Lite’s misappropriation of trade secrets claim before the Honorable Russell S. Kussman. The parties thereafter proceeded to a court trial on the remaining causes of action before the Honorable Rick Brown. After the close of evidence, as part of appellants’ closing argument, Emcod, Drucker, and Nirenberg requested leave to amend their cross-complaint to conform to proof to add a cause of action for breach of contract for Poenitz’s and Tour’s failure to sell Techno Lite to Drucker and Nirenberg. The court denied the request. Following the conclusion of the trial and a subsequent hearing, the court found Drucker, Nirenberg, and Frole liable for interfering with Techno Lite’s prospective economic advantage, and also found Drucker, Nirenberg, and Emcod liable for fraud and unfair competition. The court dismissed appellants’ cross-complaint. In a later proceeding, the Honorable Virginia Keeny denied appellants’ motion for attorneys’ fees for defeating Techno Lite’s misappropriation of trade secrets claim.
As to the remaining causes of action, the court found against Techno Lite on its claims of breach of fiduciary duty and interference with contractual relations, found Techno Lite’s conversion claim to be de minimis and awarded no damages for it, and found Techno Lite’s causes of action for injunctive relief and constructive trust to be moot.
Appellants now argue the courts below erred by: (a) finding Drucker, Nirenberg, and Emcod liable for fraud; (b) finding appellants liable for interfering with respondent Techno Lite’s prospective economic advantage; (c) denying Emcod, Drucker, and Nirenberg’s motion for leave to amend their cross-complaint to conform to proof; and (d) denying appellants’ motion for attorneys’ fees after appellants secured summary adjudication of Techno Lite’s claim for misappropriation of trade secrets. In the published portion of the opinion, we reject appellants’ argument that they could not be found liable for fraud because their promise not to compete against their current employer was void under Business and Professions Code section 16600. In the unpublished portion of the opinion, we reject their remaining contentions and affirm.
STATEMENT OF RELEVANT FACTS
A. Poenitz and Tour Purchase Techno Lite
In 2003, Olshan, Poenitz, and Tour purchased Techno Lite from Shafrir Romano. Both Drucker and Nirenberg were working for Techno Lite, and they continued on with the new ownership.
Originally, Romano was kept on to run Techno Lite, but in 2005, following a dispute with the new owners, Romano left the company and Drucker was tasked with running Techno Lite. Following his departure, Romano interfered with Techno Lite’s relationship with its suppliers, nearly causing Techno Lite to go out of business.
B. Drucker and Nirenberg Found Emcod and Promise Emcod Will Not Compete with Techno Lite
In 2006, with Techno Lite in dire financial straits, Drucker and Nirenberg founded Emcod, LLC. Drucker testified they did so because they "were in fear of Techno Lite closing its doors." They "started Emcod as a backup to basically have something to fall on to if Techno Lite was to close its doors." Drucker and Nirenberg were each 50 percent owners of Emcod, and its only employees.
By the time trial began, Emcod had become a corporation.
When Olshan, Tour, and Poenitz discovered Emcod, the parties had "many discussions," but ultimately they decided to permit Drucker and Nirenberg to operate Emcod while still working for Techno Lite, because Drucker and Nirenberg promised them Emcod would not compete with Techno Lite. Drucker testified he told Techno Lite’s owners that Emcod would not compete with them in the lighting industry. Tour testified that Nirenberg promised him Emcod’s business "will have nothing to do with any of your parts. We’re not going into competition with you." Tour further testified that he and Techno Lite’s other owners were assured that Emcod’s operations "weren’t going to affect [Techno Lite’s] business in any way, shape, or form." Poenitz testified that "Arik [Nirenberg] and/or Scott [Drucker]" told him "that Emcod made custom transformers ... that had nothing to do with [Techno Lite’s] market or [its] customer base."
In 2009, Frole began selling products for both Techno Lite and Emcod as an outside salesperson; he was paid by commission on products sold.
C. Emcod Begins Competing with Techno Lite; Appellants Conceal Their Actions
In 2012, Emcod started selling to Techno Lite customers the same products Techno Lite was selling. Specifically, Drucker admitted that Emcod sold to certain Techno Lite customers such as Diode L.E.D., G.M. Lighting, Five Star Wholesale, Ark Lighting, and Village View Lighting the same products Techno Lite sold. Drucker claimed Emcod did this because Techno Lite did not have the resources to fill customer demand, so Emcod stepped in to "maintain and keep the account." Drucker claimed Emcod was able to sell to these customers when Techno Lite could not, due to Drucker’s personal connections. Drucker did not tell Techno Lite’s owners that Emcod was selling to their customers, and Emcod kept the profits from these sales.
In 2013, long before Drucker offered to purchase Techno Lite, several e-mails were sent to Techno Lite’s customers asking them to replace Techno Lite with Emcod. For example, on January 7, 2013, Frole wrote an e-mail to L.E.D. Lighting Wholesale, a customer Drucker admitted was "the type of lighting wholesaler that Techno[ ]Lite could sell to," stating: " ‘All of our accounts are going to be changed to the new name, Emcod. Consequently, we want to clean up all the old invoices.’ " After Frole forwarded this e-mail to Drucker, Drucker responded with, " ‘Thanks, Joe.’ "
On April 25, 2013, Frole forwarded to Drucker an e-mail he had sent to Light Bulbs Unlimited, telling the company representative where a list of Emcod’s products could be found. In response, Drucker stated, " ‘We have to be very careful who we contact until we leave here. I don’t trust Joe [the person to whom Frole had sent the e-mail]. He is a dirtbag from dealing with him in the past. Please talk with me before contacting any customers about Emcod. We can only go after accounts we trust. We can’t risk Magnitude [Shafrir Romano’s company which also sold transformers], Shafrir calling David [Tour] or Stefan [Poenitz] saying we are taking over with Emcod.’ " On October 4, 2013, Frole sent an e-mail to Village View Lighting (a Techno Lite customer) asking, "How much of a problem would it be for you to change the purchase order that you have in your computer from TechnoMagnet to Emcod, same address? Emcod is a company that Scott [Drucker] and Arik [Nirenberg], the engineer, have had for the last seven years making the same products as Techno Lite. They are in the process of talking to the owners of TechnoMagnet to buy them out. They have been talking about going out on their own for quite a while and decided to do it now."
TechnoMagnet was a DBA (doing business as) of Techno Lite.
D. Drucker Offers to Buy Techno Lite; Negotiations Fail; Lawsuits Commence
After Olshan died, Poenitz and Tour decided to offer Olshan’s shares of Techno Lite to Drucker for free. Drucker declined their offer, and instead offered to purchase Techno Lite from Poenitz and Tour. Drucker testified the parties had agreed on terms, but when he arrived to sign the final contracts Poenitz and Tour asked for $100,000 more. Drucker countered Poenitz and Tour’s new offer by increasing his previous offer by $50,000. Poenitz and Tour rejected Drucker’s counteroffer, and Drucker and Nirenberg resigned from Techno Lite on December 13, 2013. Rodney Davis was brought in to replace Drucker as operations manager.
On January 29, 2014, Techno Lite sued appellants, alleging causes of action for breach of fiduciary duty, misappropriation of trade secrets, interference with contractual relationships, intentional and negligent interference with economic advantage, conversion, injunctive relief, and constructive trust. The gist of Techno Lite’s complaint was that while Drucker and Nirenberg were employed by Techno Lite, appellants were siphoning off accounts of Techno Lite’s and diverting the business of their employer to their own company, Emcod.
On March 3, 2014, Emcod, Drucker, and Nirenberg cross-complained against Techno Lite, David Tour, and Stefan Poenitz, among others, for intentional interference with contract, intentional and negligent interference with prospective economic relations, violation of various unfair competition and antitrust statutes, defamation, and injunctive relief. The gist of their cross-complaint was that Techno Lite and persons acting under its direction were interfering with Emcod’s business by warning Emcod’s suppliers they would lose business if they supplied Emcod, and by telling Emcod’s customers that Drucker and Nirenberg had committed improprieties while running Techno Lite and had stolen Techno Lite’s proprietary information. E. The Court Finds Techno Lite Has No Trade Secrets
Through discovery, Techno Lite eventually identified its trade secrets as its "Customer List." On July 15, 2015, appellants moved for summary judgment or summary adjudication, arguing in part that Techno Lite had been "unable to establish the existence of any trade secrets as defined by Civil Code § 3426." In responding to appellants’ motion, Techno Lite admitted its customer list had been "prominently and publicly exhibited for years on Techno Lite’s website." On September 23, 2015, the Honorable Russell S. Kussman granted appellants’ motion for summary adjudication as to Techno Lite’s misappropriation of trade secrets claim, but denied it as to all other causes of action.
A trade secret is "information" that derives value "from not being generally known to the public" and "[i]s the subject of efforts that are reasonable under the circumstances to maintain its secrecy." (Civ. Code, § 3426.1, subd. (d).)
F. Trial
On June 29, 2016, Techno Lite filed its second amended complaint (SAC), alleging causes of action for breach of fiduciary duty, interference with contractual relationships, intentional and negligent interference with economic advantage, conversion, fraud, unfair business practices, injunctive relief, and constructive trust. On September 19, 2016, the parties proceeded to a court trial before the Honorable Rick Brown on the SAC and Emcod, Drucker, and Nirenberg’s cross-complaint. Techno Lite presented evidence that Drucker and Nirenberg had promised Techno Lite that Emcod would not compete with it. Techno Lite also presented evidence that Emcod sold products that Techno Lite also sold to customers who had previously purchased from Techno Lite.
After the close of evidence, during their closing argument, Emcod, Drucker, and Nirenberg asked the court for permission to amend their cross-complaint to conform to proof to add a breach of contract cause of action, alleging Tour and Poenitz breached a contract to sell Techno Lite to Drucker and Nirenberg. The court denied the request, finding the amendment would be "prejudicial to the other side," and that the evidence at trial showed "there was no meeting of the mind[s]."
Following a seven-day trial, the court found for Techno Lite on the causes of action for intentional interference with contractual relations, intentional and negligent interference with prospective economic advantage, fraud and unfair competition. In its statement of decision, the court found that Emcod wrongfully diverted $390,952.23 in sales in 2013, and at least $1,000,000 in 2014; it awarded 15 percent of those amounts as damages (15% being the profit margin Drucker testified to), or $208,642. Using a multiplier of three, the court also awarded $625,926 in punitive damages. The court found against Emcod, Drucker, and Nirenberg on their cross-complaint. However, in response to appellants’ motion for new trial, the court vacated the statement of decision and judgment and reopened the case "on the issue of the award of punitive damages and the financial situation of defendants Scott Drucker, Arkadi [Arik] Nirenber[g] and Emcod LLC only." The court also stated it would "address the issue of multiplier as to punitive damages for individual defendants Drucker and Nirenberg and Emcod LLC."
G. The Court Reopens Proceedings and Reduces Damages
On March 9, 2017, the court heard evidence relating to "the award of punitive damages and the financial situation of defendants Drucker, Nirenberg, and Emcod ...." It also heard argument addressing "on what basis can plaintiffs be awarded a portion of Emcod’s 2014 net proceeds in a year when Drucker and Nirenberg were not employed by Techno[ ]Lite." The court additionally heard argument on "whether using the 15 percent [margin to determine net profits] ... is the reasonable approach to be taken."
At the conclusion of the hearing, the court struck $150,000 (i.e. 15% of the $1,000,000 Emcod earned in 2014) from the compensatory damages, leaving $58,642, plus interest, and used a multiplier of 0.5 for punitive damages against Drucker, Nirenberg, and Emcod, awarding $29,321 against each defendant, or $87,963 total. On July 6, 2017, the court issued a Statement of Decision and Judgment to this effect. Appellants timely appealed.
H. The Court Denies Appellants’ Request for Fees
On August 21, 2017, appellants moved for attorneys’ fees under Civil Code section 3426.4, requesting the fees incurred in defeating Techno Lite’s trade secret claim. The Honorable Virginia Keeny heard the motion on February 14, 2018, and denied it. Appellants timely appealed. We subsequently granted a motion to consolidate the appeals.
DISCUSSION
A. The Court Did Not Err in Finding Appellants Liable for Fraud
1. A Promise Not to Compete with an Employer While Employed Is Not Void
Appellants argue the trial court erred in holding them liable for fraud because the false promise on which the fraud was based was void as a matter of law. Specifically, appellants argue any promise Drucker and Nirenberg made not to compete with Techno Lite was void because, "the covenant not to compete with Techno-Lite was contrary to public policy and in violation of the express provisions of Business & Professions [Code] section 16600." Because "[a] promise ... to violate a statute or to violate an expressly stated legislative public policy is ab initio invalid, [it] cannot form the basis of a promisee’s justifiable reliance; and justifiable reliance is a critical element of a promissory fraud action." We disagree that Business and Professions Code section 16600 (hereinafter Section 16600 ) renders Drucker and Nirenberg’s promise void.
" Business and Professions Code section 16600 has consistently been interpreted as invalidating any employment agreement that unreasonably interferes with an employee’s ability to compete with an employer after his or her employment ends. (See Muggill v. Reuben H. Donnelley Corp. (1965) 62 Cal.2d 239, 242, [42 Cal. Rptr. 107, 398 P.2d 147].) However, the statute does not affect limitations on an employee’s conduct or duties while employed . ‘While California law does permit an employee to seek other employment and even to make some "preparations to compete" before resigning [citation], California law does not authorize an employee to transfer his loyalty to a competitor. During the term of employment, an employer is entitled to its employees’ "undivided loyalty." [Citation.]’ ( Fowler v. Varian Associates, Inc. (1987) 196 Cal.App.3d 34, 41, .)" ( Angelica Textile Services, Inc. v. Park (2013) 220 Cal.App.4th 495, 509, 163 Cal.Rptr.3d 192 ( Angelica ).)
In Angelica , "a former employee breached his employment agreement and his duty of loyalty to plaintiff because, while still employed by plaintiff, the employee disparaged plaintiff to a local bank and, in negotiating new linen contracts with large customers of plaintiff, gave the customers cancellation rights that are not customary in the industry and that permitted those customers to shortly thereafter take their business to the employee’s new employer." ( Angelica, supra, 220 Cal.App.4th at p. 499, 163 Cal.Rptr.3d 192.) During the course of his employment, this former employee had signed an agreement promising "he would not, during his employment, ‘become interested, directly or indirectly, as a partner, officer, director, stockholder, advisor, employee, independent contractor or in any other form or capacity, in any other business similar to Company’s business.’ " ( Id. at p. 500, 163 Cal.Rptr.3d 192.) In addressing whether some of the company’s claims against the former employee were barred by Section 16600, the court held, "[Because] [plaintiff’s] claims are based on [defendant]’s conduct during his employment by [plaintiff] ... they are in no sense barred by Business and Professions Code section 16600." ( Angelica , supra , at p. 509, 163 Cal.Rptr.3d 192.) In their reply brief, appellants acknowledge Angelica but attempt to distinguish it by arguing: (1) Angelica failed to address the Supreme Court case of Edwards v. Arthur Andersen LLP (2008) 44 Cal.4th 937, 81 Cal.Rptr.3d 282, 189 P.3d 285 ( Edwards ); and (2) the competing employee in Angelica was an officer and therefore a fiduciary, whereas Drucker and Nirenberg were not. We are unpersuaded.
First, it is unsurprising the Angelica court failed to mention Edwards as the latter case is inapposite. In Edwards , our Supreme Court invalidated a noncompetition agreement that "prohibited [plaintiff] from working for or soliciting certain Andersen clients for limited periods following his termination." ( Edwards , supra , 44 Cal.4th at p. 942, 81 Cal.Rptr.3d 282, 189 P.3d 285.) The court’s declaration that noncompetition agreements were "invalid under section 16600 in California, even if narrowly drawn, unless they fall within the applicable statutory exceptions of section 16601, 16602, or 16602.5" thus defined a category of agreements that could not be enforced against former employees who sought to compete with their former employers after leaving their employment. ( Id. at p. 955, 81 Cal.Rptr.3d 282, 189 P.3d 285.) Edwards did not address -- much less invalidate -- agreements by employees not to undermine their employer’s business by surreptitiously competing with it while being paid by the employer. (See Kinsman v. Unocal Corp. (2005) 37 Cal.4th 659, 680, 36 Cal.Rptr.3d 495, 123 P.3d 931 [" ‘It is axiomatic that language in a judicial opinion is to be understood in accordance with the facts and issues before the court. An opinion is not authority for propositions not considered’ "], quoting Chevron U.S.A., Inc. v. Workers’ Comp. Appeals Bd. (1999) 19 Cal.4th 1182, 1195, 81 Cal.Rptr.2d 521, 969 P.2d 613.)
Second, while appellants correctly note the employee in Angelica was an officer (and thus owed his employer a fiduciary duty), this is a distinction without a difference. If appellants were correct that Edwards invalidated all noncompetition agreements -- regardless of employment status -- "unless they fall within the applicable statutory exceptions of section 16601, 16602, or 16602.5," it would not matter whether the employee was an officer; there are no "officer" or "fiduciary" exceptions enumerated in Business and Professions Code sections 16601, 16602, or 16602.5.
Appellants’ other cases -- Bancroft-Whitney Co. v. Glen (1966) 64 Cal.2d 327, 49 Cal.Rptr. 825, 411 P.2d 921 ( Bancroft-Whitney ), Mamou v. Trendwest Resorts, Inc. (2008) 165 Cal.App.4th 686, 81 Cal.Rptr.3d 406 ( Mamou ), and Quidel Corp. v. Superior Court (2019) 39 Cal.App.5th 530, 251 Cal.Rptr.3d 823 ( Quidel ), review granted November 13, 2019, S258283 -- are also inapposite. In Bancroft-Whitney , the Supreme Court expressly held that in certain situations, an officer could be liable for competing with his current employer. ( Bancroft-Whitney , supra , 64 Cal.2d at p. 347, 49 Cal.Rptr. 825, 411 P.2d 921 [there is "no requirement that an officer disclose his preparations to compete with the corporation in every case, and failure to disclose such acts will render the officer liable for a breach of his fiduciary duties only where particular circumstances render nondisclosure harmful to the corporation." "Conversely, the mere act of disclosing his activities cannot immunize the officer from liability where his conduct in other respects amounts to a breach of duty. The significant inquiry in each situation is whether the officer’s acts or omissions constitute a breach under the general principles applicable to the performance of his trust"].)
In Mamou , the court found employees could prepare to compete with their employer " ‘so long as they do so on their own time and with their own resources.’ " ( Mamou , supra , 165 Cal.App.4th at 719, 81 Cal.Rptr.3d 406.) But the court recognized " ‘while an employee may secretly incorporate a competing business prior to departing, the employee may not use his or her principal’s time, facilities or proprietary secrets to build the competing business.’ " ( Ibid. , quoting Chemfab Corp. v. Integrated Liner Tech. Inc. (N.Y.App.Div. 1999) 263 A.D.2d 788, 790, 693 N.Y.S.2d 752.) As particularly relevant here, the court noted that " ‘[s]olicitation of an employer’s customers likely will constitute a violation of the duty of loyalty in almost every case ....’ " ( Ibid. , quoting Futch v. McAllister Towing of Georgetown (1999) 335 S.C. 598, 609-610, 518 S.E.2d 591.)
Finally, Quidel dealt with a noncompetition agreement between two corporations. Quidel, supra , 39 Cal.App.5th at p. 538, 251 Cal.Rptr.3d 823. In rejecting the argument that Edwards invalidated the noncompetition agreement in question, the court noted "the per se ban on noncompetition clauses outlined in Edwards is limited to employment agreements." ( Id. at p. 539.) Quidel ’s statement regarding the inapplicability of Edwards to an agreement between two corporations does not support appellants’ claim that Edwards prohibits an employee from agreeing not to compete with his current employer.
Appellants do not cite -- and we have not found -- a single case in which Section 16600 was held to invalidate an agreement not to compete with one’s current employer while employed by that employer. The public policy behind Section 16600 is to ensure "that every citizen shall retain the right to pursue any lawful employment and enterprise of their choice" ( Metro Traffic Control, Inc. v. Shadow Traffic Network (1994) 22 Cal.App.4th 853, 859, 27 Cal.Rptr.2d 573 ) and to encourage "open competition and employee mobility" ( Edwards , supra , 44 Cal.4th at p. 946, 81 Cal.Rptr.3d 282, 189 P.3d 285 ); it is not to immunize employees who undermine their employer by competing with it while still employed. "We state the obvious in observing that no ‘firmly established principle of public policy’ [citation] authorizes an employee to assist his employer’s competitors." ( Fowler v. Varian Associates, Inc., supra, 196 Cal.App.3d at p. 43, 241 Cal.Rptr. 539 ; see also ibid. [a company has good cause to terminate an employee who helped "in obtaining financing for[ ] an enterprise organized to become [his employer]’s direct competitor"].) It should be even more obvious that no firmly established principle of public policy authorizes an employee to become his employer’s competitor while still employed. Section 16600 is not an invitation to employees to bite the hand that feeds them.
Drucker and Nirenberg’s promise that Emcod would not compete with Techno Lite was not void ab initio , and Techno Lite was entitled to rely on it. Accordingly, the trial court did not err in finding appellants liable for fraud based on that false promise.
In their reply brief, appellants suggest for the first time that any noncompetition agreement Drucker and Nirenberg entered with Techno Lite was per se invalid because "[t]here is no evidence that Techno Lite’s shareholders limited their restraint only for as long as Nirenberg and Drucker remained employees of Techno Lite." We need not consider this untimely argument. (In re Marriage of Khera & Sameer (2012) 206 Cal.App.4th 1467, 1477-1478, 143 Cal.Rptr.3d 81 [" ‘Obvious reasons of fairness militate against consideration of an issue raised initially in the reply brief of an appellant.’ " " " ‘[P]oints raised in the reply brief for the first time will not be considered, unless good reason is shown for failure to present them before’ " "].) No such reason has been presented.
2. Appellants Had a Duty of Disclosure
See footnote *, ante .
DISPOSITION
The judgment and order are affirmed. Respondent is awarded its costs on appeal.
We concur:
WILLHITE, J.
CURREY, J.