Opinion
H046875
10-14-2022
APPLIED MATERIALS, INC., Plaintiff and Respondent, v. EJOULE INTERNATIONAL LTD et al., Defendants and Appellants.
NOT TO BE PUBLISHED
(Santa Clara County Super. Ct. No. CV237790)
BAMATTRE-MANOUKIAN, ACTING P.J.
I. INTRODUCTION
In December 2012, Applied Materials, Inc. (Applied, or the Company) filed this trade secrets misappropriation case against four former employees. The former employees are Liang Y. Chen, Wei-Yung Hsu, Robert Ewald, and Donald Olgado (hereafter, collectively, the Employee Defendants), who each had written employment agreements. Each agreement included a provision concerning the employee's obligation to preserve the confidentiality of Applied's proprietary information and trade secrets. The agreements of Liang Chen, Hsu, and Ewald each provided that claims or controversies under the agreement would be subject to arbitration except for claims related to Applied's confidential information and trade secrets. Olgado's employment agreement contained no dispute resolution provision.
Shortly after the action was filed, Liang Chen filed a motion to compel arbitration of the dispute pursuant to section 1292.4 of the Code of Civil Procedure, contending that under an August 2012 agreement with Applied (the Separation Agreement), the underlying dispute was subject to mandatory arbitration. Before Liang Chen's motion to compel arbitration was heard, the court below issued a stay of the litigation pursuant to Pacers, Inc. v. Super. Court (1984) 162 Cal.App.3d 686 (Pacers)) because of an ongoing criminal investigation of all Employee Defendants that was related to the civil action.
Further statutory references are to the Code of Civil Procedure unless otherwise stated.
Nearly five years later, the court granted Applied's motion to lift the Pacers stay and to file a second amended complaint. That amended pleading contained significant new allegations and named two new defendants, appellants Jasmine Chin (Liang Chin's spouse), and a foreign entity, eJoule International Limited (eJoule Ltd.). Applied filed a third amended complaint in December 2018, naming eJoule, Inc., the wholly-owned California subsidiary of eJoule Ltd., as a new defendant. (Hereafter, eJoule Ltd. and eJoule, Inc., which are startup companies founded by Liang Chen, are collectively referred to as eJoule.)
eJoule and Jasmine Chen filed motions to compel arbitration in January 2019. They asserted that although they were not parties to Liang Chen's Separation Agreement that contained an arbitration provision, because Applied's claims against them arose out of obligations created by that agreement, the new claims were subject to the arbitration under the doctrine of equitable estoppel. The trial court lifted the stay to address Liang Chen's 2012 motion to compel arbitration in conjunction with the arbitration motions of eJoule and Jasmine Chen, and it received further briefing from Liang Chen and Applied.
On April 16, 2019, the trial court-in a lengthy order (the Order), which involved several steps of reasoning-denied all three motions to compel arbitration. The court applied the third-party exception under section 1281.2, subdivision (c) (§ 1281.2(c)), in exercising its discretion to deny arbitration. The court found that because California law governed under the terms of the Separation Agreement, and that section 1281.2(c) was not preempted by federal law, the statute potentially applied to the arbitration motions. It concluded further that the three elements of section 1281.2(c) were satisfied because (1) there was at least one defendant, Olgado, who was a "third party" not bound by an arbitration agreement but who might be affected by the arbitration proceeding involving other parties; (2) Applied's lawsuit against Olgado arose out of the same transaction or series of transactions as Applied's claims against Liang Chen; and (3) if the arbitration case were to proceed, there would be a possibility of rulings that would conflict with those in the court litigation against Olgado. Finally, the trial court, after considering the four statutory options, concluded that the best approach was to deny enforcement of the arbitration agreement and to require all parties to litigate the claims in court.
Four of the seven Defendants-eJoule, Ltd., eJoule, Inc., Liang Chen, and Jasmine Chen (collectively, Appellants)-appeal the Order. Addressing the components of the trial court's detailed ruling, we conclude that (1) the potential application of section 1281.2(c) was not preempted by federal law under the circumstances of this case; (2) the court correctly found that each of the three statutory elements under section 1281.2(c) was satisfied, including the finding that there was a third party, Olgado; and (3) the trial court did not abuse its discretion by concluding that, because of the possibility of conflicting rulings as between matters arbitrated and matters adjudicated in court, the appropriate solution was to deny the arbitration motions. Accordingly, we will affirm the April 16, 2019 Order denying the motions to compel arbitration.
II. PROCEDURAL BACKGROUND
A. Complaint
On December 13, 2012, Applied filed a complaint alleging three causes of action against the Employee Defendants (Liang Chen, Hsu, Ewald, and Olgado) for misappropriation of trade secrets (Civ. Code, § 3426.1 et seq.), breach of written contract, and breach of fiduciary duty/duty of loyalty. It was alleged in the complaint that each of the Employee Defendants was a senior executive and fiduciary of Applied, and each had signed written employment agreements containing provisions concerning the confidentiality of Applied's proprietary information and trade secrets to which they were exposed through their employment with the Company.
The confidential information at issue was described in the complaint as technology relating to MOCVD equipment and processes. MOCVD (metal organic chemical vapor deposition) is the system for the mass production of GaN (gallium nitride) layers. GaN is a kind of semiconductor material having application for power devices (such as wireless infrastructure, electric cars, and military electronics), and LEDs (light-emitting diodes). Applied referred internally to its research into MOCVD equipment and processes as" 'Project NEON' or 'Project NLighten'" (hereafter, "Project NEON/NLighten"). Applied referred to the research and development of its next generation MOCVD equipment and processes as" 'Project Paragon.' "
The Employee Defendants worked for Applied in the MOCVD group that focused on LED technology, and they had access to, and worked on technology and data involving Project NEON/NLighten and Project Paragon. In or about June 2012, "[the Employee] Defendants formed a plan to misappropriate and use" Applied MOCVID technology and processes for their personal benefit through the creation of their new company to further their objectives. In furtherance of this plan, the Employee Defendants prepared multiple investor presentations that included Applied's confidential information, and they used the presentations to solicit venture capital and private equity sources in China and other locations while they were still employed by Applied. The Employee Defendants took various measures to conceal their plan to misappropriate and use Applied's trade secrets.
B. Employment Agreements
In connection with its application for a temporary restraining order filed at or about the time of the filing of the complaint, Applied submitted a declaration attaching copies of its employment agreements with each of the Employee Defendants. The respective employment agreements were dated November 30, 1992 (Olgado), March 10, 1995 (Liang Chen), December 13, 1999 (Ewald), and March 4, 2000 (Hsu). Each agreement contained provisions under which the employee acknowledged the existence of Applied's confidential information, the employee's obligations not to disclose such information outside of Applied either during or after the period of employment, and the employee's assignment to Applied of all patents, trade secrets, and inventions developed during the term of employment.
The record reflects that Applied's request for a temporary restraining order was denied by the court on December 21, 2012, with the court finding that the "plaintiff has failed to show a reasonable probability that it is likely to prevail on the merits."
The employment agreements of Liang Chen, Hsu, and Ewald each contained a provision for the arbitration of disputes, with an express carve-out reading as follows: "This agreement to arbitrate shall not apply to claims for Worker's Compensation or unemployment compensation or to controversies or claims arising out of or related to misappropriation, misuse or unauthorized disclosure of APPLIED's trade secrets or confidential information." Olgado's employment agreement contained no arbitration provision.
The quoted language is from the Liang Chen employment agreement. The carve-out language is substantially the same in the Hsu and Ewald employment agreements.
C. Liang Chen's 2012 Motion to Compel Arbitration
On December 19, 2012, Liang Chen filed a motion to compel arbitration. Liang Chen argued that his Separation Agreement with the Company provided for the resolution of disputes by arbitration, and that the disputes alleged in the complaint were embraced by that arbitration agreement. He relied on paragraph 15 of the Separation Agreement, which provided in part: "Any dispute, controversy or claim arising under or in connection with this Agreement, or the breach of this Agreement, shall be settled exclusively by arbitration in accordance with the Employment Arbitration Rules of the American Arbitration Association ("AAA") now in effect . . . . Judgment upon the award rendered by the Arbitrator(s) may be entered in any court having jurisdiction of the matter. . . ." Hsu and Ewald joined in Liang Chen's motion to compel arbitration.
Applied opposed the motion. It argued that the arbitration provision did not apply, because Applied's lawsuit was based upon Liang Chen's breach of his 1995 employment agreement and his breach of fiduciary duties owed to the Company. Applied asserted that, since it had not sued Liang Chen for breach of the August 2012 Separation Agreement, his arbitration claim failed.
D. Stay Order
Prior to the hearing on the Liang Chen's motion to compel arbitration, the Employee Defendants filed a motion to stay civil proceedings. On September 20, 2013, the trial court entered an order, pursuant to Pacers, supra, 162 Cal.App.3d 686, granting a stay of the civil action due to a pending criminal investigation that resulted in the Employee Defendants' Fifth Amendment privileges being placed in jeopardy by participating in discovery in the civil case.
The criminal investigation ultimately resulted in the filing on November 30, 2017, of a grand jury indictment against all Employee Defendants.
E. Applied's Amended Pleadings
In May 2018, Applied filed a motion to lift the Pacers stay to file a second amended complaint. Applied sought to add new causes of action involving other confidential information not related to its MOVID trade secrets, and to add eJoule Ltd. and Jasmine Chen as defendants. Applied stated in its motion that it had learned from investigation while the civil suit was stayed that eJoule Ltd. had been formed for the business of "lithium ion battery manufacturing, a focus of Applied's Large Energy Storage ('LES') group." This discovery spurred further investigation, resulting in Applied determining "that [Liang] Chen and Olgado [had] misappropriated confidential and trade secret information related to Applied's LES technology for manufacturing cathode material for lithium ion batteries, which was referred to internally as Project Hyacinth. . . . [Liang] Chen and Olgado were both privy to confidential information regarding Project Hyacinth."
Applied stated further that subsequent to May 2013, Liang Chen had submitted four patent applications that had "disclose[d] a device for manufacturing cathode material for lithium ion batteries, which map[ped] directly to the confidential manufacturing equipment developed during Project Hyacinth." Applied alleged that Jasmine Chen, a former outside patent counsel for Applied, was listed as the patent prosecution counsel on the four patent applications. As a result of her role in presenting the patent applications, Applied alleged that Jasmine Chen had intentionally induced the breach of her spouse's contractual obligations to assign inventions to the Company. Applied thus sought leave to amend to add new allegations concerning the Employee Defendants' misappropriation of Applied's "confidential and trade secret LES technology related to Project Hyacinth."
The record suggests that the court granted Applied's motion to lift the stay on June 1, 2018, to permit Applied to file the proposed second amended complaint and to proceed against eJoule, Ltd. and Jasmine Chen, only (with the case remaining stayed against the Employee Defendants). Applied filed its second amended complaint on June 12, 2018.
Thereafter, Applied filed a motion for leave to file a third amended complaint to add eJoule, Inc. as a defendant, which was granted.
Applied filed its third amended complaint on December 5, 2018, naming as defendants the Employee Defendants, eJoule Ltd., eJoule, Inc., and Jasmine Chen. The third amended complaint alleged seven causes of action, i.e., (1) for misappropriation of trade secrets, Civ. Code section 3426.1 et seq. (against the Employee Defendants and eJoule), (2) breach of written contract (against the Employee Defendants), (3) breach of fiduciary duty/duty of loyalty (against the Employee Defendants), (4) violation of the Computer Fraud and Abuse Act, 18 U.S.C. § 1030 (against Liang Chen and Ewald), (5) violation of Penal Code section 502 (against Liang Chen and Ewald), (6) declaratory relief (against Liang Chen), and (7) intentional interference with contract (against Jasmine Chen). The allegations concerned the misappropriation of (1) Applied's MOCVD technology that was the subject of the original complaint filed in 2012, and (2) Applied's LES technology relating to lithium ion battery materials and design.
Although the first claim for misappropriation of trade secrets was alleged against the Employee Defendants and eJoule, the allegations concerning the misappropriation of Applied's LES technology appear to be directed against defendants Liang Chen, Olgado, and eJoule, only.
E. eJoule's and Jasmine Chen's Motions to Compel Arbitration
On January 4, 2019, eJoule filed a motion to compel arbitration. eJoule argued that Liang Chen's Separation Agreement clearly provided for arbitration of all claims involving Applied. eJoule asserted further that, under the doctrine of equitable estoppel," 'a nonsignatory defendant may invoke an arbitration clause to compel a signatory plaintiff to arbitrate its claims when the causes of action against the nonsignatory are "intimately founded in and intertwined" with the underlying contract obligations.'" (Garcia v. Pexco. LLC (2017) 11 Cal.App.5th 782, 786.) eJoule argued therefore that the entities were entitled to stand in Liang Chen's shoes to assert that the claims against them must be arbitrated.
The motion by eJoule also included a motion to quash summons and complaint for lack of personal jurisdiction as to eJoule Ltd. In an order filed March 21, 2019, the court deferred ruling on that motion, granting Applied the right to conduct additional jurisdictional discovery.
On January 3, 2019, Jasmine Chen also moved to compel arbitration. She argued that her husband's Separation Agreement with Applied clearly provided for arbitration of the dispute alleged in the third amended complaint. Jasmine Chen asserted further that Applied's claim that she had interfered with her husband's obligations of confidentiality under his employment contract with the Company implicated the Separation Agreement, which contained similar confidentiality provisions. Jasmine Chen argued that, as an agent of the signatory (Liang Chen), she was entitled to enforce the arbitration clause contained in the Separation Agreement.
Applied opposed eJoule's and Jasmine Chen's motions to arbitrate. The court heard argument on the two motions. After submitting the matters and issuing an interim order requesting a status report from all parties, the court issued an order in which it (1) vacated its submission order relative to the motions of eJoule and Jasmine Chen; (2) partially lifted the Pacers stay for the limited purpose of hearing and deciding Liang Chen's previously filed motion to compel arbitration; (3) permitted Liang Chen and Applied to submit supplemental briefing on that motion no later than March 15, 2019; and (4) stated that as of March 15, all three motions to compel arbitration would be deemed submitted without further argument. Liang Chen filed a supplemental brief in support of his motion to compel arbitration, and Applied filed supplemental opposition to that motion.
F. Order on Three Motions to Compel Arbitration
On April 16, 2019, the trial court denied all three motions to compel arbitration. In the Order, the court-after making an assumption that the arbitration clause in the Separation Agreement applied-conducted a five-step analysis to reach this determination.
The court observed that all Defendants (except Olgado) had sought arbitration based upon their reliance upon the Separation Agreement between Liang Chen and Applied. All Defendants other than Liang Chen were" 'nonsignatories'" to that agreement. Those nonsignatories (except for Olgado) contended that arbitration was appropriate because Applied's claims against them were" '[inextricably] intertwined' with Applied's claims against Mr. Chen." And while Applied argued that the arbitration clause in Liang Chen's Employment Agreement (containing an express carve-out for claims involving Applied's trade secrets) governed the action-and thus the claims were not subject to arbitration-the Defendants (save Olgado) contended that the arbitration clause in the Separation Agreement (containing no such carve-out) applied. The court concluded that it need not decide which of the two agreements controlled, and it assumed for purposes of its analysis that the arbitration clause in the Separation Agreement governed.
The court's analysis focused on the potential applicability of the third-party exception to mandatory arbitration as provided in section 1281.2(c). Under section 1281.2, if "[a] party to the arbitration agreement is also a party to a pending court action or special proceeding with a third party, arising out of the same transaction or series of related transactions and there is a possibility of conflicting rulings on a common issue of law or fact" (§ 1281.2(c)), the court may choose not to enforce arbitration (§ 1281.2, subd. (d) (§ 1281.2(d)). As the California Supreme Court has explained, section 1281.2(c), rather than providing for a limitation of the parties' right to choose arbitration, is a statutory exception that "addresses the peculiar situation that arises when a controversy also affects claims by or against other parties not bound by the arbitration agreement." (Cronus Investments, Inc. v. Concierge Services (2005) 35 Cal.4th 376, 393 (Cronus).)
Section 1281.2(c) reads in part as follows: "A party to the arbitration agreement is also a party to a pending court action or special proceeding with a third party, arising out of the same transaction or series of related transactions and there is a possibility of conflicting rulings on a common issue of law or fact. For purposes of this section, a pending court action or special proceeding includes an action or proceeding initiated by the party refusing to arbitrate after the petition to compel arbitration has been filed, but on or before the date of the hearing on the petition."
In the first step of its analysis, the court asked whether section 1281.2(c) could apply here, or whether, alternatively, it was subject to federal preemption under the Federal Arbitration Act (9 U.S.C. § 1 et. seq.; FAA). It concluded that section 1281.2(c) was not preempted here by the FAA.
Second, the trial court addressed whether there was at least one "third party" in the litigation to permit application of section 1281.2(c). The court noted that Liang Chen and Applied were both parties to the arbitration agreement in question (i.e., the arbitration clause in the Separation Agreement). It concluded that the remaining parties seeking arbitration-eJoule, Jasmine Chen, Hsu, and Ewald-would not be third parties within the meaning of the statute if they were potentially bound by or could enforce the arbitration agreement. Because each of them asserted they could enforce arbitration, assuming without deciding the merits of their motions, the court deemed them not to be third parties for purposes of its analysis. But because Olgado was not a signatory to a contract with Applied calling for arbitration, had never sought arbitration, and Applied had never sought to arbitrate its claims against him, the court concluded Olgado was a third party under section 1281.2(c).
The record reflects that after the motions were submitted and before the court issued its Order, the court made inquiry of counsel to confirm that its understanding was correct that Olgado (1) had not sought arbitration in 2012 or 2013, and (2) was not currently seeking arbitration of any of the claims against him. Olgado's counsel responded, advising the court that Olgado (1) had not sought arbitration in 2012 or 2013, (2) had no arbitration agreement with Applied, and (3) was not currently seeking to compel arbitration.
Third, the court determined that, as required under section 1281.2(c), Applied's claims against the third party, Olgado, arose "out of the same transaction or series of related transactions" (ibid.) as the claims against Liang Chen.
Fourth, the trial court evaluated whether "there is a possibility of conflicting rulings on a common issue of law or fact." (§ 1281.2(c).) It held there was such a possibility, given that Applied's claims against Olgado closely paralleled those against Liang Chen.
Fifth, having concluded that section 1281.2(c) applied, the trial court considered whether it should exercise its discretion to deny or stay arbitration notwithstanding there being an (assumed) existing and applicable agreement to arbitrate. Recognizing that section 1281.2(d) specified four options, the trial court chose to refuse to enforce arbitration and require all parties to litigate the substantive issues in the pending court proceeding. The court reasoned that this approach was "the best way to avoid any inconsistent rulings on common issues of law or fact." It therefore denied all motions to compel arbitration.
eJoule and Liang Chen/Jasmine Chen filed separate timely notices of appeal from the order denying the petition to compel arbitration. (See § 1294, subd. (a).) [order denying or dismissing petition to compel arbitration appealable].)
III. DISCUSSION
A. Mandatory Arbitration
1. The Federal Arbitration Act (FAA)
Under the Federal Arbitration Act (9 U.S.C. § 1 et seq.; FAA), there is "a strong federal policy of enforcing arbitration agreements, including agreements to arbitrate statutory rights. [Citation.]" (Armendariz v. Foundation Health Psychcare Services, Inc. (2000) 24 Cal.4th 83, 96-97.) The FAA specifies that" '[a] written provision in . . . a contract evidencing a transaction involving [interstate] commerce to settle by arbitration the controversy thereafter arising out of such contract or transaction, . . . shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract." (9 U.S.C. § 2.)" (Broughton v. Cigna Healthplans of California (1999) 21 Cal.4th 1066, 1073-1074.) "The [FAA] was intended to 'revers[e] centuries of judicial hostility to arbitration agreements' [citation], by 'plac[ing] arbitration agreements "upon the same footing as other contracts."' [Citations.]" (Shearson/American Exp., Inc. v. McMahon (1987) 482 U.S. 220, 225-226.)
Congress is authorized under the FAA to enact substantive rules where the subject arbitration agreement involves interstate commerce. (Cronus, supra, 35 Cal.4th at pp. 383-384, citing Southland Corp. v. Keating (1984) 465 U.S. 1, 10-11 (Keating).) The FAA "establishes that, as a matter of federal law, any doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration, whether the problem at hand is the construction of the contract language itself or an allegation of waiver, delay, or a like defense to arbitrability." (Moses H. Cone Memorial Hospital v. Mercury Constr. Corp. (1983) 460 U.S. 1, 24-25, fn. omitted (Moses H. Cone).) However, the purpose of the FAA "is not to provide special status for arbitration agreements." (Cronus, supra, at p. 384.) Furthermore, "the FAA does not force parties to arbitrate when they have not agreed to do so [citation] or require them to do so under any specific set of procedural rules [citation]." (Id. at p. 385.)
The United States Supreme Court has explained that the procedural rules of the FAA (9 U.S.C. §§ 3, 4) are not intended to apply to state court proceedings. (Keating, supra, 465 U.S. at p. 16, fn. 10.) Thus, only "the FAA's 'substantive' provisions [i.e., 9 U.S.C. §§ 1 and 2] are applicable in state as well as federal court [citation] . . . ." (Volt Information Sciences, Inc. v. Board of Trustees of Leland Stanford Junior Univ. (1989) 489 U.S. 468, 477, fn. 6 (Volt).)
In Volt, the Supreme Court explained FAA preemption: "The FAA contains no express pre-emptive provision, nor does it reflect a congressional intent to occupy the entire field of arbitration. [Citation.] But even when Congress has not completely displaced state regulation in an area, state law may nonetheless be pre-empted to the extent that it actually conflicts with federal law-that is, to the extent that it 'stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress.' [Citation.]" (Volt, supra, 489 U.S. at p. 477.) As we will discuss, post-as an issue of preemption highly relevant here-the high court in Volt concluded that a California court's application of § 1281.2(c) did not undermine the goals and policies of the FAA and was therefore not preempted by federal law. (Volt, supra, at pp. 477-479.)
2. The California Arbitration Act (CAA)
The California Arbitration Act (§ 1280 et seq.; CAA) similarly enunciates a strong public policy in favor of arbitration. "The CAA 'represents a comprehensive statutory scheme regulating private arbitration in this state. [Citation.] Through this detailed statutory scheme, the Legislature has expressed a "strong public policy in favor of arbitration as a speedy and relatively inexpensive means of dispute resolution."' [Citation.] 'The statutes set forth procedures for the enforcement of agreements to arbitrate (§§ 1281.2-1281.95), establish rules for the conduct of arbitration proceedings except as the parties otherwise agree (id., §§ 1282-1284.2), describe the circumstances in which arbitrators' awards may be judicially vacated, corrected, confirmed, and enforced (id., §§ 1285-1288.8), and specify where, when, and how court proceedings relating to arbitration matters shall occur (id., §§ 1290-1294.2).' [Citation.]" (Aguilar v. Lerner (2004) 32 Cal.4th 974, 983.) Under section 1281.2, the court is required to "order contractual arbitration in a proper case." (Molecular Analytical Systems v. Ciphergen Biosystems, Inc. (2010) 186 Cal.App.4th 696, 704 (Molecular Analytical).)
The CAA contains an exception to mandatory arbitration in section 1281.2(c). That statute "addresses the peculiar situation that arises when a controversy also affects claims by or against other parties not bound by the arbitration agreement." (Cronus, supra, 35 Cal.4th at p. 393.) "It is an evenhanded law that allows the trial court to stay arbitration proceedings while the concurrent lawsuit proceeds or stay the lawsuit while arbitration proceeds to avoid conflicting rulings on common issues of fact and law amongst interrelated parties." (Ibid.) Under section 1281.2(c), contractual arbitration "may have to yield if there is an issue of law or fact common to the arbitration and a pending action or proceeding with a third party and there is a possibility of conflicting rulings thereon." (Mercury Ins. Group v. Superior Court (1998) 19 Cal.4th 332, 348.)
B. Standard of Review
As we discuss, post, there are several components of our review of the trial court's Order. Most components of the Order are subject to de novo review. For instance, our review of the trial court's determination that section 1281.2(c) in this instance was not preempted by federal law is de novo. (See Farm Raised Salmon Cases (2008) 42 Cal.4th 1077, 1089, fn. 10 ["federal preemption presents a pure question of law"]; see also Rodriguez v. American Technologies, Inc. (2006) 136 Cal.App.4th 1110, 1117 ["whether federal law governs the arbitration agreement" is subject to de novo review].) The interpretation of section 1281.2(c) and its potential application in a given case are matters that are reviewed de novo. (Barsegian v. Kessler & Kessler (2013) 215 Cal.App.4th 446, 450.) Thus, whether an arbitration agreement is binding on a nonsignatory for purposes of determining whether the nonsignatory is a "third party" under section 1281.2(c) is also reviewed de novo. (Daniels v. Sunrise Senior Living, Inc. (2013) 212 Cal.App.4th 674, 680 (Daniels).)
If the prerequisites of section 1281.2(c) are satisfied, the trial court's conclusion to stay or deny arbitration under the statute based upon the possibility of conflicting rulings is reviewed for abuse of discretion. (Laswell v. AG Seal Beach, LLC (2010) 189 Cal.App.4th 1399, 1405 (Laswell).) Accordingly, "the trial court's order [staying or denying arbitration] will not be disturbed on appeal unless it exceeds the bounds of reason. [Citations.]" (Henry v. Alcove Investment, Inc. (1991) 233 Cal.App.3d 94, 101 (H enry).)
C. No Error in Denial of Arbitration Motions
Appellants challenge the findings made by the trial court in reaching its ultimate conclusion that it was appropriate, in exercising its discretion under section 1281.2(c), to deny the motions to compel arbitration. As noted, after the trial court assumed without deciding that the arbitration clause in the Liang Chen Separation Agreement applied in this case, it concluded that (1) section 1281.2(c) was not preempted here by the FAA; (2) Olgado was a "third party" within the meaning of section 1281.2(c); (3) Applied's claims against Olgado arose "out of the same transaction or series of related transactions" (ibid.) as the claims against Liang Chen; (4) there was the "possibility of conflicting rulings on a common issue of law or fact" (ibid.) as between Applied's claims against Olgado and those against Liang Chen; and (5) given the applicability of section 1281.2(c), denial of enforcement of arbitration was the most appropriate choice. We will address each of these five steps of the trial court's analysis below.
1. FAA Preemption
A threshold matter was whether, based upon the circumstances, section 1281.2(c) could be applied here given federal preemption concerns under the FAA. The trial court, citing Cronus, supra, 35 Cal.4th at page 387, held that the "generic California choice-of-law provision [in the Separation Agreement] govern[ed] all issues relating to the agreement, including procedural issues in the arbitration. [Citation.] Consequently, section 1281.2(c) is not preempted in this case. [Citation.]" Appellants contend that the court erred in applying California law. They assert that although the court acknowledged the choice-of-California-law provision in the Separation Agreement, it ignored a clause therein reading "unless otherwise governed by federal law." They argue that, through this language, the parties agreed that the FAA, including its procedural requirements, would preempt the "generic California choice-of-law provision" at issue here. Applied responds that Appellants are procedurally barred from asserting federal preemption, and that, if their argument is considered on the merits, it nonetheless fails.
a. Claimed Waiver of Preemption Claim
Applied argues that Appellants waived the contention that section 1281.2(c) was preempted by the FAA. It contends that Liang Chen conceded in his motion below that section 1281.2(c) was potentially applicable in this case. Applied asserts further that eJoule in its papers below cited California law and argued that arbitration should be ordered under section 1281.2. And Applied contends that Jasmine Chen "relied on both the FAA and the CAA in her motion to compel arbitration and never argued that the FAA's procedural provisions superseded the CAA's." Therefore, Applied contends, Appellants may not argue that section 1281.2(c) is preempted by the FAA under the principle that "[a] party is not permitted to change his [or her] position and adopt a new and different theory on appeal." (Cable Connection, Inc. v. DIRECTV, Inc. (2008) 44 Cal.4th 1334, 1350, fn. 12 (Cable Connection).)
In addressing Applied's claim of waiver, we must consider in some detail the arguments concerning the arbitration motions that were made by the parties below.
(1) Procedural History
Our review of the record discloses that the matter of the trial court exercising its discretion under section 1281.2(c) was far from the focal point in the motion and opposition papers filed below. In his motion filed in December 2012, Liang Chen relied on the arbitration clause in the Separation Agreement, noting that he was seeking to compel arbitration under the FAA and the CAA (citing section 1281.2). Applied's January 2013 opposition cited section 1281.2 (but not subdivision (c)); Applied's position was that there was no arbitration agreement because the employment agreement, not the Separation Agreement, was the contract that controlled the controversy.
Jasmine Chen's original motion to compel arbitration (as to the superseded second amended complaint) filed in September 2018 sought arbitration under the FAA and CAA. She argued that the arbitration clause in the Separation Agreement controlled; the claim that she intentionally induced her spouse to breach his duty to keep secret and not disclose Applied's proprietary information and trade secrets necessarily implicated his obligations under the Separation Agreement; and she could enforce the arbitration clause as Liang Chen's agent. Jasmine Chen's motion did not address section 1281.2(c). Applied's opposition to Jasmine Chen's motion focused on the inapplicability of the Separation Agreement to the dispute. And Applied argued that even if the agreement were applicable, Jasmine Chen could not invoke it because she was neither a signatory nor a third-party beneficiary to it. Applied did not mention section 1281.2(c).
eJoule's motion to compel arbitration filed in January 2019 relied on the arbitration clause in the Separation Agreement. eJoule asserted that it was entitled to invoke arbitration under the doctrine of equitable estoppel. eJoule invoked California law, relying on section 1281.2 but did not specifically refer to 1281.2(c). Applied's opposition disputed that the Separation Agreement was applicable, and Applied argued that reliance on equitable estoppel was misplaced. Applied contended that its claims against eJoule were" 'fully viable'" without reference to the Separation Agreement in that eJoule had the independent statutory obligation not to acquire or use Applied's trade secrets if eJoule knew or should have known they were acquired by improper means (see Civ. Code, § 3426.1). Applied did not refer to section 1281.2(c) in its opposition.
In response to the trial court's order permitting the filing of simultaneous supplemental briefs concerning Liang Chen's motion to compel arbitration, Liang Chen filed his brief on March 15, 2019. He asserted alternative positions. Liang Chen reiterated his argument that the claims against him were subject to arbitration because the Separation Agreement plainly called for the dispute to be arbitrated; he argued that all questions of arbitrability should be decided by the arbitrator. But Liang Chen's principal argument was that it was premature to rule on his motion. He requested that because "the need to protect all defendants' Fifth Amendment rights [was] stronger than ever," the court should keep in place the Pacers stay of the proceedings and it should extend that stay to the new defendants, eJoule and Jasmine Chen. The bulk of his argument concerned extending the Pacers stay. In connection with that discussion, Liang Chen asserted that if the court, contrary to his request, were to grant his motion, any arbitration proceedings should be stayed under the authority of section 1281.2 and Cronus, supra, 35 Cal.4th at page 393 "to avoid duplicative efforts or inconsistent rulings . . . where . . . there is another legal action pending-the criminal action-involving facts and issues common to the arbitration."
Applied filed its supplemental opposition to Liang Chen's motion on March 15, 2019. Applied argued that the court should first determine whether there was a valid agreement to arbitrate; Applied defined the issue as whether Liang Chen's employment agreement or Separation Agreement was the controlling agreement. Applied argued further that the court, not the arbitrator, should decide arbitrability. Its next contention was that even if some claims against Liang Chen were arbitrable, there was no basis for the court to stay the nonarbitrable claims. The remainder of Applied's opposition contained an argument it had not previously raised in opposing any of the arbitration motions: Even if some of its claims against Liang Chen were subject to arbitration, the court should exercise its discretion under section 1281.2(c) to deny arbitration to prevent the possibility of conflicting rulings involving Applied's claims against Liang Chen and those against third parties (the other Defendants in the litigation).
(2) Resolution of Waiver Contention
Under the procedural circumstances detailed above, it is inappropriate to apply the theory of the case doctrine to bar Appellants' preemption argument. As explained by the high court," 'The rule is well settled that the theory upon which a case is tried must be adhered to on appeal. A party is not permitted to change his [or her] position and adopt a new and different theory on appeal. To permit him [or her] to do so would not only be unfair to the trial court, but manifestly unjust to the opposing litigant.' [Citations.]" (Cable Connection, supra, 44 Cal.4th at p. 1350, fn. 12, italics added.) Here, neither eJoule nor Jasmine Chen asserted any position concerning section 1281.2(c) in their motion papers. We do not view their appellate claim that section 1281.2(c) was preempted by the FAA as a change in their trial position or as their adoption of a "new and different theory on appeal." (Cable Connection, supra, at p, 1350, fn. 12.)
Our analysis as to Liang Chen's preemption argument is more complex, but we reach the same conclusion. The basis for Liang Chen's original 2012 motion was the arbitration clause in his Separation Agreement, and he invoked both the FAA and CAA in seeking to compel arbitration. The focus of the dispute between Liang Chen and Applied concerning arbitrability was whether the Separation Agreement or the earlier (1995) employment agreement applied. And the focus of Liang Chen's argument in his 2019 supplemental brief in support of his motion was that the court should continue to suspend any decision on arbitration by acknowledging the existing Pacers stay, and that because his "Fifth Amendment rights face [even] greater prejudice today," the court should extend that stay to the newly joined defendants (eJoule and Jasmine Chen). Liang Chen argued in the alternative that were the court to lift the Pacers stay to grant his motion, it should stay any arbitration proceedings under section 1281.2 and Cronus, supra, 35 Cal.4th at page 393 in light of the potential of "duplicative efforts or inconsistent rulings" as between the arbitration and the pending criminal proceedings.
We do not find the position taken by Liang Chen below to constitute a waiver of his appellate challenge to the trial court's conclusion that application of section 1281.2(c) was not preempted by federal law. Throughout the briefing on his motion, Liang Chen did not present or respond to the issue of whether the court should exercise its discretion under section 1281.2(c) to deny arbitration based upon the joinder of claims against a third party. In its order of February 27, 2019, permitting further briefing by Liang Chen and Applied, the trial court made no mention that it was considering this issue. And the filing of Applied's supplemental opposition on March 15, 2019, does not support the claimed waiver by Liang Chen of his appellate claim. Although Applied argued for the first time in its supplemental opposition that if claims against Liang Chen were arbitrable, the court should exercise its discretion under section 1281.2(c) to deny arbitration to prevent the possibility of conflicting rulings, Liang Chen had no opportunity to respond to this new argument. As structured by the trial court, Liang Chen and Applied were granted leave to file and serve simultaneous supplemental briefs by March 15, 2019; after that time, the three arbitration motions would be deemed submitted by the court. Accordingly, absent Liang Chen's having filed an application permitting further briefing-and the record does not disclose that any such application was filed-he had no opportunity to present his position concerning Applied's section 1281.2(c) argument. We conclude that because Liang Chen has not "change[d] his position and adopt[ed] a new and different theory on appeal" (Cable Connection, supra, 44 Cal.4th at p. 1350, fn. 12), he has not waived the appellate argument that application of section 1281.2(c) is preempted by federal law.
A reading of the opening brief suggests that Appellants take issue with the procedure by which the trial court decided the arbitration motions. That procedure included (1) after submission of the motions on March 15, 2019, the court contacted counsel to confirm that Olgado had never sought, nor was requesting, arbitration; (2) the court relied on the confirmation by Olgado's counsel that his client had not and was not seeking arbitration; and (3) the court in its Order based its denial of arbitration upon the finding that Olgado was a third party and therefore section 1281.2(c) was applicable. Appellants, however, have not articulated a specific procedural challenge to the Order, and we will therefore disregard any implied objections in Appellants' opening brief. (See People v. Williams (1997) 16 Cal.4th 153, 215 [contentions" 'perfunctorily asserted without argument in support'" are not properly before appellate court].)
b. Volt and Cronus
We conclude that the preemption issue here is governed by Volt, supra, 489 U.S. 468 and Cronus, supra, 35 Cal.4th 376.
The controversy in Volt was a construction dispute involving the installation of an electrical system where the owner and contractor had an agreement that called for (1) arbitration of disputes" 'arising out of or relating to this contract or the breach thereof,'" and (2) a choice-of-law clause that the contract" 'shall be governed by the law of the place where the Project is located [in California].'" (Volt, supra, 489 U.S. at p. 470, fn. omitted.) After disputes arose, the contractor demanded arbitration, and the owner filed a lawsuit against the contractor and others with whom there was no arbitration agreement. (Id. at pp. 470-471.) The trial court granted the owner's motion to stay arbitration under section 1281.2(c), and the California appellate court affirmed. (Volt, supra, at pp. 471-472.)
The contractor, citing Moses H. Cone, supra, 460 U.S. at pp. 24-25, argued that enforcement of the choice-of-law clause "violate[d] the settled federal rule that questions of arbitrability in contracts subject to the FAA must be resolved with a healthy regard for the federal policy favoring arbitration. [Citations.]" (Volt, supra, 489 U.S. at p. 475.) The Supreme Court rejected this argument, reasoning that "[t]here is no federal policy favoring arbitration under a certain set of procedural rules; the federal policy is simply to ensure the enforceability, according to their terms, of private agreements to arbitrate. Interpreting a choice-of-law clause to make applicable state rules governing the conduct of arbitration-rules which are manifestly designed to encourage resort to the arbitral process-simply does not offend the rule of liberal construction set forth in Moses H. Cone, nor does it offend any other policy embodied in the FAA." (Id. at p. 476, fn. omitted.)
Specifically, as it concerned section 1281.2(c), the Supreme Court stated in Volt: "[T]he California arbitration rules . . . generally foster the federal policy favoring arbitration . . . . [T]he FAA itself contains no provision designed to deal with the special practical problems that arise in multiparty contractual disputes when some or all of the contracts at issue include agreements to arbitrate. California[, through section 1281.2(c),] has taken the lead in fashioning a legislative response to this problem, by giving courts authority to consolidate or stay arbitration proceedings in these situations in order to minimize the potential for contradictory judgments." (Volt, supra, 489 U.S. at p. 476, fn. 5; see also Doctor's Associates, Inc. v. Casarotto (1996) 517 U.S. 681, 688 (Doctor's Associates) [describing § 1281.2(c) as a statute that "determined only the efficient order of proceedings; it did not affect the enforceability of the arbitration agreement itself"].)
The Volt court rejected further the claim that section 1281.2(c) was preempted by the FAA insofar as it was used to stay arbitration. (Volt, supra, 489 U.S. at p. 476-479.) The Court noted that "[t]he FAA contains no express pre-emptive provision, nor does it reflect a congressional intent to occupy the entire field of arbitration. [Citation.]" (Id. at p. 477.) Defining the preemption inquiry as whether the state law in question" 'stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress' [citation]" (id. at p. 477), the Supreme Court explained that the question to be decided was whether applying section "1281.2(c) to stay arbitration under this contract in interstate commerce, in accordance with the terms of the arbitration agreement itself, would undermine the goals and policies of the FAA. We conclude that it would not." (Id. at p. 477-478.) It reasoned that "parties are generally free to structure their arbitration agreements as they see fit. Just as they may limit by contract the issues which they will arbitrate, [citation], so too may they specify by contract the rules under which that arbitration will be conducted. Where . . .the parties have agreed to abide by state rules of arbitration, enforcing those rules according to the terms of the agreement is fully consistent with the goals of the FAA, even if the result is that arbitration is stayed where the [FAA] would otherwise permit it to go forward." (Id. at p. 479.)
Cronus, supra, 35 Cal.4th 376 similarly involved the issue of whether, notwithstanding the parties' arbitration agreement containing a California choice-of-law provision, application of section 1281.2(c) to stay arbitration was preempted by the FAA. (Cronus, supra, at p. 380.) In addition to a provision that" '[t]his agreement shall be construed and enforced in accordance with and governed by the laws of the State of California,'" the parties agreed that" '[t]he designation of a situs or specifically a governing law for this agreement or the arbitration shall not be deemed an election to preclude application of the [FAA], if it would be applicable.'" (Id. at p. 381, fn. omitted.) In multiple-party litigation in which some of the parties were not signatories to an arbitration agreement, there were cross-motions to compel arbitration and to stay arbitration pending the outcome of litigation, and the trial court ordered that arbitration be stayed pending the outcome of the litigation to avoid possible conflicting outcomes. (Id. at p. 382.) The appellate court affirmed, finding that section 1281.2(c) was not preempted by the FAA. (Cronus, supra, at p. 382)
The California Supreme Court affirmed. It held that the California choice-of-law provision in the subject contract should be construed as incorporating California's rules of arbitration. (Cronus, supra, 35 Cal.4th at p. 387.) The parties agreed that the choice-of-law provision was" 'specifically limited by applicable provisions of the FAA' and [was] nullified 'only where the FAA's provisions [were] inconsistent with the CAA.'" (Ibid.) The Cronus court-relying on Volt, supra, 489 U.S. at page 477, footnote 6, and Keating, supra, 465 U.S. at page 16, footnote 10-held that the procedural provisions of the FAA were not intended to apply to state court proceedings and did not conflict with section 1281.2(c). (Cronus, supra, at pp. 388-391.) Cronus addressed further the argument "that section 1281.2(c) conflict[ed] with the spirit of the FAA because its application would undermine and frustrate 9 United States Code section 2's policy of enforceability of arbitration agreements." (Id. at p. 391.) Observing that the United States Supreme Court had rejected this argument in Volt, supra, at page 476, the Cronus court similarly held that section 1281.2(c) did not undermine and frustrate the FAA's policy concerning enforceability of arbitration agreements. It explained: "[S]ection 1281.2(c) . . . is an evenhanded law that allows the trial court to stay arbitration proceedings while the concurrent lawsuit proceeds or stay the lawsuit while arbitration proceeds to avoid conflicting rulings on common issues of fact and law amongst interrelated parties. Moreover, '[s]ection 1281.2(c) is not a provision designed to limit the rights of parties who choose to arbitrate or otherwise to discourage the use of arbitration. Rather, it is part of California's statutory scheme designed to enforce the parties' arbitration agreements, as the FAA requires. Section 1281.2(c) addresses the peculiar situation that arises when a controversy also affects claims by or against other parties not bound by the arbitration agreement. The California provision giving the court discretion not to enforce the arbitration agreement under such circumstances-in order to avoid potential inconsistency in outcome as well as duplication of effort-does not contravene the letter or the spirit of the FAA. That was the explicit holding in Volt.'" (Cronus, supra, at p. 393.)
"A written provision in . . . a contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction, or the refusal to perform the whole or any part thereof, or an agreement in writing to submit to arbitration an existing controversy arising out of such a contract, transaction, or refusal, shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract or as otherwise provided in chapter 4." (9 U.S.C. § 2.)
c. Section 1281.2(c) Was Not Preempted by the FAA
Application of Volt and Cronus compels the conclusion here that section 1281.2(c) was not preempted by the FAA. Here, as in Cronus, Liang Chen and Applied agreed to a broad California choice-of-law provision. The paragraph of the Separation Agreement that immediately followed the arbitration provision reads in its entirety as follows: "l6. Governing law. Unless otherwise governed by federal law, this Agreement will be governed by and construed in accordance with the laws of the State of California (except for its conflict of laws provisions)." We construe that provision to have incorporated the CAA, the rules for arbitration adopted in California. (See Cronus, supra, 35 Cal.4th at p. 387.)
Contrary to appellants' position, the existence of the qualifying language in this clause, "[u]nless otherwise governed by federal law," does not support the conclusion that the FAA preempted the application of section 1281.2(c). This language-like the contractual language in Cronus, supra, 35 Cal.4th at page 394, providing that the FAA would apply" 'if it would be applicable' "-cannot be construed as incorporating FAA procedural rules. Here, as in Cronus, the parties agreed that California law would control. (Id. at p. 380.) Since the FAA's procedural rules "were intended to apply only in federal court proceedings" (id. at p. 388), the parties' agreement here to apply California law, including the CAA and section 1281.2(c), should not be construed as being overridden by the general qualifier, "[u]nless otherwise governed by federal law." (See Valencia v. Smyth (2010) 185 Cal.App.4th 153, 174 ["the procedural provisions of the CAA apply in California courts by default" absent "an express designation" to the contrary].) Indeed, since the subject contract in Cronus specifically mentioned the FAA, while the Separation Agreement here did not, it could be argued that the circumstances in Cronus presented a stronger case for preemption-rejected by the Supreme Court-than the circumstances in this case.
There is no provision of the FAA parallel to section 1281.2(c). (See Volt, supra, 489 U.S. at p. 476, fn. 5.) Further, the procedural provisions of the FAA, which were not intended to apply to state court proceedings, do not conflict with section 1281.2(c), and thus do not support appellants' preemption argument. (Cronus, supra, at pp. 388-391.) And the law is clear that the application of section 1281.2(c), in an appropriate case involving claims where not all parties are bound by an arbitration agreement, does not undermine or frustrate the substantive provisions of the FAA supporting the liberal enforcement of arbitration agreements. (Volt, supra, at p. 476; Cronus, supra, at p. 393.) Here, section 1281.2(c) is not preempted by the FAA, because there is no federal law "otherwise govern[ing]" that would preclude the application of state procedural law that "determine[s] only the efficient order of proceedings" (Doctor's Associates, supra, 517 U.S. at p. 688).
Appellants contend that because the Separation Agreement provided that the arbitration of disputes, controversies or claims were to be "in accordance with the Employment Arbitration Rules of the American Arbitration Association ("AAA")," the" 'generic' California choice of law provision [was] not sufficient to avoid preemption by the FAA." Appellants do not adequately explain this contention. And the argument, in any event, lacks merit. (See Mastick v. TD Ameritrade, Inc. (2012) 209 Cal.App.4th 1258, 1264 [rejecting argument that "a general California choice-of-law provision does not invoke the specific provisions of the CAA, particularly when the parties agreed that arbitration would proceed under AAA arbitration rules"].)
Moreover, there is no merit to Appellants' contention that Preston v. Ferrer (2008) 552 U.S. 346 (Preston) supports their position that incorporation of AAA's Employment Arbitration Rules nullified the parties' agreement to be governed by California law. Preston involved a California statute vesting exclusive jurisdiction before the Labor Commissioner of disputes that parties agreed to arbitrate; the high court concluded the law was at variance with the FAA. (Id. at p. 356.) It held that "when parties agree to arbitrate all questions arising under a contract, state laws lodging primary jurisdiction in another forum, whether judicial or administrative, are superseded by the FAA." (Id. at pp. 349-350.) The parties in their agreement to arbitrate had stipulated that arbitration would be conducted under AAA rules. (Id. at p. 350.) One such rule provided that" '[t]he arbitrator shall have the power to determine the existence or validity of a contract of which an arbitration clause forms a part.'" (Id. at p. 362.) It was under these circumstances, including the conflict between the FAA and the state statute vesting the Labor Commission with exclusive jurisdiction over arbitrable claims, that the high court concluded that "the 'best way to harmonize' the parties' adoption of the AAA rules and their selection of California law [was] to read the latter to encompass prescriptions governing substantive rights of the parties, but not the State's 'special rules limiting the authority of arbitrators.' [Citation.]" (Id. at p. 363, quoting Mastrobuono v. Shearson Lehman Hutton, Inc. (1995) 514 U.S. 52, 63-64.)
Preston, supra, 552 U.S. 346 offers no support for appellants' position. In Preston, there were only two parties to the controversy, both of whom having agreed to arbitrate. (See id. at pp. 350, 361.) Here, in contrast, there are joined claims involving two parties bound by an arbitration agreement and others who were not. And in Preston, there was a state statute-purportedly incorporated by the parties into their agreement- that expressly limited arbitrators' authority. Here, we are concerned with a choice-of-law provision that incorporated section 1281.2(c), which "is not a special rule limiting the authority of arbitrators" (Cronus, supra, 35 Cal.4th at p. 393); rather, it is a procedural statute "designed to deal with the special practical problems that arise in multiparty contractual disputes when some or all of the contracts at issue include agreements to arbitrate" (Volt, supra, 489 U.S. at p. 476, fn. 5). Preston has no application, and there is no need in this case to harmonize the Separation Agreement's California choice-of-law provision with its incorporation of the AAA's Employment Arbitration Rules.
Based upon Volt, supra, 489 U.S. 468 and Cronus, supra, 35 Cal.4th 376, the trial court correctly held that application of section 1281.2(c) was not preempted by the FAA.
2. Existence of a Third Party under Section 1281.2(c)
The trial court, having found that section 1281.2(c) was not preempted by federal law, next addressed whether there was at least one "third party" in the litigation as required for the statute to apply. The trial court first acknowledged that Liang Chen was a party to the arbitration agreement that the court assumed in its Order to be operative (i.e., the Separation Agreement). Second, it assumed without deciding that eJoule, Jasmine Chen, Hsu, and Ewald were not third parties. The trial court then found that Olgado was a third party under section 1281.2(c). In so holding, the court reasoned that Olgado was not a signatory to a contract with Applied calling for arbitration, he had never sought arbitration, and Applied had never sought to arbitrate its claims against him.
Appellants contend that the trial court erred by concluding that Olgado was a third party within the meaning of section 1281.2(c). They argue that the claims against Olgado were" 'intimately intertwined'" with the Separation Agreement containing the arbitration clause, and that he was therefore entitled to enforce the arbitration agreement under the doctrine of equitable estoppel. Applied responds that the court correctly found that Olgado was a third party because he was not bound by the arbitration agreement and did not seek to compel arbitration. Applied argues further that, even if it were relevant to consider whether Olgado could have asserted a right to arbitrate (but did not), any potential arbitration claim would be unavailing because he could not establish equitable estoppel.
Applied also makes two procedural arguments. It asserts that Appellants do not have standing to assert any right that Olgado may have to claim that his dispute is subject to arbitration under the doctrine of equitable estoppel. Second, Applied argues that any equitable estoppel claim is waived because it was not raised below by Olgado or by Appellants. (See Ailanto Properties, Inc. v. City of Half Moon Bay (2006) 142 Cal.App.4th 572, 594 [plaintiff's failure to raise equitable estoppel in trial court resulted in waiver of appellate claim].) As noted, ante, the three arbitration motions did not focus on the potential applicability of section 1281.2(c), and because Applied did not raise the issue until it filed its supplemental opposition (immediately after which filing, the cause was submitted), we will not bar Appellants' arguments based upon a claimed lack of standing or waiver.
The exception to arbitration under section 1281.2(c) applies only where" '[a] party to the arbitration agreement is also a party to a pending court action or special proceeding with a third party.'" "The term 'third party' for purposes of section 1281.2, must be construed to mean a party that is not bound by the arbitration agreement." (RN Solution, Inc. v. Catholic Healthcare West (2008) 165 Cal.App.4th 1511, 1519; see Cronus, supra, 35 Cal.4th at p. 393.) As has been otherwise stated, "the term 'third party' means a party to the action that is not bound by or entitled to enforce the arbitration agreement. [Citation.]" (Thomas v. Westlake (2012) 204 Cal.App.4th 605, 612.)
a. Olgado's Failure to Request Arbitration
We first address the threshold position at the base of Appellants' argument: that while Olgado has never asserted a right to arbitrate Applied's claims, he could have done so successfully, and therefore, notwithstanding his failure to request arbitration, he is not a third party under section 1281.2(c). Appellants' position thus attacks the trial court's fundamental conclusion that Olgado was a third party. As stated by the court: "[Olgado] is not a signatory to any Applied contract containing an arbitration clause. And Mr. Olgado has never asked for arbitration: not in 2012, not in 2013, and not now. For its part, Applied has never sought to compel arbitration against him, nor has it ever argued that Mr. Olgado is bound by Mr. Chen's arbitration agreement." As argued by Appellants, the court's finding was based upon its focus upon the "irrelevant" question of whether Olgado had ever requested arbitration.
We find no support for Appellants' position. It is undisputed that Olgado had no arbitration agreement with Applied. It is further undisputed that Olgado never requested arbitration, and Applied never sought to arbitrate its claims against him. To hold that Olgado was not a third party under section 1281.2(c)-effectively deeming him to have agreed to arbitrate his controversy with Applied-would run counter to the proposition that "[t]here is no public policy favoring arbitration of disputes which the parties have not agreed to arbitrate. [Citation.]" (Engineers & Architects Assn. v. Community Development Dept. (1994) 30 Cal.App.4th 644, 653; see also Daniels, supra, 212 Cal.App.4th at p. 680 [generally, "a party cannot be compelled to arbitrate a dispute that he or she has not agreed to resolve by arbitration"].) Further, accepting Appellants' position would effectively bar the potential application of section 1281.2(c) to a situation in which the third-party exception was meant to apply: where there are arbitrable claims that are joined with "claims by or against other parties not bound by the arbitration agreement" (Cronus, supra, 35 Cal.4th at p. 393).
Appellants cite no cases in which section 1281.2(c) has been held inapplicable under circumstances in which a party who did not contract for arbitration and did not request it was nonetheless deemed to not be a third party because he or she could have successfully enforced the arbitration agreement of another. (See People ex rel. 20th Century Ins. Co. v. Building Permit Consultants, Inc. (2000) 86 Cal.App.4th 280, 284 [failure to cite legal authority for position in appellate brief "amounts to an abandonment of the issue"].) Instead, Appellants rely on two cases (discussed below) that are factually distinguishable and offer no support for Appellants' position that Olgado was not a third party because he could have asserted a right to arbitrate.
In Molecular Analytical, supra, 186 Cal.App.4th 696, the noncontracting defendant had been assigned by the contracting defendant the subject licensing agreement containing an arbitration provision. (Id. at p. 702.) The plaintiff asserted claims against both defendants, including a breach of licensing agreement claim against the assignee. (Ibid.) Both defendants requested arbitration. (Ibid.) Unlike the circumstances in Molecular Analytical, (1) Applied's claims against Olgado do not derive from the Liang Chen Separation Agreement, (2) Applied did not assert a claim that Olgado breached the Separation Agreement, and (3) Olgado never requested arbitration.
In Laswell, supra, 189 Cal.App.4th at page 1402, a patient sued a rehabilitation health facility and its related entities, including the management company in charge of day-to-day operations and maintenance of the facility, for improper care she allegedly received while recovering from hip surgery. All defendants moved to compel arbitration. (Id. at p. 1403.) The trial court denied the motion, in part, because it concluded that there were parties who had not signed the arbitration agreement and therefore would not participate in the arbitration. (Id. at p. 1404.) The appellate court reversed, concluding that the noncontracting defendants were not third parties under section 1281.2(c). (Laswell, supra, at pp. 1406-1407.) It reasoned that although the arbitration agreement was signed by the facility, the management company and other entities related to the facility were "equally are bound by the agreement and thus entitled to enforce it against [the plaintiff]." (Id. at p. 1407.) Here, unlike the circumstances in Laswell, Olgado (1) did not bear a close relationship with Liang Chen, (2) could not be deemed to have been bound by Liang Chen's Separation Agreement, and (3) did not request arbitration.
We therefore reject the premise asserted by Appellants here-that Olgado was not a third party under section 1281.2(c) because he could have (but did not) successfully claim a right to arbitrate his dispute. Accordingly, the trial court did not err in finding that Olgado-having not agreed to arbitration and having not asserted a right to arbitrate-was a third party.
b. Olgado Could Not Have Shown a Right to Arbitrate
Notwithstanding Olgado's failure to request arbitration-which we have determined to preclude Appellants' argument here-we will proceed to address the merits of Appellants' assertion that he was not a third party because he could have successfully asserted a right to arbitration. This question was not addressed by the trial court below. Appellants contend that Olgado was not a third party under section 1281.2(c) "because the claims against him 'derive[] from, rel[y] on, or [are] intimately intertwined with the subject contract containing the arbitration agreement,' and he is thus entitled to enforce the arbitration provision through the doctrine of equitable estoppel." (Quoting Molecular Analytical, supra, 186 Cal.App.4th at p, 717.) Applied disagrees, responding that the circumstances here do not support application of equitable estoppel.
A nonsignatory to an arbitration provision is not a third party within the meaning of section 1281.2(c) if he or she can establish a right to arbitration under the doctrine of equitable estoppel. (Rowe v. Exline (2007) 153 Cal.App.4th 1276, 1287.) Under the doctrine, "a nonsignatory defendant may invoke an arbitration clause to compel a signatory plaintiff to arbitrate its claims when the causes of action against the nonsignatory are 'intimately founded in and intertwined' with the underlying contract obligations." (Boucher v. Alliance Title Co., Inc. (2005) 127 Cal.App.4th 262, 271 (Boucher).) "By relying on contract terms in a claim against a nonsignatory defendant, even if not exclusively, a plaintiff may be equitably estopped from repudiating the arbitration clause contained in that agreement." (Id. at p. 272.) An equitable estoppel claim is based upon an evaluation of the complaint (Goldman v. KPMG, LLP (2009) 173 Cal.App.4th 209, 229-230 (Goldman)), and is a "fact specific" inquiry (id. at p. 235).
The rationale for this equitable doctrine is as follows: "One should not be permitted to rely on an agreement containing an arbitration clause for its claims, while at the same time repudiating the arbitration provision contained in the same contract. [Citation.]" (DMS Services, LLC v. Superior Court (2012) 205 Cal.App.4th 1346, 1354.) Its application "prevents a party from playing fast and loose with its commitment to arbitrate, honoring it when advantageous and circumventing it to gain undue advantage." (Metalclad Corp. v. Ventana Environmental Organizational Partnership (2003) 109 Cal.App.4th 1705, 1714.)" '[T]he linchpin for equitable estoppel is equity-fairness.' [Citation.]" (Goldman, supra, 173 Cal.App.4th at p. 220.)
We consider Applied's pleadings in evaluating the assertion by Appellants that Olgado was not a third party within the meaning of section 1281.2(c) because he could have theoretically asserted equitable estoppel. (See Boucher, supra, 127 Cal.App.4th at p. 272 [in considering equitable estoppel, "[t]he focus is on the nature of the claims against the nonsignatory defendant"].)
Applied in its third amended complaint alleged that Olgado was formerly employed as a "Managing Director of Engineering, Product Business Group," and as such, he was a "high-ranking executive[]" of Applied, was "highly compensated and occupied a special position of trust and confidence within the company." Olgado, as a condition of his employment, signed an employee agreement that included a provision that he would not disclose or use for the benefit of anyone other than his employer Applied 's trade secrets and other confidential information. He was terminated by the Company on January 24, 2012. Applied alleged further that Olgado (1) stole (with his codefendants' knowledge and participation) tens of thousands of confidential MOCVID files concerning Applied's NEON/NLighten and Paragon Projects and shared it with his codefendants and others; (2) formed and implemented a plan with Liang Chen prior to their leaving the Company to misappropriate and use Applied's LES technology; (3) misappropriated Applied's trade secrets in violation of Civil Code section 3426.1 et seq. (first cause of action); (4) breached his employment contract with Applied with respect to his obligations concerning the Company's confidential information (second cause of action); and (5) breached his fiduciary duty/duty of loyalty to the Company by establishing a new competing business utilizing Applied's MOCVID technology and processes, by stealing such technology and processes, and by actively concealing the new venture (third cause of action).
We assess the relationship of these claims against Olgado with those involving the signatories (Applied and Liang Chen) to the Separation Agreement containing the arbitration provision. We conclude that this is not an instance in which "the causes of action against the nonsignatory [Olgado] are 'intimately founded in and intertwined' with the underlying contract obligations" between Liang Chen and Applied. (Boucher, supra, 127 Cal.App.4th at p. 271.) The claims against Olgado arose out of independent duties he owed to Applied, both under his employment agreement and by virtue of his "special position of trust and confidence" as a "high-ranking executive[]" of the Company. The claims are not"' "intimately founded in" '" the separate contractual obligations of another employee, Liang Chen, that are stated in Liang Chen's Separation Agreement. Nor are the Olgado claims"' "intertwined" with [Liang Chen's] underlying contractual obligations.'" The claims against Olgado may stand or fall, independently of the merits of Applied's separate (albeit similar) claims against Liang Chen under a separate contract he had with the Company.
Nor are the general policy considerations of equitable estoppel implicated here. In bringing suit against Olgado, Applied does not "rel[y] on the terms of an agreement to assert [its] claims against a nonsignatory defendant" such that it should "be equitably estopped from repudiating the arbitration clause of that very agreement." (Goldman, supra, 173 Cal.App.4th at p. 220.) Indeed, Applied-although Appellants claim otherwise, asserting that the allegations against Liang Chen relate to his obligations under his original employment agreement-does not even invoke the Liang Chen Separation Agreement in the Third Amended Complaint. Plainly, as noted above, Applied's claims against Olgado relate to his obligations under his own employment contract and as an executive of the Company. It cannot be said in any respect that Applied, as a signatory to the Separation Agreement containing the arbitration clause, is attempting to"' "have it both ways"' . . . 'on the one hand, [by] seek[ing] to hold the non-signatory liable pursuant to duties imposed by the agreement, which contains an arbitration provision, but, on the other hand, deny[ing] arbitration's applicability because the defendant is a non-signatory.' [Citation.]" (Ibid.)
Molecular Analytical, supra, 186 Cal.App.4th 696, relied on by Appellants, does not support their position. There, the nonsignatory defendant was the assignee of the licensing agreement containing an arbitration provision, and it was joined with the licensee (assignor) defendant. (Id. at p. 702.) The plaintiff asserted claims against both defendants, including a breach of licensing agreement claim against the assignee. (Ibid.) Under these circumstances, a panel of this court concluded that the doctrine of equitable estoppel permitted the nonsignatory defendant to enforce the arbitration agreement, holding, inter alia, that "[t]his claim [for breach of contract against the nonsignatory] is not merely intertwined with the underlying contract, it expressly derives from it." (Id. at pp. 716-717.) Here, Applied's claims against Olgado are neither intertwined with, nor derived from, the Liang Chen Separation Agreement.
Appellants' reliance on Laswell, supra, 189 Cal.App.4th 1399 is likewise misplaced. There, the licensee and operator of the health care facility was the contracting party, and there were two nonsignatory defendants (i.e., the entity that owned the licensee and operator, and the management company involved in the facility's day-to-day operations) that also sought to enforce the agreement containing the arbitration provision. (Id. at pp. 1402, 1406-1407.) The appellate court noted that" '[i]n many cases, nonparties to arbitration agreements are allowed to enforce those agreements where there is sufficient identity of parties.' [Citation.]" (Id. at p. 1407.) It held that the nonsignatories were not third parties for purposes of section 1281.2(c) (Laswell, supra, at pp. 1406-1407), concluding that all defendants consented to arbitration and were represented by the same counsel, and "the substance of [the plaintiff's] allegations is that all of the defendants are responsible for the improper care that she received while she resided at [the facility], demonstrating her claims against all defendants are based on the same facts and theory and are inherently inseparable." (Id. at p. 1407.) The circumstances in Laswell, where the court found that the nonsignatory defendants were entitled to assert equitable estoppel, bear no resemblance to those in the present case. Here, Olgado (1) was not closely related to the signatory, Liang Chen, (2) was separately represented, and (3) did not assert a right to, or a willingness to participate in, arbitration of the claims against him.
Appellants contend further that the Olgado claims were" 'intimately intertwined'" with those involving Liang Chen-and thus equitable estoppel applies- because of general allegations in the third amended complaint that (1) all" 'Defendants [engaged in] a massive coordinated conspiracy' to engage in the misappropriation of trade secrets"; and (2)" 'Defendants . . . are individually sued as participants and aiders and abettors in the wrongful conduct complained of herein, . . .'" (Original italics and emphasis.) This argument has no merit. "[A]llegations of substantially interdependent and concerted misconduct by signatories and nonsignatories, standing alone, are not enough: the allegations of interdependent misconduct must be founded in or intimately connected with the obligations of the underlying agreement." (Goldman, supra, 173 Cal.App.4th at p. 219, italics added, fn. omitted.) Therefore, since "[i]t is the relationship of the claims, not merely the collusive behavior of the signatory and nonsignatory parties, that is key" (id. at p. 223), the general allegations of conspiracy and aiding and abetting contained in the third amended complaint offer nothing in support of Appellants' position that Olgado could have successfully invoked the doctrine of equitable estoppel to enforce the arbitration clause in the Separation Agreement.
Finally, it is undisputed that Olgado had a written employment agreement with Applied but that he had no arbitration agreement with the Company. That being the case, it would be particularly inimical to the principles of arbitration to impose arbitration upon Olgado where he had a written agreement containing no such right or duty to arbitrate. The same issue was addressed by the Goldman court: "The existence of engagement letters with KPMG containing no arbitration clauses makes it all the more apparent that the application of an equitable doctrine to require arbitration between parties who have not agreed to arbitrate is entirely inappropriate in this case. . . . [T]he 'linchpin' for equitable estoppel 'is equity-fairness' [citation], and that the application of the doctrine is fact-specific. [Citation.] . . . [U]nless a party to an arbitration agreement has used the substantive terms of that agreement as the foundation for his claims against a nonsignatory, there is no reason in equity why he should be forced to arbitrate his claims against the nonsignatory. This is especially so where that party actually has a written agreement with the defendant containing no arbitration clause." (Goldman, supra, 173 Cal.App.4th at p. 235, italics added.)
Accordingly, we conclude that, even if Olgado's failure to assert a right to arbitration does not preclude Appellants from arguing that he is not a third party under section 1281.2(c), any such argument is without merit. We proceed with the remaining two requirements for the application of section 1281.2(c).
3. Claims Arising Out of Same Transaction
The trial court considered whether Applied's claims against the third party, Olgado, arose "out of the same transaction or series of related transactions" as the claims against Liang Chen. (§ 1281.2(c).) The court concluded that this element of the statute was satisfied.
Appellants do not contest this determination. To the contrary, they argue that Olgado was not a third party because the claims against him were" 'intimately intertwined' with and depend on the claims against [Liang] Chen." In so arguing, Appellants implicitly concede that the claims against Olgado arose "out of the same transaction or series of related transactions" as the claims against Liang Chen.
The trial court did not err in concluding that this element of the statute was satisfied.
4. Possibility of Conflicting Rulings
The trial court considered whether "there is a possibility of conflicting rulings on a common issue of law or fact." (§ 1281.2(c).) It concluded that such a possibility existed, given the similarity between Applied's claims against Olgado and the claims against Liang Chen.
It appears from their briefs that Appellants do not challenge the trial court's finding. While they argue that the possibility of inconsistent rulings was remote but "theoretical," Appellants make this assertion in the context of arguing that the trial court abused its discretion in denying arbitration under section 1281.2(c).
Based upon the allegations of the third amended complaint, it is plain that there existed the possibility of conflicting rulings on common issues of law and fact as between claims that would be judicially decided and those decided by an arbitrator. The trial court did not err in finding that this element of section 1281.2(c) was satisfied.
5. Denial of Arbitration Enforcement Under Section 1281.2(c)
Since we conclude that the trial court properly found the section 1281.2(c) applied, we review the court's exercise of discretion in refusing to enforce arbitration and thereby requiring all parties to litigate the substantive issues in the pending court proceeding. Appellants contend this was error. They argue that the trial court based its determination in large measure upon circumstances that-due to events occurring after the court's Order of April 16, 2019-no longer exist. Specifically, Appellants refer to the fact that criminal proceedings against Liang Chen, Hsu, and Ewald were, in August 2021, resolved in their favor. Appellants argue further that any possibility of conflicting rulings is "remote"-or, indeed, "now fanciful"-and such possibility therefore did not justify the trial court's refusal to enforce arbitration.
We address these arguments after first considering Appellants' request for judicial notice that directly relates to their claim that the court abused its discretion under section 1281.2(c) in denying arbitration.
a. Judicial Notice Requests
Appellants filed a request that this court take judicial notice of four exhibits, consisting of documents filed in federal court. As identified by Appellants, the exhibits are (1) the criminal indictment of the Employee Defendants filed November 30, 2017; (2) the judgments of acquittal of Hsu (August 25, 2021), Ewald (August 25, 2021), and Liang Chen (August 27, 2021); (3) the verdicts as to Liang Chen, Hsu, and Ewald (August 24, 2021); and (4) the motion for judgment of acquittal, or motion for new trial of Olgado (August 24, 2021).
Applied opposed Appellants' request for judicial notice. But Applied also filed a conditional request that, in the event Appellants' request for judicial notice were granted, this court should grant judicial notice of an order of the federal court dated January 6, 2022, granting in part and denying in part Olgado's alternative posttrial motions.
We address Appellants' request for judicial notice of exhibits 2 through 4, i.e., the August 2021 court filings in the related criminal proceedings.
The November 30, 2017 federal indictment of the Employee Defendants is already part of the court record. Accordingly, as to exhibit 1, "we deny the request for judicial notice as unnecessary to our decision." (Adams v. Bank of America, N.A. (2020) 51 Cal.App.5th 666, 674, fn. 4.)
The underlying reason for Appellants' request that this court take judicial notice of the August 2021 court filings is to support their claim that there is no sufficient basis for the trial court's denial of arbitration under section 1281.2(c). As urged by Appellants, because Liang Chen, Hsu, and Ewald were acquitted-more than two years after entry of the Order that is the subject of this appeal-two of the trial court's reasons for its decision are no longer based in fact.
"It has long been the general rule and understanding that 'an appeal reviews the correctness of a judgment as of the time of its rendition, upon a record of matters which were before the trial court for its consideration.' [Citation.]" (In re Zeth S. (2003) 31 Cal.4th 396, 405.) Thus, an assessment by the appellate court as to whether the trial court abused its discretion is based on state of the record at the time the trial court's decision was made, not upon later developments. (Reese v. Wal-Mart Stores, Inc. (1999) 73 Cal.App.4th 1225, 1237 (Reese); see also People v. Mendoza (2000) 24 Cal.4th 130, 161 [abuse of discretion determined from "the record before the trial court at the time of its ruling"], superseded by statute on other grounds as stated in People v. Brooks (2017) 3 Cal.5th 1, 63, fn. 8.)
Based upon these principles, as a general rule, "an appellate court will consider only matters which were part of the record at the time the judgment was entered. [Citation.]" (Reserve Insurance Co. v. Pisciotta (1982) 30 Cal.3d 800, 813 (Reserve Insurance).) There are exceptions to this rule-that are not applicable to this case- where legislative changes have occurred after the judgment, or where post-judgment events have rendered issues in the appeal moot. (Ibid.) Accordingly, absent compelling "circumstances," an appellate court will decline a request for judicial notice of documents not presented before the trial court. (Vons Companies, Inc. v. Seabest Foods, Inc. (1996) 14 Cal.4th 434, 444, fn. 3 (Vons).) Thus, for instance, the appellate court in one case denied the appellant's request to take judicial notice of proceedings in a different case that occurred after the filing of the instant appeal. (See Olson v. Cohen (2003) 106 Cal.App.4th 1209, 1213, fn. 1; see also Truong v. Nguyen (2007) 156 Cal.App.4th 865, 882 [appellate court denies request for judicial notice of safety study published subsequent to summary judgment hearing at issue in appeal].)
There is no legal basis for Appellants' request for judicial notice of the filings from the related criminal proceedings occurring more than 28 months after the trial court's Order challenged in this appeal. Appellants' argument is essentially that the court abused its discretion in denying arbitration based upon the facts as they existed at the time of the ruling, where those facts were undercut by the subsequent developments. This is tantamount to arguing that the trial court abused its discretion by considering the facts before it, rather than foreseeing how those circumstances might later change. There is no legal basis for this position. As we have noted, "error on the part of the [trial] court cannot be predicated by reason of any matter occurring subsequent to its rendition of the judgment." (People's Home Sav. Bank v. Sadler (1905) 1 Cal.App. 189, 193 (Sadler), disapproved on other grounds in Reitano v. Yankwich (1951) 38 Cal.2d 1, 4.) Indeed, making an assessment of a discretionary determination under section 1281.2(c) by considering facts occurring over two years later "would be eminently unfair to [the] trial court[]." (Reese, supra, 73 Cal.App.4th at p. 1237.) Accordingly, we will deny Appellants' request for judicial notice of the filings from the criminal proceedings identified as exhibits 2 through 4. The material is not relevant to the disposition of the appeal. (Doe v. City of Los Angeles (2007) 42 Cal.4th 531, 544, fn. 4.) Moreover, judicial notice of the documents-which were not before the trial court and concern post-appeal developments-is not appropriate. (Vons, supra, 14 Cal.4th at p. 444, fn. 3; Reserve Insurance, supra, 30 Cal.3d at p. 813.)
Appellants assert that Applied's position that the appellate court cannot consider events occurring years after the Order in evaluating whether the trial court abused its discretion "is silly." For the reasons we have discussed, we conclude, to the contrary, it is Appellants' claim concerning the relevance of subsequent developments here that is without merit.
For the same reasons, Applied's conditional request for judicial notice of an order in the criminal proceedings, filed years after the entry of the Order at issue in this appeal, is denied.
b. Denial of Arbitration Was Not an Abuse of Discretion
The trial court, having found that section 1281.2(c) applied, then considered which, of the four options available to the court under the statute would be the most appropriate in this case. The statute provides that if the elements of 1281.2(c) are satisfied, the court "(1) may refuse to enforce the arbitration agreement and may order intervention or joinder of all parties in a single action or special proceeding; (2) may order intervention or joinder as to all or only certain issues; (3) may order arbitration among the parties who have agreed to arbitration and stay the pending court action or special proceeding pending the outcome of the arbitration proceeding; or (4) may stay arbitration pending the outcome of the court action or special proceeding." (§ 1281.2(d).) The trial court concluded that the first option, denial of arbitration, was "the fairest course of action." The court reasoned that selection of this approach eliminated the "potential for conflicting rulings on common issues of fact and law. In addition, [it is unknown] whether an arbitrator would implement a 'Pacers'-like stay of the arbitration pending the outcome of the criminal case-which is what Defendants request if there were to be an arbitration . . . . While not dispositive, the need to safeguard the [Applied] Defendants' Fifth Amendment rights weighs against an arbitration. Finally, while there is a strong public policy favoring arbitration, there also is a 'compelling argument that the Legislature has also authorized trial courts to refuse enforcement of an arbitration agreement when, as here, there is a possibility of conflicting rulings. (§ 1281.2, subd. (c).)' [Citation.]" The trial court thus held that "[a]ll in all, . . . "the best way to avoid any inconsistent rulings on common issues of law or fact" was to deny enforcement of the arbitration agreement as to all defendants who sought arbitration.
Appellants present three main arguments. First, they challenge the trial court's rationale for denial of arbitration based upon the uncertainty of whether an arbitrator would implement a Pacers stay. Appellants argue that the concern "is now irrelevant" given the fact that Liang Chen, Hsu, and Ewald were subsequently acquitted. But we cannot and do not consider such developments occurring over 28 months later in assessing whether, from the record before it at the time, the trial court abused its discretion. (Reese, supra, 73 Cal.App.4th at p. 1237.) Further, the trial court made clear that the issue of whether an arbitrator would implement a Pacers stay was only one concern and it was "not dispositive." It is plain that the trial court's main ground for denying arbitration (as discussed below) was its concern about inconsistent rulings.
Even were we to credit Appellants' argument that the uncertainty of whether the arbitrator would maintain a Pacers stay is no longer an issue because of the outcome of the criminal proceedings involving Liang Chen, Hsu, and Ewald, the contention is based upon a premise that appears faulty: that any arbitration would proceed involving all Defendants, save Olgado. Neither Hsu nor Ewald filed notices of appeal in this case, and they therefore do not challenge the trial court's Order denying arbitration. As to Hsu and Ewald, the Order is final. (See Hobbs v. Bateman Eichler, Hill Richards, Inc. (1985) 164 Cal.App.3d 174, 190-191.) Thus, it appears that they could not under any circumstances on remand reassert a right to arbitrate the claims alleged against them.
Second, Appellants challenge the court's rationale that, were it to choose the fourth statutory option (i.e., stay arbitration until completion of litigation), additional delay in the resolution of the case would result. Appellants assert that this justification no longer supports the trial court's Order because Liang Chen, Hsu and Ewald have since been acquitted and "the arbitration of those defendants could proceed immediately, while the case against Mr. Olgado [(see fn. 14, ante)] could not proceed until the criminal case against him . . . has been finally resolved." (Original italics.) We cannot and do not consider the three Employee Defendants' subsequent acquittals here, since we will not base a finding of trial court error upon "any matter occurring subsequent to its rendition of the judgment." (Sadler, supra, 1 Cal.App. at p. 193.)
Third, Appellants takes issue with the trial court's reliance on the potential for inconsistent rulings of law and fact in its exercise of discretion to deny arbitration. Appellants assert that "the remote possibility of inconsistent rulings cannot support [the] denial of arbitration." (Initial capitalization and bold omitted.) The argument mischaracterizes the trial court's ruling; the court did not assess as "remote" the possibility that there would be inconsistent rulings between the arbitration and court proceedings. Rather, the court's concern about potential inconsistent rulings was underscored by its repeated references to it in the Order, and its recitation of several examples of potential inconsistent rulings. On the latter question, the trial court expressed concern that the arbitrator and court could reach inconsistent rulings on (1) whether information allegedly taken by Defendants constituted actual Applied trade secrets, (2) the identification of what trade secrets were in fact taken, (3) the identification of what information was specifically taken by Olgado at the direction of the remaining Employee Defendants, as alleged, (4) whether any disclosure of information had been authorized by Applied, and (5) the determination of the amount of any damages sustained by Applied by the claimed misappropriation.
The trial court, in selecting the appropriate remedy under section 1281.2(c), has "broad discretion." (Birl v. Heritage Care, LLC (2009) 172 Cal.App.4th 1313, 1322 (Birl).) Thus, for example, in Birl, the trial court considered a petition to compel arbitration in a wrongful death and elder abuse case against a nursing home, hospital, and physicians, where only the nursing home was a signatory to the arbitration agreement. (Id. at p. 1315.) The court denied the petition, finding section 1281.2(c) applicable and concluding that denial of arbitration was appropriate to avoid conflicting rulings. (Birl, supra, at p. 1318.) The appellate court affirmed, concluding that "[a] myriad of conflicting rulings" were possible, including "conflicting conclusions as to which party or parties were liable," and concerning the apportionment of damages. (Id. at p. 1321.)
Similarly, in Henry, supra, 233 Cal.App.3d at page 98, the trial court granted the plaintiff's motion to stay arbitration under section 1281.2(c). The appellate court found the trial court's determination of the possibility of conflicting rulings was "clearly 'in bounds'" because of the possibility the court might find that one or more codefendants had defrauded the plaintiff while an arbitrator might find no liability for fraud. (Henry, supra, at p. 101; see also Abaya v. Spanish Ranch I, L.P. (2010) 189 Cal.App.4th 1490, 1498-1499 [no abuse of discretion where trial court denied arbitration in case involving large number of mobile home park residents, only some of whom having agreed to arbitration, concluding that there was the possibility of conflicting rulings regarding common allegations of substandard living conditions].)
The trial court here did not abuse its discretion under section 1281.2(c) by denying arbitration based upon the finding of a possibility of conflicting rulings. Clearly, given the commonality of the issues presented in the third amended complaint-as to Applied's claims against Olgado and those against the remaining Employee Defendants-"[a] myriad of conflicting rulings [was] possible." (Birl, supra, 172 Cal.App.4th at p. 1321.) Appellants' suggestion that the record shows that the possibility of conflicting rulings was "remote" is unfounded, as is the implication from their argument that the trial court was required to find a likelihood of conflicting rulings in order to deny arbitration under section 1281.2(c). That is not the law. "The issue to be addressed under section 1281.2, subdivision (c) . . . is not whether inconsistent rulings are inevitable but whether they are possible if arbitration is ordered." (Lindemann v. Hume (2012) 204 Cal.App.4th 556, 567 (Lindemann).)
Moreover, the trial court, in its thoughtful Order, identified a series of specific areas where conflicting rulings were possible, and it explained why the three statutory alternatives to the denial of arbitration were, in its view, inferior choices. (See, e.g., Lindemann, supra, 204 Cal.App.4th at pp. 567-568 [trial court did not err by denying arbitration rather than ordering arbitration and staying it pending conclusion of court proceedings; the court properly exercised its discretion in considering and rejecting the latter option].) The record thus clearly demonstrates that the trial court clearly acted within the "bounds of reason" in denying Appellants' arbitration motions. (Henry, supra, 233 Cal.App.3d at p. 101.)
IV. DISPOSITION
The Order of April 16, 2019, denying the motions to compel arbitration of Appellants Liang Chen, Jasmine Chen, eJoule International, Limited, and eJoule, Inc., is affirmed. Respondent Applied Materials, Inc. shall recover its costs on appeal.
WE CONCUR: LIE, J., WILSON, J.