Filed 12/26/19 Voit v. Chaudhry CA6

NOT TO BE PUBLISHED IN OFFICIAL REPORTS

California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication or ordered published for purposes of rule 8.1115.

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

SIXTH APPELLATE DISTRICT

ROBERT L. VOIT,

Plaintiff and Appellant,

v.

JAGTAR S. CHAUDHRY et al.,

Defendants and Respondents.

H043860

(Santa Clara County

Super. Ct. No. 2015-1-CV285027)

In this action by plaintiff Robert L. Voit for fraud and breach of fiduciary duty against his employer and company executives, the superior court granted defendants’ petition to compel arbitration and denied plaintiff’s motion to disqualify defense counsel for conflict of interest. Plaintiff seeks review of both orders. We find neither order appealable, however, and therefore must dismiss the appeal.

Procedural History

After initiating this action in August 2015, plaintiff filed an amended complaint naming his employer, Zscaler, Inc.; Jagtar Chaudhry (also known as Jay Chaudhry), Zscaler’s co-founder and chief executive officer; and Kailash, the company’s chief architect and co-founder. Proceeding in propria persona, plaintiff asserted three causes of action for fraud against Chaudhry, one cause of action for breach of fiduciary duty against Chaudhry, and one cause of action for fraud against Kailash. In essence, plaintiff alleged that in January 2008, when he joined the company— which was then named SafeChannel, Inc. —Chaudhry represented, through Kailash, that plaintiff would acquire company stock through his employment, and the stock would not be diluted. Plaintiff remained at Zscaler until December 4, 2014.

According to the complaint, the assurance that “ ‘[y]ou won’t be diluted’ was a key representation used to sell people stock in exchange for their service as employees.” In “justifiable reliance” on Chaudhry’s promise, plaintiff “continued to work for Zscaler and thereby continued to purchase equity in the company and continued to contribute to the value of the equity he had already earned.” However, instead of acquiring an increasing amount of equity, as plaintiff believed, his equity share had been reduced through dilution from approximately .19 percent to .065 percent, effectively resulting in “a retroactive pay cut.” Because the dilution was not disclosed to plaintiff, he did not take steps to oppose it.

In the fourth cause of action Chaudhry was alleged to have breached his fiduciary duties to minority stockholders by selling himself shares for inadequate consideration, “thereby diluting other stockholders to his own advantage.” Finally, Kailash was alleged to have engaged in fraud because he “knew of repeated issues of new stock causing dilution, but did not notify plaintiff even though he had previously promised plaintiff non dilution.”

Defendants petitioned the superior court for an order compelling arbitration, citing the arbitration clause in plaintiff’s at-will employment agreement and in the employee handbooks published and distributed three times thereafter. Each of those documents referred to the company’s arbitration policy. The “At Will Employment, Confidential Information, Invention Assignment, and Arbitration Agreement” (Arbitration Agreement) contained the following arbitration provision: “IN CONSIDERATION OF MY EMPLOYMENT WITH THE COMPANY, ITS PROMISE TO ARBITRATE ALL EMPLOYMENT-RELATED DISPUTES, AND MY RECEIPT OF THE COMPENSATION, PAY RAISES AND OTHER BENEFITS PAID TO ME BY THE COMPANY, AT PRESENT AND IN THE FUTURE, I AGREE THAT ANY AND ALL CONTROVERSIES, CLAIMS, OR DISPUTES WITH ANYONE (INCLUDING THE COMPANY AND ANY EMPLOYEE, OFFICER, DIRECTOR, SHAREHOLDER OR BENEFIT PLAN OF THE COMPANY IN THEIR CAPACITY AS SUCH OR OTHERWISE). . . ARISING OUT OF, RELATING TO, OR RESULTING FROM MY EMPLOYMENT WITH THE COMPANY OR THE TERMINATION OF MY EMPLOYMENT WITH THE COMPANY . . . SHALL BE SUBJECT TO BINDING ARBITRATION UNDER THE ARBITRATION RULES SET FORTH IN CALIFORNIA CODE OF CIVIL PROCEDURE SECTION 1280 THROUGH 1294.2 . . . AND PURSUANT TO CALIFORNIA LAW.” The agreement continued by listing a number of disputes embraced within the arbitration provision, including “ANY STATUTORY CLAIMS UNDER STATE OR FEDERAL LAW, INCLUDING, BUT NOT LIMITED TO, CLAIMS UNDER . . . THE SARBANES-OXLEY ACT . . . .”

Similarly, the employee handbooks issued in 2008, 2011, and 2014, which employees were “ ‘required to read and understand,’ ” included a statement of the company’s arbitration policy. The 2013 version, revised and distributed in early 2014, stated (in language modified only slightly from the 2008 version), “In the event of any dispute or controversy arising out of, relating to, or in connection with an employee’s employment, including but not limited to the claims of harassment, discrimination, and wrongful termination, it is the Company’s policy that all such disputes shall be settled by binding arbitration under the Arbitration Rules set forth in California Code of Civil Procedure Section 1280 through 1294.2 . . . and pursuant to California procedural and substantive law . . . The Arbitration Agreement [which each employee must sign as a condition of employment] specifically provides for arbitration of all employment-related claims and waives any right to a trial by jury.” The employee was asked to acknowledge receipt of the handbook and thereby agree that it provided for “arbitration of all employment related claims and waives any right to a trial by jury.”

Plaintiff responded to the petition with a motion to disqualify defense counsel, Wilson Sonsini Goodrich & Rosati, from representing Zscaler and to require separate representation for each named defendant, based on “multiple conflicts of interest that cannot be waived.” According to plaintiff, the attorneys’ loyalty was to Chaudhry, but the damage he had caused affected all stockholders. Not only were there conflicts of interest between Chaudhry and the stockholders—which the board of directors, loyal to Chaudhry, could not waive— but conflicts between Kailash and the stockholders and between Kailash and Chaudhry. Consequently, plaintiff asked the court to prevent injustice by appointing independent counsel for Zscaler and different counsel for Chaudhry and Kailash. And once the law firm was disqualified, there was “no one to sign the pleading until new counsel is found and decides whether or not to re-file”; accordingly, the current pleading “must be stricken.”

After filing his motion to disqualify defense counsel, plaintiff moved to strike defendants’ petition to compel arbitration, in whole or in part. Their entire petition should be stricken, he argued, based on the previously asserted conflicts of interest. The alternative request to strike portions of the petition was based on the assertion that it contained “false and/or irrelevant” statements, within the meaning of Code of Civil Procedure section 436, subdivision (a). On the same day, plaintiff filed his opposition to the petition, arguing that the duties he sought to enforce in his claims did not “result from” his employment at Zscaler.

Defendants opposed the motion to disqualify counsel and replied to plaintiff’s opposition to their petition. Plaintiff’s motion, they argued, should be decided by the arbitrator, not the court. Even if appropriately before the court, defendants added, plaintiff lacked standing to assert a conflict of interest, and in any event, no conflict of interest existed.

The superior court decided both matters on the same day in May 2016. The court found that the arbitration agreement between plaintiff and Zscaler covered all of plaintiff’s claims and was not unconscionable. Accordingly, it stayed the action until the arbitration was completed. In light of that order, the court then denied plaintiff’s motion to disqualify without prejudice, adding, “Although the Court does not find any merit in the motion, Plaintiff may file the motion with the arbitrator once appointed.” Plaintiff appeals from both orders.

Discussion

At the outset defendants have questioned the appealability of the two orders at issue. Their point is well taken. “The right of appeal is statutory and a judgment or order is not appealable unless expressly made so by statute.” (State Farm Fire & Casualty v. Hardin (1989) 211 Cal.App.3d 501, 505 (Hardin); accord, Griset v. Fair Political Practices Com. (2001) 25 Cal.4th 688, 696.) While orders denying petitions to compel arbitration are made appealable by Code of Civil Procedure section 1294, orders compelling arbitration are generally considered interlocutory and thus nonappealable. The rationale behind this rule “is that inasmuch as the order does not resolve all of the issues in controversy, to permit an appeal would delay and defeat the purposes of the arbitration statute.” (Wheeler v. St. Joseph Hospital (1976) 63 Cal.App.3d 345, 353.) In addition, as some courts have pointed out, as an interlocutory decision the order “works no hardship on the litigant because the party who objects to arbitration may win at the arbitration hearing, and if he does not, the issue is reviewable on appeal from the judgment of confirmation.” (See, e.g., Hardin, supra, at p. 506; La Pietra v. Freed (1978) 87 Cal.App.3d 1025, 1031.)

Plaintiff acknowledges this general rule, but he maintains that the order granting the petition is appealable because the petition was filed by an attorney who should have been disqualified. That argument would require review of the order denying disqualification, which itself is not appealable. First, the order was made without prejudice, subject to the determination of the issue by the arbitrator. Thus, the court did not resolve the issue on its merits. Plaintiff’s resort to Code of Civil Procedure section 904.1, subdivision (a)(6) is unavailing, as the order granting the petition is not, as plaintiff suggests, “an order that refuses to grant an injunction, i.e., the disqualification of the attorney submitting the petition.”

The judicial authorities plaintiff nonetheless cites for appealability of this ruling are distinguishable. In Meehan v. Hopps (1955) 45 Cal.2d 213, 218, the superior court had denied the principal defendant’s motion to disqualify plaintiff’s counsel, who had confidential information based on his previous representation of that defendant. The Supreme Court denied the plaintiffs’ motion to dismiss the defendants’ appeal, reasoning that “if Hopps must wait for a determination on appeal from the judgments of his right to exclude the attorneys from disclosing information they had formerly obtained, the damage to him which he now properly seeks to avoid would have been done.” (Ibid.) And in Costello v. Buckley (2016) 245 Cal.App.4th 748, the trial court properly granted the plaintiff’s motion to disqualify the defendant’s attorney, who had confidential information she had previously disclosed during his prior representation of her.

In neither of these cases did the trial court deny a motion to disqualify without prejudice. Moreover, both involved conflicts of interest created by counsel’s representation of the opposing party after having represented the moving party. Such circumstances are not presented here; the theory underlying plaintiff’s motion was that a conflict of interest existed based on representation of the defendants jointly, not based on any conflict arising from confidential information previously acquired from plaintiff or from any duty of loyalty to him. On the contrary, plaintiff relies on the duty of loyalty to Zscaler in arguing that defendants’ counsel cannot represent both the corporation and its principals, particularly Chaudhry. If plaintiff seeks to assert standing to seek disqualification based on his status as a minority stockholder, as is belatedly suggested in his reply brief, he can assert that position in arbitration before proceeding on the merits of the dispute.

As defendants acknowledge, we may review this matter as a petition for writ of mandate if we find exceptional circumstances to justify it. (Zembsch v. Superior Court (2006) 146 Cal.App.4th 153, 160.) Such circumstances may exist when “the matters ordered arbitrated fall clearly outside the scope of the arbitration agreement.” (Ibid.) Plaintiff contends that writ review is justified here because his complaint “seeks to enforce legal duties that are independent of the employment relationship; therefore his claims are not within the scope of his arbitration agreement.” He thus depicts the action as based on “laws regulating securities,” which impose a fiduciary duty to “someone buying stock, whether he is buying it with money or with employment labor.”

But even cast as an effort to enforce duties applicable to other shareholders, this action is not a shareholder derivative action, brought on behalf of the corporation. The fraud alleged in the complaint was based on a false promise and misrepresentations on which plaintiff relied in accepting and continuing employment at Zscaler, “believing that each day, in addition to salary, he earned more equity in the company” and “contribute[d] to the value of the equity he had already earned.” The damage thereby inflicted through defendants’ misrepresentations and concealment of Chaudhry’s dilution was the equity “taken from the plaintiff” and the loss of dividend share, for which he sought compensation and punitive damages.

These allegations were within the scope of the employment agreement plaintiff signed. The provision at issue stated, in all capital letters, that all controversies, claims, or disputes with anyone (including the company and its officers) arising out of, relating to, or resulting from plaintiff’s employment with the company were to be arbitrated under California law. The employee handbook additionally made it clear that “the Arbitration Agreement specifically provides for arbitration of all employment-related claims”; and it reiterated the policy by stating that “any dispute or controversy arising out of, relating to, or in connection with an employee’s employment . . . shall be settled by binding arbitration. This broad inclusion of any dispute arising from his employment must be viewed as applicable to plaintiff’s allegations that he was deceived by defendants’ misrepresentations and concealment of facts made in connection with his acquisition of increasing equity in the company; and that equity was “earned,” not merely by retaining the stock he had been granted upon being hired, but by continuing to work for Zscaler. Thus, the “legal duties” he seeks to enforce are those owed to him as a result of his decision to work for the company; he was promised that if he accepted the offer of employment, he would acquire equity from stock ownership which would never be diluted, and indeed would increase in value. Because the action was brought to compensate him for defendants’ breach of the obligations they had assumed in hiring plaintiff, it was within the scope of the arbitration provision to which he had agreed when beginning his employment. We therefore conclude that the order granting the petition to compel arbitration is not appropriate for writ review. As neither of the challenged orders is appealable, plaintiff’s appeal must be dismissed.

Disposition

The appeal is dismissed.

_________________________________

ELIA, ACTING P. J.

WE CONCUR:

_______________________________

GROVER, J.

_______________________________

DANNER, J.

Voit v. Chaudhry et al.

H043860