Techno Lite v. EMCOD ( 2020 )

Filed 1/21/20
CERTIFIED FOR PARTIAL PUBLICATION*
IN THE COURT OF APPEAL OF THE STATE OF
CALIFORNIA
SECOND APPELLATE DISTRICT
DIVISION FOUR
TECHNO LITE, INC., B284989 c/w B289486
(Los Angeles County
Plaintiff, Cross-defendant Super. Ct. No. LC101264)
and Respondent,
v.
EMCOD, LLC, et al.,
Defendants, Cross-complainants
and Appellants.
* Pursuant to California Rules of Court, rules 8.1100 and
8.1110, this opinion is certified for publication with the exception
of parts A.2. through and including D. of the Discussion.
APPEAL from a judgment and order of the Superior
Court of Los Angeles County, Rick Brown, Judge and
Virginia Keeny, Judge. Affirmed.
Schwartz & Asiedu and Kwasi A. Asiedu; Law Offices
of Stephen K. Lubega and Stephen K. Lubega for
Defendants, Cross-complainants and Appellants.
Reed & Reed and Darren G. Reed for Plaintiff, Cross-
defendant and Respondent.
_________________________________________
INTRODUCTION
Appellants Scott Drucker and Arik Nirenberg worked
for respondent Techno Lite, a company engaged in selling
lighting transformers that was previously owned by Neil
Olshan and respondents Stefan Poenitz and David Tour.
While Drucker and Nirenberg worked for Techno Lite, they
also ran their own company, appellant Emcod, LLC. Though
Emcod also sold transformers, Techno Lite consented to
Drucker’s and Nirenberg’s operating Emcod while working
for Techno Lite, based on their promise that they would run
Emcod on their own time, and that Emcod would not
compete with Techno Lite.
In 2013, after Olshan died, Poenitz and Tour offered to
gift Olshan’s shares in Techno Lite to Drucker. Drucker
refused the shares and instead offered to purchase Techno
Lite from Poenitz and Tour. Although the parties
negotiated, no purchase was consummated, and Drucker and
Nirenberg resigned from Techno Lite in mid-December 2013.
2
Shortly thereafter, Techno Lite accused Drucker, Nirenberg,
and appellant Joseph Frole -- an outside salesperson who
sold products on behalf of both Techno Lite and Emcod -- of
stealing its customers and misappropriating its trade
secrets.
On January 29, 2014, Techno Lite filed a complaint
against Emcod, Drucker, Nirenberg, and Frole for breach of
fiduciary duty, misappropriation of trade secrets,
interference with contractual relationships, intentional and
negligent interference with prospective economic advantage,
conversion, injunctive relief, and constructive trust. Emcod,
Drucker, and Nirenberg, in turn, cross-complained against
Techno Lite, its owners, its operations manager respondent
Rodney Davis, and several others for intentional interference
with contract, intentional and negligent interference with
prospective economic relations, violation of the California
unfair competition law, violation of the Cartwright Act,
violation of the unfair business practices act, defamation,
and injunctive relief. Techno Lite subsequently filed two
amended complaints, adding causes of action for fraud and
unfair business practices.
Appellants secured summary adjudication of Techno
Lite’s misappropriation of trade secrets claim before the
Honorable Russell S. Kussman. The parties thereafter
proceeded to a court trial on the remaining causes of action
before the Honorable Rick Brown. After the close of
evidence, as part of appellants’ closing argument, Emcod,
Drucker, and Nirenberg requested leave to amend their
cross-complaint to conform to proof to add a cause of action
3
for breach of contract for Poenitz’s and Tour’s failure to sell
Techno Lite to Drucker and Nirenberg. The court denied the
request. Following the conclusion of the trial and a
subsequent hearing, the court found Drucker, Nirenberg,
and Frole liable for interfering with Techno Lite’s
prospective economic advantage, and also found Drucker,
Nirenberg, and Emcod liable for fraud and unfair
competition.1 The court dismissed appellants’ cross-
complaint. In a later proceeding, the Honorable Virginia
Keeny denied appellants’ motion for attorneys’ fees for
defeating Techno Lite’s misappropriation of trade secrets
claim.
Appellants now argue the courts below erred by: (a)
finding Drucker, Nirenberg, and Emcod liable for fraud; (b)
finding appellants liable for interfering with respondent
Techno Lite’s prospective economic advantage; (c) denying
Emcod, Drucker, and Nirenberg’s motion for leave to amend
their cross-complaint to conform to proof; and (d) denying
appellants’ motion for attorneys’ fees after appellants
secured summary adjudication of Techno Lite’s claim for
misappropriation of trade secrets. In the published portion
of the opinion, we reject appellants’ argument that they
1 As to the remaining causes of action, the court found
against Techno Lite on its claims of breach of fiduciary duty and
interference with contractual relations, found Techno Lite’s
conversion claim to be de minimis and awarded no damages for
it, and found Techno Lite’s causes of action for injunctive relief
and constructive trust to be moot.
4
could not be found liable for fraud because their promise not
to compete against their current employer was void under
Business and Professions Code section 16600. In the
unpublished portion of the opinion, we reject their remaining
contentions and affirm.
STATEMENT OF RELEVANT FACTS
A. Poenitz and Tour Purchase Techno Lite
In 2003, Olshan, Poenitz, and Tour purchased Techno
Lite from Shafrir Romano. Both Drucker and Nirenberg
were working for Techno Lite, and they continued on with
the new ownership.
Originally, Romano was kept on to run Techno Lite,
but in 2005, following a dispute with the new owners,
Romano left the company and Drucker was tasked with
running Techno Lite. Following his departure, Romano
interfered with Techno Lite’s relationship with its suppliers,
nearly causing Techno Lite to go out of business.
B. Drucker and Nirenberg Found Emcod and
Promise Emcod Will Not Compete with
Techno Lite
In 2006, with Techno Lite in dire financial straits,
Drucker and Nirenberg founded Emcod, LLC.2 Drucker
testified they did so because they “were in fear of Techno
Lite closing its doors.” They “started Emcod as a backup to
2 By the time trial began, Emcod had become a corporation.
5
basically have something to fall on to if Techno Lite was to
close its doors.” Drucker and Nirenberg were each 50
percent owners of Emcod, and its only employees.
When Olshan, Tour, and Poenitz discovered Emcod,
the parties had “many discussions,” but ultimately they
decided to permit Drucker and Nirenberg to operate Emcod
while still working for Techno Lite, because Drucker and
Nirenberg promised them Emcod would not compete with
Techno Lite. Drucker testified he told Techno Lite’s owners
that Emcod would not compete with them in the lighting
industry. Tour testified that Nirenberg promised him
Emcod’s business “will have nothing to do with any of your
parts. We’re not going into competition with you.” Tour
further testified that he and Techno Lite’s other owners were
assured that Emcod’s operations “weren’t going to affect
[Techno Lite’s] business in any way, shape, or form.”
Poenitz testified that “Arik [Nirenberg] and/or Scott
[Drucker]” told him “that Emcod made custom transformers
. . . that had nothing to do with [Techno Lite’s] market or
[its] customer base.”
In 2009, Frole began selling products for both Techno
Lite and Emcod as an outside salesperson; he was paid by
commission on products sold.
C. Emcod Begins Competing with Techno Lite;
Appellants Conceal Their Actions
In 2012, Emcod started selling to Techno Lite
customers the same products Techno Lite was selling.
Specifically, Drucker admitted that Emcod sold to certain
6
Techno Lite customers such as Diode L.E.D., G.M. Lighting,
Five Star Wholesale, Ark Lighting, and Village View
Lighting the same products Techno Lite sold. Drucker
claimed Emcod did this because Techno Lite did not have the
resources to fill customer demand, so Emcod stepped in to
“maintain and keep the account.” Drucker claimed Emcod
was able to sell to these customers when Techno Lite could
not, due to Drucker’s personal connections. Drucker did not
tell Techno Lite’s owners that Emcod was selling to their
customers, and Emcod kept the profits from these sales.
In 2013, long before Drucker offered to purchase
Techno Lite, several e-mails were sent to Techno Lite’s
customers asking them to replace Techno Lite with Emcod.
For example, on January 7, 2013, Frole wrote an e-mail to
L.E.D. Lighting Wholesale, a customer Drucker admitted
was “the type of lighting wholesaler that Techno[]Lite could
sell to,” stating: “‘All of our accounts are going to be changed
to the new name, Emcod. Consequently, we want to clean up
all the old invoices.’” After Frole forwarded this e-mail to
Drucker, Drucker responded with, “‘Thanks, Joe.’”
On April 25, 2013, Frole forwarded to Drucker an e-
mail he had sent to Light Bulbs Unlimited, telling the
company representative where a list of Emcod’s products
could be found. In response, Drucker stated, “‘We have to be
very careful who we contact until we leave here. I don’t
trust Joe [the person to whom Frole had sent the e-mail]. He
is a dirtbag from dealing with him in the past. Please talk
with me before contacting any customers about Emcod. We
can only go after accounts we trust. We can’t risk
7
Magnitude [Shafrir Romano’s company which also sold
transformers], Shafrir calling David [Tour] or Stefan
[Poenitz] saying we are taking over with Emcod.’”
On October 4, 2013, Frole sent an e-mail to Village
View Lighting (a Techno Lite customer) asking, “How much
of a problem would it be for you to change the purchase order
that you have in your computer from TechnoMagnet to
Emcod, same address?[3] Emcod is a company that Scott
[Drucker] and Arik [Nirenberg], the engineer, have had for
the last seven years making the same products as Techno
Lite. They are in the process of talking to the owners of
TechnoMagnet to buy them out. They have been talking
about going out on their own for quite a while and decided to
do it now.”
D. Drucker Offers to Buy Techno Lite;
Negotiations Fail; Lawsuits Commence
After Olshan died, Poenitz and Tour decided to offer
Olshan’s shares of Techno Lite to Drucker for free. Drucker
declined their offer, and instead offered to purchase Techno
Lite from Poenitz and Tour. Drucker testified the parties
had agreed on terms, but when he arrived to sign the final
contracts Poenitz and Tour asked for $100,000 more.
Drucker countered Poenitz and Tour’s new offer by
increasing his previous offer by $50,000. Poenitz and Tour
3 TechnoMagnet was a DBA (doing business as) of Techno
Lite.
8
rejected Drucker’s counteroffer, and Drucker and Nirenberg
resigned from Techno Lite on December 13, 2013. Rodney
Davis was brought in to replace Drucker as operations
manager.
On January 29, 2014, Techno Lite sued appellants,
alleging causes of action for breach of fiduciary duty,
misappropriation of trade secrets, interference with
contractual relationships, intentional and negligent
interference with economic advantage, conversion, injunctive
relief, and constructive trust. The gist of Techno Lite’s
complaint was that while Drucker and Nirenberg were
employed by Techno Lite, appellants were siphoning off
accounts of Techno Lite’s and diverting the business of their
employer to their own company, Emcod.
On March 3, 2014, Emcod, Drucker, and Nirenberg
cross-complained against Techno Lite, David Tour, and
Stefan Poenitz, among others, for intentional interference
with contract, intentional and negligent interference with
prospective economic relations, violation of various unfair
competition and antitrust statutes, defamation, and
injunctive relief. The gist of their cross-complaint was that
Techno Lite and persons acting under its direction were
interfering with Emcod’s business by warning Emcod’s
suppliers they would lose business if they supplied Emcod,
and by telling Emcod’s customers that Drucker and
Nirenberg had committed improprieties while running
Techno Lite and had stolen Techno Lite’s proprietary
information.
9
E. The Court Finds Techno Lite Has No Trade
Secrets
Through discovery, Techno Lite eventually identified
its trade secrets as its “Customer List.” On July 15, 2015,
appellants moved for summary judgment or summary
adjudication, arguing in part that Techno Lite had been
“unable to establish the existence of any trade secrets as
defined by Civil Code §3426.” In responding to appellants’
motion, Techno Lite admitted its customer list had been
“prominently and publicly exhibited for years on Techno
Lite’s website.”4 On September 23, 2015, the Honorable
Russell S. Kussman granted appellants’ motion for summary
adjudication as to Techno Lite’s misappropriation of trade
secrets claim, but denied it as to all other causes of action.
F. Trial
On June 29, 2016, Techno Lite filed its second
amended complaint (SAC), alleging causes of action for
breach of fiduciary duty, interference with contractual
relationships, intentional and negligent interference with
economic advantage, conversion, fraud, unfair business
practices, injunctive relief, and constructive trust. On
September 19, 2016, the parties proceeded to a court trial
before the Honorable Rick Brown on the SAC and Emcod,
4 A trade secret is “information” that derives value “from not
being generally known to the public” and “[i]s the subject of
efforts that are reasonable under the circumstances to maintain
its secrecy.” (Civ. Code, § 3426.1, subd. (d).)
10
Drucker, and Nirenberg’s cross-complaint. Techno Lite
presented evidence that Drucker and Nirenberg had
promised Techno Lite that Emcod would not compete with it.
Techno Lite also presented evidence that Emcod sold
products that Techno Lite also sold to customers who had
previously purchased from Techno Lite.
After the close of evidence, during their closing
argument, Emcod, Drucker, and Nirenberg asked the court
for permission to amend their cross-complaint to conform to
proof to add a breach of contract cause of action, alleging
Tour and Poenitz breached a contract to sell Techno Lite to
Drucker and Nirenberg. The court denied the request,
finding the amendment would be “prejudicial to the other
side,” and that the evidence at trial showed “there was no
meeting of the mind[s].”
Following a seven-day trial, the court found for Techno
Lite on the causes of action for intentional interference with
contractual relations, intentional and negligent interference
with prospective economic advantage, fraud and unfair
competition. In its statement of decision, the court found
that Emcod wrongfully diverted $390,952.23 in sales in
2013, and at least $1,000,000 in 2014; it awarded 15 percent
of those amounts as damages (15% being the profit margin
Drucker testified to), or $208,642. Using a multiplier of
three, the court also awarded $625,926 in punitive damages.
The court found against Emcod, Drucker, and Nirenberg on
their cross-complaint. However, in response to appellants’
motion for new trial, the court vacated the statement of
decision and judgment and reopened the case “on the issue of
11
the award of punitive damages and the financial situation of
defendants Scott Drucker, Arkadi [Arik] Nirenber[g] and
Emcod LLC only.” The court also stated it would “address
the issue of multiplier as to punitive damages for individual
defendants Drucker and Nirenberg and Emcod LLC.”
G. The Court Reopens Proceedings and Reduces
Damages
On March 9, 2017, the court heard evidence relating to
“the award of punitive damages and the financial situation
of defendants Drucker, Nirenberg, and Emcod . . . .” It also
heard argument addressing “on what basis can plaintiffs be
awarded a portion of Emcod’s 2014 net proceeds in a year
when Drucker and Nirenberg were not employed by
Techno[]Lite.” The court additionally heard argument on
“whether using the 15 percent [margin to determine net
profits] . . . is the reasonable approach to be taken.”
At the conclusion of the hearing, the court struck
$150,000 (i.e. 15% of the $1,000,000 Emcod earned in 2014)
from the compensatory damages, leaving $58,642, plus
interest, and used a multiplier of 0.5 for punitive damages
against Drucker, Nirenberg, and Emcod, awarding $29,321
against each defendant, or $87,963 total. On July 6, 2017,
the court issued a Statement of Decision and Judgment to
this effect. Appellants timely appealed.
12
H. The Court Denies Appellants’ Request for
Fees
On August 21, 2017, appellants moved for attorneys’
fees under Civil Code section 3426.4, requesting the fees
incurred in defeating Techno Lite’s trade secret claim. The
Honorable Virginia Keeny heard the motion on February 14,
2018, and denied it. Appellants timely appealed. We
subsequently granted a motion to consolidate the appeals.
DISCUSSION
A. The Court Did Not Err in Finding
Appellants Liable for Fraud
1. A Promise Not to Compete with an
Employer While Employed Is Not Void
Appellants argue the trial court erred in holding them
liable for fraud because the false promise on which the fraud
was based was void as a matter of law. Specifically,
appellants argue any promise Drucker and Nirenberg made
not to compete with Techno Lite was void because, “the
covenant not to compete with Techno-Lite was contrary to
public policy and in violation of the express provisions of
Business & Professions [Code] section 16600.” Because “[a]
promise . . . to violate a statute or to violate an expressly
stated legislative public policy is ab initio invalid, [it] cannot
form the basis of a promisee’s justifiable reliance; and
justifiable reliance is a critical element of a promissory fraud
action.” We disagree that Business and Professions Code
13
section 16600 (hereinafter Section 16600) renders Drucker
and Nirenberg’s promise void.
“Business and Professions Code section 16600 has
consistently been interpreted as invalidating any
employment agreement that unreasonably interferes with an
employee’s ability to compete with an employer after his or
her employment ends. (See Muggill v. Reuben H. Donnelley
Corp. (1965) 62 Cal. 2d 239, 242 [42 Cal. Rptr. 107, 398 P.2d
147].) However, the statute does not affect limitations on an
employee’s conduct or duties while employed. ‘While
California law does permit an employee to seek other
employment and even to make some “preparations to
compete” before resigning [citation], California law does not
authorize an employee to transfer his loyalty to a competitor.
During the term of employment, an employer is entitled to
its employees’ “undivided loyalty.” [Citation.]’ (Fowler v.
Varian Associates, Inc. (1987) 196 Cal. App. 3d 34, 41 [241
Cal. Rptr. 539].)” (Angelica Textile Services, Inc. v. Park
(2013) 220 Cal. App. 4th 495, 509 (Angelica).)
In Angelica, “a former employee breached his
employment agreement and his duty of loyalty to plaintiff
because, while still employed by plaintiff, the employee
disparaged plaintiff to a local bank and, in negotiating new
linen contracts with large customers of plaintiff, gave the
customers cancellation rights that are not customary in the
industry and that permitted those customers to shortly
thereafter take their business to the employee’s new
employer.” (Angelica, supra, 220 Cal.App.4th at p. 499.)
During the course of his employment, this former employee
14
had signed an agreement promising “he would not, during
his employment, ‘become interested, directly or indirectly, as
a partner, officer, director, stockholder, advisor, employee,
independent contractor or in any other form or capacity, in
any other business similar to Company’s business.’” (Id. at
p. 500.) In addressing whether some of the company’s claims
against the former employee were barred by Section 16600,
the court held, “[Because] [plaintiff’s] claims are based on
[defendant]’s conduct during his employment by [plaintiff]
. . . they are in no sense barred by Business and Professions
Code section 16600.” (Angelica, supra, at p. 509.)
In their reply brief, appellants acknowledge Angelica
but attempt to distinguish it by arguing: (1) Angelica failed
to address the Supreme Court case of Edwards v. Arthur
Andersen LLP (2008) 44 Cal. 4th 937 (Edwards); and (2) the
competing employee in Angelica was an officer and therefore
a fiduciary, whereas Drucker and Nirenberg were not. We
are unpersuaded.
First, it is unsurprising the Angelica court failed to
mention Edwards as the latter case is inapposite. In
Edwards, our Supreme Court invalidated a noncompetition
agreement that “prohibited [plaintiff] from working for or
soliciting certain Andersen clients for limited periods
following his termination.” (Edwards, supra, 44 Cal.4th at
p. 942.) The court’s declaration that noncompetition
agreements were “invalid under section 16600 in California,
even if narrowly drawn, unless they fall within the
applicable statutory exceptions of section 16601, 16602, or
16602.5” thus defined a category of agreements that could
15
not be enforced against former employees who sought to
compete with their former employers after leaving their
employment. (Id. at p. 955.) Edwards did not address --
much less invalidate -- agreements by employees not to
undermine their employer’s business by surreptitiously
competing with it while being paid by the employer. (See
Kinsman v. Unocal Corp. (2005) 37 Cal. 4th 659, 680 [“‘It is
axiomatic that language in a judicial opinion is to be
understood in accordance with the facts and issues before
the court. An opinion is not authority for propositions not
considered’”], quoting Chevron U.S.A., Inc. v. Workers’ Comp.
Appeals Bd. (1999) 19 Cal. 4th 1182, 1195.)
Second, while appellants correctly note the employee in
Angelica was an officer (and thus owed his employer a
fiduciary duty), this is a distinction without a difference. If
appellants were correct that Edwards invalidated all
noncompetition agreements -- regardless of employment
status -- “unless they fall within the applicable statutory
exceptions of section 16601, 16602, or 16602.5,” it would not
matter whether the employee was an officer; there are no
“officer” or “fiduciary” exceptions enumerated in Business
and Professions Code sections 16601, 16602, or 16602.5.
Appellants’ other cases -- Bancroft-Whitney Co. v. Glen
(1996) 64 Cal. 2d 327 (Bancroft-Whitney), Mamou v.
Trendwest Resorts, Inc. (2008) 165 Cal. App. 4th 686(Mamou), and Quidel Corp. v. Superior Court (2019) 39
Cal.App.5th 530 (Quidel), review granted November 13,
2019, S258283 -- are also inapposite. In Bancroft-Whitney,
the Supreme Court expressly held that in certain situations,
16
an officer could be liable for competing with his current
employer. (Bancroft-Whitney, supra, 64 Cal.2d at p. 347
[there is “no requirement that an officer disclose his
preparations to compete with the corporation in every case,
and failure to disclose such acts will render the officer liable
for a breach of his fiduciary duties only where particular
circumstances render nondisclosure harmful to the
corporation.” “Conversely, the mere act of disclosing his
activities cannot immunize the officer from liability where
his conduct in other respects amounts to a breach of duty.
The significant inquiry in each situation is whether the
officer’s acts or omissions constitute a breach under the
general principles applicable to the performance of his
trust”].)
In Mamou, the court found employees could prepare to
compete with their employer “‘so long as they do so on their
own time and with their own resources.’” (Mamou, supra,
165 Cal.App.4th at 719.) But the court recognized “‘while an
employee may secretly incorporate a competing business
prior to departing, the employee may not use his or her
principal’s time, facilities or proprietary secrets to build the
competing business.’” (Ibid., quoting Chemfab Corp. v.
Integrated Liner Tech. Inc. (N.Y.App.Div. 1999) 263 A.D.2d
788, 790.) As particularly relevant here, the court noted that
“‘[s]olicitation of an employer’s customers likely will
constitute a violation of the duty of loyalty in almost every
case . . . .’” (Ibid., quoting Futch v. McAllister Towing of
Georgetown (1999) 335 S.C. 598, 609-610.)
17
Finally, Quidel dealt with a noncompetition agreement
between two corporations. Quidel, supra, 39 Cal.App.5th at
p. 538. In rejecting the argument that Edwards invalidated
the noncompetition agreement in question, the court noted
“the per se ban on noncompetition clauses outlined in
Edwards is limited to employment agreements.” (Id. at
p. 539.) Quidel’s statement regarding the inapplicability of
Edwards to an agreement between two corporations does not
support appellants’ claim that Edwards prohibits an
employee from agreeing not to compete with his current
employer.
Appellants do not cite -- and we have not found -- a
single case in which Section 16600 was held to invalidate an
agreement not to compete with one’s current employer while
employed by that employer. The public policy behind
Section 16600 is to ensure “that every citizen shall retain the
right to pursue any lawful employment and enterprise of
their choice” (Metro Traffic Control, Inc. v. Shadow Traffic
Network (1994) 22 Cal. App. 4th 853, 859) and to encourage
“open competition and employee mobility” (Edwards, supra,
44 Cal.4th at p. 946); it is not to immunize employees who
undermine their employer by competing with it while still
employed. “We state the obvious in observing that no ‘firmly
established principle of public policy’ [citation] authorizes an
employee to assist his employer’s competitors.” (Fowler v.
Varian Associates, Inc., supra, 196 Cal.App.3d at p. 43; see
also ibid. [a company has good cause to terminate an
employee who helped “in obtaining financing for[] an
enterprise organized to become [his employer]’s direct
18
competitor”].) It should be even more obvious that no firmly
established principle of public policy authorizes an employee
to become his employer’s competitor while still employed.
Section 16600 is not an invitation to employees to bite the
hand that feeds them.
Drucker and Nirenberg’s promise that Emcod would
not compete with Techno Lite was not void ab initio, and
Techno Lite was entitled to rely on it. Accordingly, the trial
court did not err in finding appellants liable for fraud based
on that false promise.5
2. Appellants Had a Duty of Disclosure
Appellants also argue the court erred by finding them
liable for fraud by “conceal[ing] they were diverting orders
from Techno-Lite to Emcod in violation of their 2006
covenant not to compete” because appellants lacked a duty to
disclose these facts to Techno Lite. Because, as discussed
above, we affirm the trial court’s finding of fraud based on
5 In their reply brief, appellants suggest for the first time
that any noncompetition agreement Drucker and Nirenberg
entered with Techno Lite was per se invalid because “[t]here is no
evidence that Techno Lite’s shareholders limited their restraint
only for as long as Nirenberg and Drucker remained employees of
Techno Lite.” We need not consider this untimely argument. (In
re Marriage of Khera & Sameer (2012) 206 Cal. App. 4th 1467,
1477-1478 [“‘Obvious reasons of fairness militate against
consideration of an issue raised initially in the reply brief of an
appellant.’” “‘“[P]oints raised in the reply brief for the first time
will not be considered, unless good reason is shown for failure to
present them before”’”].) No such reason has been presented.
19
the broken promise not to compete, whether Drucker and
Nirenberg had a duty to disclose is moot. Nevertheless, as
set forth below, we find the trial court did not err in holding
appellants liable for fraud for concealing their diversion of
orders to Emcod.
Appellants recognize “[a] duty to disclose may . . . arise
. . . ‘in at least three instances: (1) the defendant makes
representations but does not disclose facts which materially
qualify the facts disclosed, or which render his disclosure
likely to mislead;[] (2) the facts are known or accessible only
to defendant, and defendant knows they are not known to or
reasonably discoverable by the plaintiff;[] (3) the defendant
actively conceals discovery from the plaintiff.’” (Warner
Constr. Corp. v. City of Los Angeles (1970) 2 Cal. 3d 285, 294,
fns. omitted.)
All three instances are present here. First, appellants
represented that Emcod would not compete with Techno Lite
but failed to disclose their intention to do so. Second,
Drucker admits he never told Techno Lite’s owners that
Emcod was selling to Techno Lite customers the same
products Techno Lite sold, and because Drucker was the
individual managing Techno Lite, these facts were not
reasonably discoverable by Techno Lite. Finally, appellants
took pains to conceal their activities from Techno Lite, for
example writing an e-mail stating: “We have to be very
careful who we contact until we leave here. . . . We can only
go after accounts we trust. We can’t risk Magnitude [Shafrir
Romano’s company], Shafrir calling David [Tour] or Stefan
[Poenitz] saying we are taking over with Emcod.”
20
Appellants’ arguments to the contrary are unavailing.
They contend that because Drucker’s and Nirenberg’s
continued employment was conditioned on Emcod’s not
competing with Techno Lite, this created a “concomitant
duty by the employer to reasonably monitor a breach.”
Appellants’ only authority for this proposition, Foley v.
Interactive Data Corp. (1988) 47 Cal. 3d 654, is inapplicable.
Foley holds “[t]he presumption that an employment
relationship of indefinite duration is intended to be
terminable at will is . . . ‘subject, like any presumption, to
contrary evidence. This may take the form of an agreement,
express or implied, that . . . the employment relationship will
continue indefinitely, pending the occurrence of some event
such as the employer’s dissatisfaction with the employee’s
services or the existence of some “cause” for termination.’”
(Id. at p. 680.) Nothing in Foley holds that an employee’s
promise not to compete with his employer saddles the
employer with a duty to monitor him for compliance, much
less that a failure to do so absolves the employee of the
consequences of his duplicity.
Appellants argue that because Techno Lite knew
Emcod was a “potentially competing enterprise,” Techno Lite
could not claim to have been deceived when Emcod began to
compete. Appellants miss the point -- Techno Lite did not
claim it was unaware Emcod was a potentially competing
enterprise; Techno Lite was deceived because Drucker and
Nirenberg promised it Emcod would not compete. If
knowledge that individuals sometimes lie and fail to abide
21
by their promises precluded liability for fraud, no fraud
action could ever prevail.
Appellants argue they were “legally free . . . to not
disclose that they were preparing to compete with Techno-
Lite until (according to the trial court) when they decided to
compete in 2011,” citing Bancroft-Whitney, supra, 64 Cal.2d
at pp. 346-347. They argue their lack of duty to disclose
renders their actual competition “a breach of their
employment contract . . . and not . . . [a] fraudulent[]
breach[ of] a duty of disclosure . . . .” But appellants admit a
duty of disclosure arises when “the defendant makes
representations but does not disclose facts which materially
qualify the facts disclosed, or which render his disclosure
likely to mislead.” Bancroft-Whitney did not address such as
situation.6 Here, Drucker and Nirenberg promised
Techno Lite they would not compete with it, without
disclosing that they intended to do so in the future.
Regardless of any inherent duty to disclose their
preparations to compete, their representation that Emcod
would not compete created an independent duty of
disclosure.
6 Bancroft-Whitney simply recognized that “[t]here is no
requirement that an officer disclose his preparations to compete
with the corporation in every case,” while noting that “failure to
disclose such acts will render the officer liable for a breach of his
fiduciary duties only where particular circumstances render
nondisclosure harmful to the corporation.” (Bancroft-Whitney,
supra, 64 Cal.2d at p. 347.)
22
Finally, citing Hoffman v. 162 North Wolfe LLC (2006)
228 Cal. App. 4th 1178, 1193-1194, appellants argue Techno
Lite cannot show reasonable reliance on appellants’
concealment because “the record also does not show that had
Techno-Lite’s shareholders known of the allegedly concealed
facts (i.e., that its employees were going to compete against
it), Techno-Lite would have behaved differently.”7 As
“evidence” of this claim, appellants note that after Drucker
angered the Techno Lite shareholders by rejecting their offer
of Olshan’s shares and instead offering to purchase Techno
Lite, “respondents did not terminate his employment.”
Appellants’ argument falls wide of the mark. First, no
evidence suggests that in offering to purchase Techno Lite,
Drucker revealed Emcod was poaching Techno Lite
customers. Therefore, Techno Lite’s reaction to Drucker’s
offer has no bearing on how Techno Lite would have reacted
had Drucker revealed Emcod was selling to Techno Lite’s
customers. Second, Techno Lite’s shareholders testified they
did not immediately fire Drucker because they had no one to
replace him. After Drucker made his offer, however, the
shareholders began looking for someone to replace him. Had
Drucker not concealed from Techno Lite the true facts
7 (Hoffman v. 162 North Wolfe LLC, supra, 228 Cal.App.4th
at pp. 1193-1194 [justifiable reliance “‘can be proved in a
fraudulent omission case by establishing that “had the omitted
information been disclosed, [the plaintiff] would have been aware
of it and behaved differently”’”].)
23
regarding Emcod’s actions, Techno Lite could have begun
this search earlier.
B. The Court Did Not Err in Finding
Appellants Liable for Interference with
Prospective Economic Advantage
Appellants argue the trial court erred in finding them
liable for interfering with prospective economic advantage
because: (1) “respondent failed to show that appellants
engaged in independently wrongful conduct by Emcod selling
to former or existing Techno-Lite customers”; and (2)
“Techno-Lite did not show that it had economic relationships
with those customers that probably would have resulted in
future economic benefit to Techno-Lite.” As discussed below,
we disagree.
1.
Appellants Committed an
Independently Wrongful Act
Appellants argue the trial court erred in finding that
appellants’ breach of their promise not to compete was an
independently wrongful act because “the purported 2006
non-compete promise was unlawful under B&PC §16600.”
As explained, such a promise was not unlawful.8
8 In a footnote, appellants complain “[t]he trial court’s ruling
fails to show how Emcod became bound to the non-compete
agreement.” When Drucker and Nirenberg promised Techno Lite
would not compete, they were Emcod’s only members and
employees. Their representations on behalf of Emcod were
binding upon it. (Corp. Code, § 17703.01, subd. (a) [“Unless the
(Fn. is continued on the next page.)
24
Accordingly, the court did not err in finding appellants’
breach to be an independently wrongful act.9
2. Substantial Evidence Supports the
Court’s Finding of Future Economic
Benefit
Appellants argue the court erred in finding Techno Lite
“had economic relationships with Diode LED, GM Lighting,
star [sic] Wholesale; . . . Village [View] Lighting and Ark
Lighting that probably would have resulted in an economic
benefit to Plaintiff” because “Drucker testified all were
either already lost or would have been lost by Techno-Lite
regardless of Emcod’s intervention,” and “no evidence in the
articles of organization indicate the limited liability company is a
manager-managed limited liability company, every member is an
agent of the limited liability company for the purpose of its
business or affairs, and the act of any member, including, but not
limited to, the execution in the name of the limited liability
company of any instrument, for the apparent purpose of carrying
on in the usual way the business or affairs of the limited liability
company of which that person is a member, binds the limited
liability company in the particular matter, unless the member so
acting has, in fact, no authority to act for the limited liability
company in the particular matter and the person with whom the
member is dealing has actual knowledge of the fact that the
member has no such authority”].)
9 Because we find appellants’ breach of their promise not to
compete to be an independently wrongful act, we do not address
their argument regarding the wrongfulness of Emcod’s obtaining
an Electrical Testing Laboratories (ETL) certification using data
that arguably belonged to Techno Lite.
25
record . . . contradicts Drucker’s account . . . .” We review
the court’s finding for substantial evidence.
Substantial evidence supports the trial court’s finding
that Techno Lite likely would have realized an economic
benefit if not for appellants’ wrongful actions. It is
undisputed that the customers in question had all previously
purchased product from Techno Lite. This fact alone
supported the inference that Techno Lite’s relationship with
such customers would have continued, thus providing it with
an economic benefit. Indeed, appellants admit Village View
Lighting was an account Techno Lite would not have lost,
absent Emcod’s actions. The sole evidence to challenge this
inference came from Drucker, whom the court expressly
found to be not credible.
Additionally, Drucker himself testified that: (1) Techno
Lite and Emcod both sold the transformers at issue here;
and (2) Emcod was able to buy and deliver the products
ordered when Techno Lite could not because of Drucker’s
personal connections. This testimony supports a finding that
Drucker could have used these same connections to help
Techno Lite, but instead interfered with Techno Lite’s
prospective economic advantage by selling through Emcod.
C. The Court Did Not Err in Denying
Appellants’ Motion for Leave to Amend
Appellants argue the trial court abused its discretion
by denying their request to amend their cross-complaint to
add a breach of contract cause of action regarding Poenitz
and Tour’s failure to sell Techno Lite to Drucker and
26
Nirenberg. The court found that such an amendment would
be prejudicial to Techno Lite, and that the evidence at trial
showed no contract had been formed. Appellants contend
such an amendment would have caused “no prejudice
because the cross-complaint fully and completely alleged the
facts of respondents’ breach of contract; and the evidence
admitted at trial sufficiently proved the breach.” The record
contradicts this claim.
1. The Amendment Would Have
Prejudiced Techno Lite
Preliminarily, contrary to appellants’ contention, they
failed to allege a breach of contract in the cross-complaint.
Indeed, appellants’ counsel admitted this at trial:
“The Court: All right. There’s a motion to
conform pleading to proof or amend the
pleadings. The standards are whether the
facts of legal theories have been changed,
whether the proposed amendment would
prejudice the opposing party. Totally
different cause of action, talking about the
breach of contract for sale of a business;
right? Yeah. And also there was evidence in
this trial that shows there was a -- shows
that Mr. Drucker made a counteroffer. So it
suggests to this court that it wasn’t final. It
was in the negotiating phase, and it didn’t
materialize, and there was no meeting of the
mind.
27
“Mr. Lubega: Well, your honor, there was a
meeting of the mind.
“The Court: You didn’t allege it in your
complaint.
“Mr. Lubega: I know it’s not alleged in the
complaint.”
What appellants alleged in their cross-complaint was
that “[b]y December 13, 2013, Drucker and Nirenberg
believed that all parties were finally in agreement and went
to Techno Lite’s attorney’s office (Martin Reed) with two
checks in the amount of $70,000 in the belief that they were
going there to sign the transaction documents and close the
deal.” “However, at the closing at Reed’s office . . . Tour and
Poenitz demanded an additional $100,000 to close the deal
. . . . In an effort to save the deal, Drucker and Nirenberg
counter offered to pay an additional $50,000. Tour and
Poenitz rejected the counter-offer.”
“The elements of a cause of action for breach of
contract are ‘“(1) the contract, (2) plaintiff’s performance or
excuse for nonperformance, (3) defendant’s breach, and (4)
the resulting damages to plaintiff.”’” (Tribeca Companies,
LLC v. First American Title Ins. Co. (2015) 239 Cal. App. 4th
1088, 1109.) “Mutual assent or consent is necessary to the
formation of a contract.” (Alexander v. Codemasters Group
Limited (2002) 104 Cal. App. 4th 129, 141.) Here, the cross-
complaint explicitly alleged the parties did not mutually
28
consent. And it failed to allege any damages arising from
cross-defendants’ unalleged breach of contract.
Because the cross-complaint contained no allegations
regarding a meeting of the minds or damages caused by the
purported breach, appellants were attempting to allege new
facts when they asked to amend to conform to proof. “If new
facts are being alleged, prejudice may easily result because
of the inability of the other party to investigate the validity
of the factual allegations while engaged in trial or to call
rebuttal witnesses.” (City of Stanton v. Cox (1989) 207
Cal. App. 3d 1557, 1563.) Appellants made no mention of
their intent to move to amend their cross-complaint to add a
breach of contract cause of action until after trial had begun,
and nothing in the record shows cross-defendants had
prepared to defend such an action. The trial court did not
err in finding the amendment of the cross-complaint to be
prejudicial.
2. Any Error in Denying the Motion Was
Harmless
“Contract formation requires mutual consent, which
cannot exist unless the parties ‘agree upon the same thing in
the same sense.’” (Bustamante v. Intuit, Inc. (2006) 141
Cal. App. 4th 199, 208.) “Damages are an essential element
of a breach of contract claim.” (Behnke v. State Farm
General Ins. Co. (2011) 196 Cal. App. 4th 1443, 1468.) As the
trial court recognized, appellants’ own evidence confirmed a
lack of mutual consent, and they presented no evidence of
damages.
29
“Our state Constitution provides that ‘[n]o judgment
shall be set aside, or new trial granted, in any cause, . . . for
any error as to any matter of procedure, unless, after an
examination of the entire cause, including the evidence, the
court shall be of the opinion that the error complained of has
resulted in a miscarriage of justice.’” (Cassim v. Allstate Ins.
Co. (2004) 33 Cal. 4th 780, 800, citing Cal. Const., art. VI,
§ 13.) “‘[A] “miscarriage of justice” should be declared only
when the court, “after an examination of the entire cause,
including the evidence,” is of the “opinion” that it is
reasonably probable that a result more favorable to the
appealing party would have been reached in the absence of
the error.’” (Ibid., citing People v. Watson (1956) 46 Cal. 2d
818, 836.) Because appellants failed to demonstrate either a
meeting of the minds or damages for cross-defendants’
alleged breach of contract, any error in denying leave to
amend was harmless.
D. The Court Did Not Abuse Its Discretion in
Denying Appellants’ Motion for Attorneys’
Fees
On February 14, 2018, the Honorable Virginia Keeny
denied appellants’ motion for attorneys’ fees incurred in
defeating Techno Lite’s misappropriation of trade secrets
claim. Appellants argue the court “abused her discretion by
ignoring the clear evidence in the court’s record of the
objective and subjective speciousness of Techno-Lite’s trade
secrets misappropriation claim, which had been dismissed
on summary adjudication.” We disagree.
30
“If a claim of misappropriation is made in bad faith . . .
the court may award reasonable attorney’s fees and costs to
the prevailing party.” (Civ. Code, § 3426.4.) “Although the
Legislature has not defined ‘bad faith,’ our courts have
developed a two-prong standard: (1) objective speciousness of
the claim, and (2) subjective bad faith in bringing or
maintaining the action, i.e., for an improper purpose.” (FLIR
Systems, Inc. v. Parrish (2009) 174 Cal. App. 4th 1270, 1275.)
“Objective speciousness exists where the action superficially
appears to have merit but there is a complete lack of
evidence to support the claim.” (Id. at p. 1276.) Subjective
bad faith “‘means simply that the action or tactic is being
pursued for an improper motive. Thus, if the court
determines that a party had acted with the intention of
causing unnecessary delay, or for the sole purpose of
harassing the opposing side, the improper motive has been
found, and the court’s inquiry need go no further.’” (Gemini
Aluminum Corp. v. California Custom Shapes, Inc. (2002) 95
Cal. App. 4th 1249, 1263, quoting Summers v. City of
Cathedral City (1990) 225 Cal. App. 3d 1047, 1072; see also
Cypress Semiconductor Corp. v. Maxim Integrated Products,
Inc. (2015) 236 Cal. App. 4th 243, 260 [a party brings an
action in subjective bad faith if it is brought “‘for an
improper purpose’”].) “[I]nsofar as the ruling [on a motion
under Civil Code section 3426.4] depends on questions as to
which the trial court was vested with discretion, we will
disturb its action only insofar as we are able to conclude that
its discretion was abused.” (Cypress, supra, at p. 253.)
Citing People v. Jackson (2005) 128 Cal. App. 4th 1009, 1018,
31
appellants recognize “[w]here the standard of review is
abuse of discretion, the appellate court examines the ruling
of the trial court and asks whether it exceeds the bounds of
reason or is arbitrary, whimsical or capricious.”
Appellants spend many pages of their opening brief
arguing the court “abused her discretion by ignoring the
clear evidence in the court’s record of the objective and
subjective speciousness of Techno-Lite’s trade secrets
misappropriation claim, which had been dismissed on
summary adjudication.” Setting aside whether the court
correctly concluded the claim was not objectively specious,
we find the court did not abuse its discretion in finding
Techno Lite’s claim was not brought for an improper
purpose.
Appellants argue “[t]he improper purposes . . . were
that Techno-Lite wanted to use the baseless
misappropriation claim to snuff out appellants’ ability to
compete with Techno-Lite as early as possible.” They argue
that “[b]ased on its meritless misappropriation claims and
with scant analysis, Techno-Lite warned [customers and
vendors] of potential legal action if they did business with
appellants.” But the warning in question -- a letter written
by respondent Davis, the operations manager brought in to
replace Drucker -- mentions “trade secrets” only once:
“During their time of employment, both individuals [Drucker
and Nirenberg] used Technolite’s capital, engineering and
trade secrets to development [sic] and establish their own
company, EMCOD.” The rest of the letter discusses issues
such as “gross improprieties” and “acts of conversion and
32
product theft” that took place while Drucker and Nirenberg
were employed by Techno Lite, Techno Lite’s ownership of
products designed by Drucker and Nirenberg while
employed by Techno Lite, and legal action Techno Lite had
filed against Drucker and Nirenberg. Additionally, at the
end of his letter, Davis stated, “Please review the attached;
[sic] California Labor Board Labor Codes [sic] listed below
and contact me with any questions.” He then pasted text
from Labor Code section 2860, and gave summaries of three
cases -- Goodyear Tire & Rubber Co. of Akron, Ohio v. Miller
(9th Cir. 1927) 22 F.2d 353, Aero Bolt & Screw Co. of Cal. v.
Iaia (1960) 180 Cal. App. 2d 728, and Famous Players-Lasky
Corp. v. Ewing (1920) 49 Cal. App. 676 -- all of which
addressed the ownership of designs made by an employee
during employment, and none of which dealt with a
misappropriation of trade secrets. Thus, the letter was
hardly “[b]ased on” Techno Lite’s misappropriation of trade
secrets claim. As the court noted, Techno Lite “brought the
trade secret claim among several other causes of action
which the court found meritorious after a trial.” We do not
find the court’s conclusion that Techno Lite lacked an
improper motive to be arbitrary, whimsical, or capricious.
In any event, Civil Code section 3426.4 does not
mandate an award of attorneys’ fees. The statute expressly
states the court “may” -- not “shall” -- award fees when the
statutory predicates are met. (Civ. Code, § 3426.4; cf. O2
Micro Int’l Ltd. v. Monolithic Power Sys., Inc. (N.D.Cal.
2005) 399 F. Supp. 2d 1064, 1080 [“attorneys’ fees [under
Civil Code section 3426.4] . . . [¶] . . . are not mandatory even
33
if the jury finds willful and malicious misappropriation”].)
As the court stated, “even where there is evidence of bad
faith . . . [Civil Code] Section 3426.4 gives the court
discretion to award fees. There is no equitable basis to
award fees in this case against an employer which itself had
to incur considerable attorneys’ fees to preserve its business
from its former employees’ unscrupulous behavior.”
Appellants cite no authority finding an abuse of discretion
when a court considers the moving party’s conduct in
deciding whether to award fees, and we do not independently
find such consideration to be an abuse. The court did not err
in denying appellants’ motion for fees.
34
DISPOSITION
The judgment and order are affirmed. Respondent is
awarded its costs on appeal.
CERTIFIED FOR PARTIAL PUBLICATION
MANELLA, P. J.
We concur:
WILLHITE, J.
CURREY, J.
35