Opinion
Case No. 2:18-cv-06318-ODW (MRW)
03-15-2019
STEPHEN D. HEALY, Plaintiff, v. QOGNIFY, INC., Defendant.
ORDER GRANTING IN PART AND DENYING IN PART DEFENDANT'S MOTION TO DISMISS FOR FAILURE TO STATE A CLAIM WITH LEAVE TO AMEND [9]
I. INTRODUCTION
Presently before the Court is Defendant's Motion to Dismiss for Lack of Personal Jurisdiction and/or Failure to State a Claim and Improper Venue. (Mot. to Dismiss ("Mot."), ECF No. 9.) After moving for dismissal, Defendant withdrew multiple arguments. Thus, Defendant's sole remaining argument is that Plaintiff has failed to state a claim upon which relief can be granted. For reasons that follow, Defendant's Motion is GRANTED in PART, and DENIED in PART, with leave to amend.
After carefully considering the papers filed in support of and in opposition to the Motion, the Court deemed the matter appropriate for decision without oral argument. Fed. R. Civ. P. 78; C.D. Cal. L.R. 7-15. --------
II. BACKGROUND
Plaintiff Stephen D. Healy ("Healy") began working for Defendant Qognify, Inc. ("Qognify") in or about June 2016. (See First Am. Compl. ("FAC") ¶ 9, ECF No. 7.) As a condition of employment, Healy executed a "Proprietary Information, Inventions Assignment, Non-Competition and Solicitation Agreement" ("PIIA"). (Id.) This agreement contains a non-compete provision restricting Healy's ability to work for Qognify's competitors for a period of one year following termination of employment. (Id. ¶ 10.) In addition, the PIIA contains a choice of law provision applying the laws of the State of New Jersey. (Id. ¶ 12.)
Healy was employed by Qognify for two years until he was terminated on May 14, 2018. (Id. ¶ 14.) Subsequently, Qognify offered Healy a severance package granting Healy four weeks pay in exchange for his assistance during the transition period. (Id.) In addition, Healy was required to sign a "Separation and Release" agreement (the "Separation Agreement"). (Id.) Healy executed the Separation Agreement on or about June 5, 2018. (Id. ¶ 15.)
Several days later, on or about June 18, 2018, Healy was hired by Pivot3, Inc. ("Pivot3"). (Id. ¶ 23.) Eight days later, on June 26, 2018, Qognify sent Healy a letter indicating that Qognify believed Healy had violated the PIIA's non-compete provision by accepting employment from Pivot3. (Id. ¶ 24.) In the letter, Qognify's attorneys stated their intent to bring legal action to rectify Healy's perceived breach if Healy failed to respond to the letter by June 29, 2018. (Id. ¶ 26.) A copy of this letter was also sent to Pivot3's CEO. (Id. ¶ 25.)
On July 12, 2018, Healy filed a complaint in California Superior Court, County of Los Angeles (the "California Action"). (See Ex. 1, ECF No. 1.) In the meantime, on July 19, 2018, Qognify filed an action in the United States District Court for the District of New Jersey. (Decl. of Peter C. McMahon ("McMahon Decl.") Ex. B, at 1, ECF No. 18.) Subsequently, Qognify removed the California Action on July 20, 2018, citing diversity jurisdiction. (See ECF No. 1.) On August 1, 2018, Healy filed an amended complaint, seeking relief under the Declaratory Judgment Act. (See FAC, ECF No. 7.) In the FAC, Healy alleges three causes of action: declaratory relief pursuant to 28 U.S.C. § 2201(a), California Business and Professions Code section 16600, and California Labor Code section 925; intentional interference with contract; and unfair competition pursuant to California Business and Professions Code section 17200. (See FAC ¶¶ 30-42.) On August 14, 2018, Qognify moved to dismiss this case for lack of personal jurisdiction, failure to state a claim, or improper venue. (See generally Mot.) The New Jersey District Court, in turn, dismissed Qognify's action and transferred the matter to this Court. (See Notice of Related Case 5, ECF. No. 24.) Thereafter, Qognify withdrew its personal jurisdiction and improper venue arguments. (See Reply to Mot. ("Reply") 1, ECF No. 25.) Accordingly, the sole remaining argument before the Court is Qognify's Motion to Dismiss for failure to state a claim.
III. LEGAL STANDARD
A. Rule 12(b)(6)
A court may dismiss a complaint under Rule 12(b)(6) for lack of a cognizable legal theory or insufficient facts pleaded to support an otherwise cognizable legal theory. Balistreri v. Pacifica Police Dep't, 901 F.2d 696, 699 (9th Cir. 1990). To survive a dismissal motion, a complaint need only satisfy the minimal notice pleading requirements of Rule 8(a)(2)—a short and plain statement of the claim. Porter v. Jones, 319 F.3d 483, 494 (9th Cir. 2003). The factual "allegations must be enough to raise a right to relief above the speculative level." Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007). That is, the complaint must "contain sufficient factual matter, accepted as true, to state a claim to relief that is plausible on its face." Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (internal quotation marks omitted).
The determination of whether a complaint satisfies the plausibility standard is a "context-specific task that requires the reviewing court to draw on its judicial experience and common sense." Id. at 679. A court is generally limited to the pleadings and "must construe all factual allegations set forth in the complaint . . . as true and . . . in the light most favorable" to the plaintiff. Lee v. City of Los Angeles, 250 F.3d 668, 688 (9th Cir. 2001) (internal quotation marks omitted). But a court need not blindly accept conclusory allegations, "unwarranted deductions of fact, and unreasonable inferences." Sprewell v. Golden State Warriors, 266 F.3d 979, 988 (9th Cir. 2001).
As a general rule, a court should freely give leave to amend a complaint that has been dismissed. Fed. R. Civ. P. 15(a). But a court may deny leave to amend when "the court determines that the allegation of other facts consistent with the challenged pleading could not possibly cure the deficiency." Schreiber Distrib. Co. v. Serv-Well Furniture Co., 806 F.2d 1393, 1401 (9th Cir. 1986); see Lopez v. Smith, 203 F.3d 1122, 1127 (9th Cir. 2000).
IV. DISCUSSION
As indicated, Healy's amended Complaint premises jurisdiction on the Declaratory Judgment Act, 28 U.S.C. §§ 2201-2202. The Court notes that in addition to jurisdiction existing under the Act, the parties are diverse and the amount in controversy exceeds $75,000. The Court will first address whether jurisdiction is properly premised on the Declaratory Judgment Act before transitioning to whether Healy's claims are sufficient to survive Defendant's Motion to Dismiss.
A. Declaratory Judgment Act
The Declaratory Judgment Act provides, "In a case of actual controversy within its jurisdiction . . . any court of the United States . . . may declare the rights and other legal relations of any interested party seeking such declaration." 28 U.S.C. § 2201(a). The Ninth Circuit has long held that courts must first inquire whether there is an actual case or controversy within its jurisdiction when jurisdiction is premised on the Declaratory Judgment Act. American States Ins. Co. v. Kearns, 15 F.3d 142, 143 (9th Cir. 1994). The requirement that a case or controversy exist under the Declaratory Judgment Act is "identical to Article III's constitutional case or controversy requirement." Id. at 143. "It is not enough that a case presents a live controversy when it is filed." Federal Election Comm'n v. Wisconsin Right to Life, Inc., 551 U.S. 449, 461 (2007). An actual controversy must exist at all stages of federal court proceedings. Spencer v. Kemna, 523 U.S. 1, 7 (1998). This means that at all stages of the litigation, the plaintiff "must have suffered, or be threatened with, an actual injury traceable to the defendant [that is] likely to be redressed by a favorable judicial decision." Id. (quoting Lewis v. Cont'l Bank Corp., 494 U.S. 472, 477 (1990)).
Here, a live case and controversy exists because Healy maintains that after he was terminated, Qognify interfered with his ability to contract by threatening legal action to enforce a non-compete provision contained in the employment contract he signed with Qognify. This alleged wrong committed by Qognify, is traceable, which the Court can remedy through a favorable ruling.
Once the court finds that an actual case or controversy exists, the court must decide whether to exercise its jurisdiction by analyzing the factors set out in Brillhart v. Excess Ins. Co., 316 U.S. 491 (1942), and its progeny. Kearns, 15 F.3d at 143-44. The factors guiding a court's discretion whether to decline jurisdiction include: (1) "needless[ly] determin[ing] state law issues," (2) "discourag[ing] litigants from . . . forum shopping," and (3) "avoid[ing] duplicative litigation." See, e.g., Huth v. Hartford Ins. Co. of the Midwest, 298 F.3d 800, 803 (9th Cir. 2002); Gov't Empl. Ins. Co. v. Dizol, 133 F.3d 1220, 1225 (9th Cir. 1998).
Jurisdiction is properly premised here because no forum shopping exists, as neither party disputes the selected forum; there is no duplicative litigation because the New Jersey action was transferred to this Court; and while the parties disagree as to which state law controls, neither party argues that the instant dispute can be resolved entirely through state law. Thus, state law is at the crux of the dispute, and therefore determining state law is necessary, not needless. See Huth, 298 F.3d at 803-04 (affirming district court application of Brillhart which found state law was not needless because it would answer the questions raised in a declaratory judgment action.)
Thus, Healy properly invokes the Court's jurisdiction under the Declaratory Judgment Act, and Qognify's Motion to Dismiss is DENIED on this basis.
B. Choice of Law
As a threshold matter, the parties dispute which state law controls. Qognify maintains that the PIIA agreement contains a choice of law provision applying the laws of the State of New Jersey. (Mot. 16). Healy, by contrast, maintains that the Separation Agreement modifies the PIIA and requires the imposition of California law. (Opp'n. to Mot. 1, ECF No. 16.)
Federal courts sitting in diversity look to the law of the forum state when making choice of law determinations. See Fields v. Legacy Health Sys., 413 F. 3d 943, 950 (9th Cir. 2005) (internal citation omitted). "In determining the enforceability of arm's-length contractual choice-of-law provisions, California courts shall apply the principles set forth in Restatement section 187, which reflect a strong policy favoring enforcement of such provisions." Nedlloyd Lines B.V. v. Superior Court, 3 Cal. 4th 459, 464-65 (1992).
Under the second restatement, the Court must determine:
whether the chosen state has a substantial relationship to the parties or their transaction, or whether there is any other reasonable basis for the parties' choice of law. If neither of these tests is met, that is the end of the inquiry, and the court need not enforce the parties' choice of law. If, however, either test is met, the court must next determine whether the chosen state's law is contrary to a fundamental policy of California. If there is no such conflict, the court shall enforce the parties' choice of law. If, however, there is a fundamental conflict with California law, the court must then determine whether California has a materially greater interest than the chosen state in the determination of the particular issue."
Washington Mut. Bank, FA v. Superior Court, 24 Cal. 4th 906, 916 (2001) (emphasis in original).
At the time of contracting, Healy was domiciled in California, and Qognify was domiciled in New Jersey, so the substantial relationship test is met. A substantial relationship between the chosen state and the contracting parties exists if "one of the parties is domiciled in the chosen state." Nedlloyd, 3 Cal. 4th 459 at 467 (internal citation omitted). Further, "if one of the parties resides in the chosen state, the parties have a reasonable basis for selecting that state." Id.; see also In re Marriage of Crosby & Grooms, 116 Cal. App. 4th 201, 211 (Cal. Ct. App. 2004) (holding there was no reasonable basis for choosing Idaho law when neither party resided in the state). Thus, the reasonable relationship test is met, and the Court turns to whether the chosen state's law is contrary to fundamental California policy.
"There is no bright-line definition of a fundamental policy." It's Just Lunch Intern. LLC v. Island Park Enter. Grp., Inc., No. EDCV 087-367-VAP(JCRx), 2008 WL 4683637, at *3 (C.D. Cal. Oct. 21, 2008) (internal quotation marks omitted). A fundamental policy must be "substantive, may be embodied in a statute which makes one or more kinds of contracts illegal or which is designed to protect a person against the oppressive use of superior bargaining power." Consumer Fin. Prot. Bureau v. CashCall Inc., No. CV 15-7522-JFW(RAOx), 2016 WL 4820635, at *7 (C.D. Cal. Aug. 31, 2016) (quoting Restatement § 187, comment g.)
The crux of Healy's argument is that the non-compete clause in his contract violates California public policy. In support of his argument, Healy posits that in Edwards v. Arthur Andersen LLP, the California Supreme Court evinced its position that covenants not to compete violate California public policy. 44 Cal. 4th 937, 950 (2008). In opposing Healy's argument, Qognify argues that Healy's argument is moot because "Healy does not distinguish Qognify's cited cases showing that California courts enforce non-compete and non-solicitation clauses against California residents." (Reply 3.) Qognify relies on three cases: Marcotte v. Micros Sys., Inc., NO. C-14-01372, 2014 WL 4477349 (N.D. Cal. Sept. 11, 2014); Universal Operations Risk Mgmt., LLC v. Global Rescue LLC, No. C 11-5969, 2012 WL 2792444 (N.D. Cal. July 9, 2012); and Hartstein v. Rembrandt IP Solutions, LLC, No. 12-2270, 2012 WL 3075084 (N.D. Cal. July 30, 2012). However, Qognify's reliance on these cases is misplaced. Although each case involves a non-compete provision, no court expressly analyzed choice of law with a noncompete clause. Rather, the cases analyzed forum selection clauses. Courts apply different standards when analyzing choice of law and forum selection clauses. In fact, a court need not make a choice of law determination when contemplating a forum selection clause. Lueck v. Sundastrand Corp., 235 F.3d 1137, 1148 (9th Cir. 2001). Thus, Qognify's propositional foundations are flawed. Moreover, no party offers a modicum of argument weighing against forum selection. Accordingly, given that non-compete clauses have been held to violate California public policy, the Court sees no reason to chart an alternate course.
Having determined that the noncompete clause violates California public policy, the Court turns to whether California has a "materially greater interest than the chosen state in the determination of the particular issue'" presented in the case. Wash. Mut. Bank, 24 Cal. 4th at 916. (quoting Restatement Section 187(2)) (emphasis in original). "To determine whether California has a materially greater interest than [New Jersey], we must analyze the following factors: (1) the place of contracting; (2) the place of negotiation of the contract; (3) the place of performance; (4) the location of the subject matter of the contract; and, (5) the domicile, residence, nationality, place of incorporation, and place of business of the parties." Ruiz v. Affinity Logistics Corp, 667 F.3d 1318, 1324 (9th Cir. 2012).
California has a materially greater interest than New Jersey in resolving the issue presented in this case. Although the place of contracting and negotiation took place in New Jersey, and that is where Qognify was domiciled at the time of contracting, Healy worked remotely in California, and so follows that the subject matter is also located in California. However, numerical counting of factors weighing for and against imposition of New Jersey law misses one large point—California's domestic interest is materially greater than New Jersey's interest in reaching outside of New Jersey and imposing its interests on California commerce and California employment in a manner violative of California public policy.
Accordingly, California law applies.
C. Intentional Interference with Contract
Healy alleges that Qognify intentionally interfered with his employment contract with Pivot3 by trying to get Healy fired from Pivot3. (FAC ¶ 34-38.) To state a claim for intentional interference with contractual relations in California, a plaintiff must allege facts sufficient to establish: "(1) a valid contract between the plaintiff and a third party; (2) the defendant's knowledge of this contract; (3) the defendant's intentional acts designed to induce a breach or disruption of the contractual relationship; (4) actual breach or disruption of the contractual relationship; and (5) resulting damage." Pac. Gas & Elec. Co. v. Bear Stearns & Co., 50 Cal. 3d 1118, 1126 (Cal. 1990).
Even if Healy has alleged sufficient facts to support the first three elements, his claim nonetheless fails because nothing in the FAC establishes that an actual breach or disruption of the contractual relationship occurred. Intentional interference claims do not require that the interference cause a breach of contract; it is sufficient that the interference cause a disruption of contract. Golden West Baseball Co. v. City of Anaheim, 25 Cal. App. 4th 11, 51 (Cal. Ct. App. 1994). A disruption occurs when the "defendant's conduct [makes] the plaintiff's performance . . . under the contract more burdensome or costly." Id. The only allegation in the FAC bearing on the fourth element is that Healy "immediately contacted an attorney to help him understand his rights" after being notified by Qognify that they intended to seek legal action. (FAC ¶ 29.) However, Healy "must show the defendant did more than induce the contract's other party to bring litigation on a potentially meritorious, or colorable, claim." Golden West Baseball, 25 Cal. App. 4th at 51. Moreover, Healy attempts to prove damages through emotional distress. A California Court of Appeal contemplating this question refused to award emotional damages in a case involving interference with contractual relations. See Di Loreto v. Shumake, 38 Cal. App. 4th 35, 39 (Cal. Ct. App. 1995). Accordingly, Qognify's Motion to Dismiss for failure to state a claim as to Healy's claim for intentional interference with contract is GRANTED.
D. Unfair Competition
Healy's third claim alleges that Qognify violated the Unfair Competition Law ("UCL") pursuant to California Business and Professions Code section 17200 et seq. (FAC ¶¶ 39-42.)
Regarding claims of unlawful business practices, "[v]irtually any law federal, state or local can serve as a predicate for an action" under section 17200. Smith v. State Farm Mut. Auto. Ins. Co., 93 Cal. App. 4th 700. 702 (Ct. App. 2001). "If a plaintiff cannot state a claim under the predicate law, however, [the] Section 17200 claim also fails." Rudd v. Borders, Inc., No. 09-cv-832, 2009 WL 4282013, at *2 (S.D. Cal. Nov. 25, 2009).
The relevant portion of the FAC provides that "[Qognify's] above-described conduct ... constitutes unfair competition including, without limitation, unlawful, unfair and fraudulent business acts or practices in violation of California Business and Professions Code § 17200." (Id. ¶ 40.) Healy recognizes that this claim rests on his prior claims brought under California law; namely Qognify's alleged interference with Healy's contractual relationship with Pivot3. (Id.) Therefore, the Court finds that this claim is derivative of Healy's intentional interference with contract claim. Furthermore, as Healy failed to adequately plead a claim for intentional interreference with contract under California law, the Court finds that the unfair competition claim must also fail. See Matudio v. Countrywide Home Loans, Inc., No. CV 09-02960 DDP (FFMX), 2010 WL 114185, at *3-4 (C.D. Cal. Jan. 6, 2010) (dismissing a plaintiff's derivative UCL claim where the plaintiff failed to state a claim for the underlying claims). Accordingly, Qognify's Motion to Dismiss for failure to state a claim for unfair competition is GRANTED.
D. Leave to Amend
In general, a court should liberally allow a party leave to amend its pleading. See Fed. R. Civ. P. 15(a); see also Owens v. Kaiser Found. Health Plan, Inc., 244 F.3d 708, 712 (9th Cir. 2001) ("A district court shall grant leave to amend freely when justice so requires," and "this policy is to be applied with extreme liberality.") However, the Court may deny leave to amend where amendment would be futile. Gardner v. Martino, 563 F.3d 981, 990 (9th Cir. 2009). "When a proposed amendment would be futile, there is no need to prolong the litigation by permitting further amendment." Chaset v. Fleer/Skybox Int'l, LP, 300 F.3d 1083, 1088 (9th Cir. 2002) (affirming the trial court's denial of leave to amend where plaintiffs could not cure a basic flaw—inability to demonstrate standing—in their pleading).
In sum, there is no evidence suggesting that permitting Healy to amend his Complaint a second time is tantamount to futility. Thus, Healy shall have until Friday, April 5, 2019, to amend his complaint.
V. CONCLUSION
For the reasons discussed above, Defendant's Motion to Dismiss is DENIED IN PART, and GRANTED IN PART, with leave to amend. (ECF No. 9.)
IT IS SO ORDERED.
March 15, 2019
/s/ _________
OTIS D. WRIGHT, II
UNITED STATES DISTRICT JUDGE