LINE: 5 19-CIV-01019 FREEDOM DEBT RELIEF, LLC VS. ACCREDITED DEBT RELIEF, LLC, ET AL.

FREEDOM DEBT RELIEF, LLC ACCREDITED DEBT RELIEF, LLC
ALLEN RUBY

FREEDOM DEBT RELIEF, LLC UNOPPOSED MOTION TO SEAL TENTATIVE RULING:
Plaintiff Freedom Debt Relief, LLC’s Motion to Seal, filed 4-12-19, is GRANTED. The following documents, which were conditionally filed under seal on 4-2-19, shall remain sealed: (1) the un-redacted version of Exhibits A-E to Defendant Accredited Debt Relief, LLC’s Request for Judicial Notice in Support of Defendant’s Demurrer to Plaintiff’s Complaint; and (2) the unredacted version of Defendant’s Memorandum of Points and Authorities in Support of Defendant’s Notice of Demurrer to Plaintiff’s Complaint.

The Court having considered the papers filed in connection with this motion, and for good cause appearing, hereby finds: (1) there exists an overriding interest in Freedom’s confidentiality rights that overcomes the right of public access to the records; (2) the overriding interest supports sealing the records; (3) a substantial probability exists that the overriding interest will be prejudiced if the records are not sealed; (4) the proposed sealing is narrowly tailored; and (5) no less restrictive means exist to achieve the overriding interest justifying sealing.

If the tentative ruling is uncontested, it shall become the order of the Court, pursuant to Rule 3.1308(a)(1), adopted by Local Rule 3.10, effective immediately, and no formal order pursuant to Rule 3.1312 or any other notice is required as the tentative ruling affords sufficient notice to the parties.

May 29, 2019 Law and Motion Calendar PAGE 7 Judge: HONORABLE SUSAN GREENBERG, Department 03 ________________________________________________________________________ 9:00 LINE: 6 19-CIV-01019 FREEDOM DEBT RELIEF, LLC VS. ACCREDITED DEBT RELIEF, LLC, ET AL.

FREEDOM DEBT RELIEF, LLC ACCREDITED DEBT RELIEF, LLC
ALLEN RUBY

DEFENDANT ACCREDITED DEBT RELIEF, LLC’S DEMURRER TO PLAINTIFF FREEDOM DEBT RELIEF, LLC’S 2-26-19 COMPLAINT TENTATIVE RULING:

Defendant Accredited Debt Relief, LLC’s Demurrer to Plaintiff Freedom Debt Relief, LLC’s 226-19 Complaint is ruled upon as set forth below.

The Demurrer to the First Cause of Action for breach of contract is OVERRULED. Defendant argues the breach of contract claim fails to state a cause of action (Code Civ. Proc. § 430.10(e)) because (a) if § 8.1 is properly construed, the Complaint does not allege a breach; (b) § 8.1 is an unenforceable non-compete provision; and (c) the liquidated damages clause is unenforceable. The Court addresses each argument in turn.

First, the Court finds that the Complaint sufficiently alleges a breach of § 8.1. Defendant argues no breach is alleged because, if properly construed, § 8.1 does not require exclusivity (i.e., Defendant argues the contract does not bar Defendant from referring customers to third parties), and because the Complaint does not allege that Defendant engaged in Plaintiff’s “Business” of “operating a debt settlement, debt negotiation, debt resolution and debt management services business.” § 8.1. To withstand a Demurrer, Plaintiff need only allege a breach based on a reasonable interpretation of the contract—one that is not “clearly erroneous.” Marzec v. Cal. Pub. Emps. Ref. Sys. (2015) 236 Cal.App.4th 889, 909. § 8.1 expressly refers to an “Exclusivity Period.” When using these words, it is reasonable to assume the parties meant what they said. Further, § 8.1 states that “except in [Defendant’s] capacity as an authorized independent contractor of [Plaintiff],” neither Defendant nor its affiliates, owners, etc. “shall, directly or indirectly, offer, sell, provide or otherwise engage in the Business in [Plaintiff’s] permissible geography …”). This language is reasonably susceptible to Plaintiff’s proposed interpretation, namely, that during the contract period, Defendant could offer and/or sell debt settlement services in the stated geographic region only in its capacity as Plaintiff’s independent contractor. The Complaint sufficiently alleges that Defendant breached § 8.1 by offering and/or selling debt settlement services to customers and referring them to Defendant’s parent/owner. See, e.g., Compl. ¶¶3, 15. Further, to the extent § 8.1 is ambiguous, parol evidence would be admissible to clarify its meaning, which is an issue beyond the scope of a Demurrer. Thus, the Complaint sufficiently alleges a breach of the contract.

Second, at the Demurrer stage, the Court declines to find § 8.1 unenforceable in its entirety based on its non-compete language. It is worth noting that Defendant’s non-compete argument is based on a portion of § 8.1 not asserted in the case—that is, it is based on non-compete language applicable to the 12-month period post-termination, which the Complaint does not allege has been breached. Even if the post-termination language violates Bus. & Prof. Code § 16600 and is invalid (an issue the Court need not reach on Demurrer), due to the severability clause (§ 13.3), the remainder of § 8.1 governing the period during the contract would presumably still be enforceable. And while Defendant also argues that the post-termination non-compete language renders the entirety of § 8.1 unenforceable, Defendant does so by citing cases that, at least arguably, are inapposite because they deal with the employment context, which is not the situation here. See Opp. at 10, fn 1 (citing authority suggesting that outside the employment context, courts have not rigidly applied § 16600, but instead have applied a reasonableness test. See Ixchel Pharma, LLC v. Biogen Inc., 2018 WL 558781, at *4 (ED. Cal. Jan. 25, 2018) (“Whether or not § 2.13 is a non-compete clause, because it falls outside of the employment context, the court would analyze its legality under the antitrust law’s Rule of Reason and not the narrower rule of per se illegality § 16600 that applies to non-compete agreements in employment contracts . . . . California courts have concluded that Section 16600 does not apply outside of the employment context”).

The Court need not reach the parties’ dispute regarding the liquidated damages clause because even if it were invalid (an issue the Court does not reach), the Complaint would still sufficiently allege damage from the alleged breach of contract. The Complaint alleges Plaintiff “has suffered and continues to suffer damages in amount to be determined at trial.” ¶38. It further alleges: “The Agreement also entitles [Plaintiff] to liquidated damages ….”. Both the body of the Complaint and the Prayer state that Plaintiff seeks compensatory damages in an amount to be determined, and seeks liquidated damages. ¶8; Prayer. A demurrer will not be sustained unless the complaint, liberally construed, fails to state a cause of action on any theory. Brousseau v. Jarrett (1977) 73 Cal.App.3d 864. Here, even if the liquidated damages clause (§ 8.4) were invalid, the Complaint would still sufficiently allege damage from the alleged contract breach.

The Demurrer to the Second Cause of Action for breach of the implied covenant of good faith and fair dealing is also OVERRULED. Breach of a specific provision of the contract is not a necessary prerequisite to breaching the implied covenant, nor is it necessary that the party’s conduct be dishonest. Carma Developers v. Marathon Dev. California, Inc., 2 Cal.4th 342, 3725 (1992). The covenant of good faith can be breached for objectively unreasonable conduct, regardless of the actor’s motive. Id. Difficulty arises in deciding whether such conduct, though not prohibited, is nevertheless contrary to the contract’s purposes and the parties’ legitimate expectations. Id.

Here, the Complaint alleges that after providing 30 days notice of its intent to terminate the contract, after years of referring all customers to Plaintiff, and after informing Plaintiff that it would “continue to enroll customers in [Plaintiff’s] debt resolution program for 30 days …”, immediately after being acquired, Defendant began referring new customers to Defendant’s new owner, which caused a dramatic drop in the number of referrals to Plaintiff. The Complaint further alleges that Defendant, for the first time in the parties’ five-year relationship, took the position that the contract does not call for exclusivity (i.e., does not bar Defendant from referring customers to third parties, including Defendant’s new owner). Whether or not Defendant breached § 8.1, at the Demurrer stage, a reasonable argument can be made that Defendant violated the spirit of the contract and the expectations of Plaintiff by directly helping its new owner compete with Plaintiff. Arguably, when entering into the contract and negotiating the “Exclusivity Period” language, Plaintiff had a reasonable expectation Defendant would not indirectly compete with Plaintiff by referring customers to Defendant’s new owner. See Harrison v. Cooke (1967) 213 Cal.App.2d 527 (Defendant, after having signed a non-compete agreement with Plaintiff, breached the implied covenant by thereafter loaning money to Defendant’s son to help the son start a new business that directed competed with Plaintiff). Thus, the implied covenant claim is sufficiently plead at the Demurrer stage.

Defendant’s unopposed Request for Judicial Notice is GRANTED. Evid. Code § 452(h). If the tentative ruling is uncontested, it shall become the order of the Court, pursuant to CRC Rule 3.1308(a)(1), adopted by Local Rule 3.10. If the tentative ruling is uncontested, DEMURRING PARTY is directed to prepare, circulate, and submit a written order reflecting this Court’s ruling verbatim for the Court’s signature, consistent with the requirements of CRC Rule 3.1312. The proposed order is to be submitted directly to Judge Susan L. Greenberg, Department 3.