To Stay or Not to Stay

Mattson Technology, Inc. v. Applied Materials, Inc., No. A165378 (D1d5, as modified Nov. 20, 2023)

Plaintiff and Defendant both make machines that are used make to semiconductor chips. Defendant hired Engineer, who has previously been employed by Plaintiff for a long time. Defendant similarly poached a bunch of other employees from Plaintiff. This is California, so there’s nothing, in itself, wrong about that.

But a bunch of the poached employees wiped their work phones shortly before their departure and lied about where they were going in their exit interviews. That’s kind of suspicious. And Engineer did them one better. Shortly before leaving, he accessed Plaintiff’s cloud-based data storage system and emailed more than a dozen emails to his personal email accounts, attaching highly sensitive Plaintiff company documents unrelated to Engineer’s work. In the world of trade secrets litigation, that’s pretty much a smoking gun.

So Plaintiff sued Defendant and Engineer in state court. It sought and obtained a preliminary injunction barring Defendant from using Plaintiff’s trade secrets. Defendant and Engineer than moved to compel arbitration based on an arbitration clause in Engineer’s employment agreement. The trial court granted as to Engineer, but denied as to defendant, on the grounds that it was a non-signatory. The court further declined to stay the litigation between Plaintiff and Defendant while the Plaintiff/Engineer arbitration was litigated. Defendant appealed.

There are three issues: (1) not compelling the claim against Defendant to arbitration; (2) the PI; and (3) the denial of the stay pending arbitration. The first two are pretty easy.

Defendant tried to hitch onto Engineer’s arbitration clause based on equitable estoppel. The basic point of equitable estoppel in the context of arbitration is that if you sue someone on claim that is inextricably bound up with a contract that includes an arbitration clause, that person gets to rely on the clause even if they aren’t a signatory to the contract. As the Court explains, “As a matter of fairness, when a party to a contract seeks to hold a non-signatory defendant liable for obligations imposed by the contract, the party cannot evade an arbitration clause in the contract simply because the defendant is a non-signatory.” 

But that’s not what is going on here. Plaintiff doesn’t assert that Defendant owed it some duty under Engineer’s employment agreement. It instead claims that Defendant misappropriated its trade secrets, which is a breach of statutory obligation that exists outside of any contract. The fact that the arbitration agreement would have included that claim, had Defendant been a signatory, is not enough to give rise to equitable estoppel. Nor is the fact that Defendant allegedly conspired with Engineer, a signatory, in carrying out the misappropriation. 

The PI is even more clear cut. There was credible evidence that Engineer sent some of the material to Defendant after he got hired. Defendant had no right to use that information. The equities are clearly on the side of Plaintiff. And the Trade Secrets Act specifically authorizes courts to enjoin “actual or threatened” misappropriation. Civil Code § 3426.2. Probably the better argument to make would have been that the injunction did not do enough to discern use of Plaintiff’s info from perfectly innocent activity that relied on Defendants own sources of knowledge. That’s almost always a difficult issue in granting an injunction in a trade secrets case. But Defendant doesn’t appear to have raised that issue in trial court, so it’s forfeited.

The third issue, however, is tricky. The Court reads Code of Civil Procedure § 1281.4 to require a stay of related litigation, even against different non-signatory parties, when an action with overlapping issues is compelled to arbitration. It does so because § 1281.4 uses the word “shall.” And the Court cites some cases that basically stand for those points. Heritage Provider Network, Inc. v. Superior Court, 158 Cal. App. 4th 1146, 1152 (2008); Cardiff Equities, Inc. v. Superior Court, 166 Cal. App. 4th 1541, 1551 (2008).

But a recent Court of Appeal case explains that the mandatory stay under § 1281.4 applies only to the “controversy”—the actual claims between the parties to the arbitration agreement that have been sent to arbitration. See Leenay v. Superior Court, 81 Cal. App. 5th 553, 564–65 (2022) (“[S]ection 1281.4 authorizes a stay only if a court has ordered arbitration of a question between the parties to an agreement, and the same question and the same parties are involved in the pending action.”). Leenay explains, quite convincingly, that the point of § 1281.4 is to stay the actual claims that are being arbitrated, not overlapping claims against different parties. A different statute, § 1281.2(c)(1), is addressed to that issue. Unlike § 1281.4, § 1281.2 affords the court wide discretion to address how to handle overlapping claims of additional parties that aren’t required to arbitrate. Options listed in the statute include: Refusing arbitration altogether, ordering full or partial intervention, ordering arbitration and staying the litigation, and staying arbitration until the litigation is done. If § 1281.4 applies to more than just the matter being arbitrated the contrary discretion afforded under § 1281.2 is surplusage. 

Notably Leenay tried to distinguish Heritage based on some procedural differences, but the logic of Leenay is not really reconcilable with the way these other cases read § 1281.4.

So there is a pretty clean split on this issue, although the parties’ apparent failure to flag it probably precludes review.

Reversed in part.