LGCY Power v. Superior Court, No. F082353 (D5 Mar. 1, 2022)
California law is, in general, more friendly to the rights of employees than the laws of some other jurisdictions. This arises from statutory provisions, as well as case law interpreting them. A prime protection is Business & Professions Code § 16600, which has been interpreted to, among other things, to prohibit or render unenforceable post-employment non-compete and non-solicitation terms in employment agreements. For a while, employers seeking to avoid § 16600 would craft employment agreements to ensure that employment contracts would be interpreted by out-of-California courts under non-California law.
The Legislature’s answer to that was Labor Code § 925, enacted in 2016. Under § 925, the employer of a California employee cannot require, as a term of employment to agree to adjudicate claims outside of California or under non-California law. The statute further permits an employee to void any contractual provision that violates this prohibition and provides for an award of attorneys’ fees. It applies only to contracts entered or amended after January 1, 2017. And it contains an exception: It does not apply to a contract were an employee is “in fact individually represented by legal counsel” in negotiating the choice of law and forum.
There are a number of open interpretive questions about the statute, as there are relatively few published decisions of California appellate courts addressing it. The few that exist primarily address the effective date. Midwest Motor Supply Co. v. Superior Court, 56 Cal. App. 5th 702, 710 (2020) (holding that any modification of an employment contract after January 1, 2017 brings the agreement into the statute); Ryze Claim Sols. LLC v. Superior Court, 33 Cal. App. 5th 1066, 1072 (2019) (§ 935 did not apply to contract entered before 2017).
This case resolves a few of them. A group of salespersons left their employer to found a competing company. Some of employees lived in California, but both the old and the new companies are in Utah. All of the pertinent employment agreements provided for Utah law and venue in courts in Salt Lake City. They also contained non-compete clauses. The old Employer sued the employees in Salt Lake City alleging, among other things, breaches of of the non-competes and trade secrets misappropriation. After the California employees were unsuccessful in their efforts to get their cases dismissed—both on motions to dismiss and summary judgment—under § 925, one of them brought an action in Fresno County Superior Court. (Another filed a case in San Diego, which is not the subject of this writ.) The employer demurred based on the pendency of the Utah action, which the trial court denied. The employer then sought a writ of manage with the Court of Appeal.
First, the Employer argued that the statute on compulsory cross-complaints precluded the filing of the Fresno action. Under Code of Civil Procedure § 426.30(a), if a complaint has been filed against a party, that party is required to litigate any “related cause of action”—one arising from the same transaction or occurrence—by filing a cross-complaint in the first action. Although the parties didn’t brief the issue, the Court finds that the rule applies to claims that are first-filed in other jurisdictions.
We should pause there for a moment. It’s one thing to say that when a case proceeds to judgment in some other jurisdiction, the failure to bring a compulsory counter-claim in that action bars filing a new action in California state court. That’s how the equivalent Federal Rule of Civil Procedure—Rule 13(a) works. See 6 Wright & Miller, Federal Practice & Procedure § 1417. And there are California state cases that recognize the same thing applies to § 426.30. See Currie Med. Specialties, Inc. v. Bowen, 136 Cal. App. 3d 774, 776 (1982). But the way the court reads § 426.30 is that the mere filing of a litigation in another state bars bringing suit in California if the claim would be a compulsory cross-claim in the first-filed suit.
Federal law doesn’t have this problem. See 6 Wright & Miller, Federal Practice & Procedure § 1418 But Rule 13 is phrased as a requirement to plead compulsory cross-claims and has an exception for cases where the claim is pending elsewhere. Fed. R. Civ. P. 13(a)(1), (a)(2)(B). The application of its bar to future cases is implicit. On the other hand § 426.30 is literally triggered “when a complaint has been filed and served” and says the potential cross-claimant “may not thereafter in any other action assert” the claim. So thinking the rule applies as the Court here does isn’t textually crazy.
But it’s a potentially problematic result and I can’t find any case law or evidence that that’s what the legislature intended. It’s also in tension with the rule that a plea in abatement or special demurrer for “other action pending,” see Code Civ. Proc. § 430.10(c), only lies when the first filed action was also filed in California. Gregg v. Superior Court, 194 Cal. App. 3d 134, 136 (1987). Indeed, since § 426.30 does not itself provide any procedural vehicle to move for dismissal, perhaps the limit on the special demurrer is the effective answer.
Setting aside § 925 for the moment, California has certain policy imperatives, which its citizens are generally entitled to rely on its courts to vindicate. Take for instance the bar on contractual waivers of the right jury trial. See Grafton Partners v. Superior Court, 36 Cal. 4th 944, 950 (2005). Assume a Californian is party to a contract with a jury trial waiver and a New York law and venue selection. In that case, a California court cannot enforce the venue provision on public policy grounds. But if § 426.30 works like the Court reads it here, that only works if the Californian moves first and files here. Otherwise, notwithstanding the state’s policy otherwise, a second-filed action here would be barred under § 426.30(a).
There are some potential tactical ways to avoid that. Section 426.30(a) arguably only comes into effect when the defendant in the first case files its answer. So there’s an argument that a second filed case might not be barred here if filed pre-answer. (As noted, employee here litigated somewhat extensively in Utah before filing in Fresno.) The rule doesn’t apply when the first filed court lacks personal jurisdiction. § 426.30(b)(1). (Employee tried that in Utah but his motion was denied.) And it doesn’t apply to a claim solely to declaratory relief. § 426.60(c). (Employee’s claims here include wage and hour claims for money damages.) But still. If you want to be in California, you would be advised to act fast.
In any event, the Court here digs itself out of the hole it creates by finding that § 925 creates an exception to § 426.30, which does not apply when “otherwise provided by statute.” Although § 925 doesn’t say that it permits a cross-claim that would otherwise be barred by § 426.30, the court finds that the purpose and the structure of the statute in preserving a California forum for California employees are adequate to create an exception.
Employer next argues that § 925 does not void non-California choices of law or forum—it only makes them voidable. It suggests that Employee needed to seek to void the provisions with a court—and in particular with the court in Utah. But although one generally needs to act to void a voidable obligation, Employee basically did that when he filed his complaint and opposed Employer’s demurrer in the California case. Since § 925 doesn’t have any time limit, that’s good enough.
Next, Employer argues that § 925 is facially inapplicable, because Employee entered his contract in 2015 and it was not modified after January 1, 2017. But Employee was promoted and his job duties and pay changed after that. Notably, Employee’s original job description and pay structure were written into Employee’s employment agreement. So the changes to these terms, albeit oral, were sufficient to bring the situation into the ambit of § 925. There’s nothing in § 925 that requires a triggering amendment to be in writing.
Employer also argues that Employee is, in actuality, an independent contractor And since § 925 facially applies only to employees, terms and condition of employment, and employment agreements, it does not apply. This issue has come up a bunch in federal district court cases, especially in the context of motions to compel arbitration. See, e.g., Yeomans v. World Fin. Grp. Ins. Agency, Inc., 2019 WL 5789273, at *3 (N.D. Cal. Nov. 6, 2019). Unfortunately for Employer, instead of fully briefing the issue in its petition, it opted to try to incorporate by reference briefing from the Utah case. That doesn’t satisfy Rule of Court 8.204(a), which is incorporated into the rules on writs under Rule 8.485. So the Court deems the issue forfeited. The Court of Appeal thus declines to disturb the trial court’s implicit finding that Employee alleged sufficient facts to show he was an employee for the purposes of § 925.
Finally, Employer makes an argument that the Full Faith & Credit clause of the federal constitution required the court to apply Utah’s compulsory cross-complaint rule. But the Full Faith and Credit clause applies primarily to judgments. The Utah case hasn’t yet reached a judgment. When and if it did, the Full Faith and Credit clause would generally require to apply the preclusion rules of the forum that entered the judgment, including rules about compulsory cross-complaints, to see if a later filed case is barred under res judicata. But there’s just no rule that Full Faith and Credit requires a court in a second-filed action to apply the procedural rules of the state where a first action is filed.
Writ denied.
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