Case Name: Netapp, Inc. vs. Nimble Storage, Inc., et al.

Case No.:  1-14-CV-265454

 

As an initial matter the Court in ruling on a demurrer or motion to strike considers only the pleading under attack, any attached exhibits (part of the “face of the pleading”) and any facts or documents for which judicial notice is properly requested and may be granted.  Any purported requests for judicial notice that do not comply with Rule of Court 3.1113(l) are denied.  The Court cannot consider extrinsic evidence in ruling on a demurrer or motion to strike.  Accordingly, the Court has not considered the declaration of Netapp Counsel Karineh Khachatourian, any attached exhibits, or any arguments based upon them.

 

“In reviewing the sufficiency of a complaint against a general demurer, we are guided by long settled rules.  ‘We treat the demurrer as admitting all material facts properly pleaded, but not contentions, deductions or conclusions of fact or law.  We also consider matters which may be judicially noticed.’”  Blank v. Kirwan (1985) 39 Cal.3d 311, 318.  Allegations are not accepted as true on demurrer if they contradict or are inconsistent with facts judicially noticed.  See Witkin, California Evidence (4^th Ed., 2000) 1 Judicial Notice §3(3) (“It has long been established in California that allegations in a pleading contrary to judicially noticed facts will be ineffectual; i.e., judicial notice operates against the pleader.”)  Similarly, facts appearing in exhibits attached to the complaint (part of the “face of the pleading”) are given precedence over inconsistent allegations in the complaint. See Holland v. Morse Diesel Int’l, Inc. (2001) 86 Cal App 4th 1443, 1447.  Attached as Ex. A to the Complaint is a copy of Plaintiff’s “Proprietary Information and Inventions Agreement,” an at-will employment contract that Plaintiff apparently has all employees, including the Individual Defendants here, sign.  Generally, “It is . . . solely a judicial function to interpret a written instrument unless the interpretation turns on the credibility of extrinsic evidence.”  Consolidated Theatres, Inc. v. Theatrical Stage Employees Union (1968) 69 Cal. 2d 713, 724.

 

The original request by Defendant Nimble Storage, Inc. (“Nimble”) for judicial notice of two documents: 1) A copy of the May 12, 2014 Order of the U.S. District Court for the Northern District of California (Hon. Koh) granting in part and denying in part Defendants’ motion to dismiss in the federal action between these same parties, Ex. A, and; 2) A copy of the transcript of the May 8, 2014 hearing on that motion, Ex. B, is GRANTED pursuant to Evid. Code §452(d).  See Citizens for Responsible Open Space v. San Mateo Co. Local Agency Formation Commission (2008) 159 Cal App 4^th 717, 726 fn.4 (taking judicial notice of transcript of court hearing in another case), and Mercury Interactive Corp. v. Klein (2007) 158 Cal App 4^th 60, 73 fn.11 (taking notice of a reporter’s transcript of a hearing in a securities action involving some of the same defendants).

 

Defendant Nimble’s subsequent request, filed with its Reply, for judicial notice of four more documents (exhibits A-D) copies of pleadings from two entirely unrelated federal actions (Ex. A & B) and copes of its moving papers from the federal action between these parties (Ex. C & D) is DENIED.  A precondition to judicial notice in either its permissive or mandatory form is that the matter to be noticed be relevant to the material issue before the Court.  Silverado Modjeska Recreation and Park Dist. v. County of Orange (2011) 197 Cal App 4^th 282, 307, citing People v. Shamrock Foods Co. (2000) 24 Cal 4^th 415, 422 fn. 2.

 

 

Individual Defendants’ Demurrer and Motion to Strike

 

The Individual Defendants’ demurrer to the Complaint’s 7^th cause of action for Intentional Interference with Contractual Relations on the ground that, as alleged against Individual Defendant Weber only, the claim is preempted or superseded by the California Uniform Trade Secrets Act (“CUTSA”).  The CUTSA, Civ. Code §3426.7(b) “preempts common law claims that are ‘based on the same nucleus of facts as the misappropriation of trade secrets claim for relief.’  Depending on the particular facts pleaded, the statute can operate to preempt the specific common claims asserted here: breach of confidence, interference with contract, and unfair competition.”  K.C. Multimedia, Inc. v. Bank of America Tech. & Operations, Inc. (2009) 171 Cal App 4^th 939, 958-959, internal citations omitted, emphasis added.  See also Silvaco Data Systems v. Intel Corp. (2010) 184 Cal.App.4^th 210, 236 (Silvaco), disapproved on other grounds in Kwikset Corp. v. Superior Court (2011) 51 Cal.4^th 310, 337 (“We thus reaffirm that CUTSA provides the exclusive civil remedy for conduct falling within its terms, so as to supersede other civil remedies ‘based upon misappropriation of a trade secret.’”)

 

The demurrer to the 7^th cause of action on this ground is SUSTAINED.  To state a claim for intentional interference with contractual relations a plaintiff must plead (1) a valid contract between plaintiff and a third party, (2) the defendant’s knowledge of this contract, (3) the defendant’s intentional acts designed to induce a breach or disruption of the contractual relationship, (4) actual breach or disruption of the contractual relationship, and (5) resulting damage.  PMC Inc. v. Saban Entertainment, Inc. (1996) 45 Cal. App. 4^th 579, 595.  The only intentional acts designed to induce breach or disruption presently alleged against anyone in the 7^th cause of action are entirely based on the same nucleus of facts as the alleged trade secret misappropriation.  The allegations that Defendant Weber (and Nimble) interfered with other defendants’ contracts with Plaintiff by “inducing” them to breach their contracts by “failing to return NetApp’s Company Documents and Materials when they deleted and/or otherwise made unrecoverable, inaccessible and/or unavailable information contained on their workstations prior to departing,” and “encouraged” them “to take NetApp Company Documents and Materials for the purpose of working at Nimble,” see Complaint at 122-123, cannot be reasonably separated from the allegations of trade secret misappropriation.  They clearly arise from the same nucleus of facts.

 

Plaintiff’s assertion that this claim is “[b]ased on conduct wholly independent of the existence or knowledge of NetApp’s trade secret,” is a bare contention and conclusion the Court does not accept as true on demurrer.  See Blank, supra.  The assertion is untenable as the allegations in the 7^th cause of action regarding “NetApp Company Documents and Materials” cannot be meaningfully separated from the trade secret misappropriation allegations against Weber.  See Complaint at 45-48 and 68.  A similar attempt at artful pleading was rejected by the Sixth District in Silvaco.  “[N]o attempt is made to identify any ‘Silvaco property’ other than the trade secrets supposedly used to create DynaSpice. The non-CUTSA claims therefore do not genuinely allege ‘alternative legal theories’ but are a transparent attempt to evade the strictures of CUTSA by restating a trade secrets claim as something else.”  184 Cal App 4^th at 240.

 

Leave to amend is DENIED as the Court sees no way for the claim to be amended without contradicting present pleading.  See Medina v. Safe-Guard Products (2008) 164 Cal App 4^th 105, 112 fn. 8 (“As the Rutter practice guide states: ‘It is not up to the judge to figure out how the complaint can be amended to state a cause of action. Rather, the burden is on the plaintiff to show in what manner he or she can amend the complaint, and how that amendment will change the legal effect of the pleading.’”)

 

The Individual Defendants’ demurrer to the Complaint’s 8^th cause of action for Unfair Competition on the ground that it fails to state sufficient facts against Individual Defendants Klute and Weber because as alleged against them it is also preempted/superseded by CUTSA is SUSTAINED.

 

The only allegation of Klute’s “unfair” conduct is that she took “NetApp Company Documents and Materials in breach of her employment agreement, failing to return those materials despite NetApp’s request or alternatively, using those materials for the benefit of Nimble in the marketplace, all to the detriment of NetApp, the consumer and competition in the data storage industry.”  Complaint at 131.  No reasonable distinction can be made between these allegations and the trade secret misappropriation allegations against Klute.  See Complaint at 51-56 and 69.  Plaintiff nonetheless again engages in a “transparent attempt to evade the strictures of CUTSA” by stating at 131 that the claim as alleged against Klute is “based on conduct wholly independent of the existence or knowledge of NetApp’s trade secrets.”  This contention is rejected by the Court as, literally, incredible based on the misappropriation of trade secrets allegations.  The allegations against Weber in the 8^th cause of action also clearly arise from the same nucleus of facts as the trade secret misappropriation allegations against him.  Compare Complaint at 133 with 45-48 and 68.

 

Leave to amend the 8^th cause of action as alleged against Klute and Weber is DENIED.  See Medina, supra.

 

The Individual Defendants’ demurrer to 8^th cause of action on the further ground that it fails to allege any unlawful, unfair or fraudulent acts committed by them is MOOT as to Defendants Klute and Weber as the claim is preempted/superseded as alleged against them.  The demurrer to the 8^th cause of action on this sole basis as alleged against Individual Defendants Binning, Glick and Alduino is OVERRULED.  The 8^th cause of action does allege that Binning, Glick and Alduino committed “unfair” and/or “unlawful” acts in allegedly breaching their contracts with Plaintiff.

 

The Court notes that the allegations against Binning, Glick and Alduino in the 8^th cause of action are a complete repetition of the express allegations of these three defendants’ involvement in the alleged “common scheme” to misappropriate trade secrets, even though the 1^st cause of action is not alleged against Binning, Glick, or Alduino.  Compare Complaint at 36-37, 41-44, 57-65 and 122-123 with 129, 132 and 134.  Plaintiff’s assertion that the allegations against these Defendants in the 8^th cause of action are somehow “wholly independent of the existence or knowledge of NetApp’s trade secrets,” despite being identical to allegations that are central to the allegations of misappropriation of trade secrets is again disregarded.

 

To the extent Plaintiff is trying to use the same nucleus of facts to allege claims beyond trade secret misappropriation based on the “Proprietary Information and Inventions Agreement,” attached to the Complaint it has a more fundamental problem.  The “Agreement” states (at “O”) that it is to be interpreted and enforced in accordance with California law.  Under California law claims for breach of contract and for intentional interference with contractual relations must be based on valid contracts. Cal. Bus. & Prof. Code §16600 states: “Except as provided in this chapter, every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.”  “California courts have consistently declared this provision [§16600] an expression of public policy to ensure that every citizen shall retain the right to pursue any lawful employment and enterprise of their choice.  Section 16600 has specifically been held to invalidate employment contracts which prohibit an employee from working for a competitor when the employment has terminated, unless necessary to protect the employer’s trade secrets.  The corollary to this proposition is that competitors may solicit another’s employees if they do not use unlawful means or engage in acts of unfair competition.”  Metro Traffic Control, Inc. v. Shadow Traffic Network (1994) 22 Cal App 4^th 853, 859, internal citations omitted, emphasis added.

 

In addition to the right to work for a competitor, a former employee has the right to compete with his or her former employer, even for the business of those who had been customers of the former employer, provided such competition is legally conducted.  Reeves v. Hanlon (2004) 33 Cal 4^th 1140, 1149.  A former employee’s covenant with his/her former employer is enforceable only to the extent necessary to prevent unfair competition by the former employee.  “In other words, it seems the former employee will be able to restrain by contract only that conduct of the former employee that would have been subject to judicial restraint under the law of unfair competition, absent the contract.”  Metro Traffic, supra, at 579.  A contract may prohibit employees, after termination of their employment, from soliciting their former co-workers to join a new business or a competitor.  Loral Corp. v. Moyes (1985) 171 Cal App 3d 268, 280. Barring or limiting contact with former co-workers that is not initiated by the former employees is another matter.  “Equity will not enjoin a former employee from receiving and considering applications from employees of his former employer, even though the circumstances be such that he should be enjoined from soliciting their applications.”  Id. at 279-280.

 

The “Non-Solicitation of Company Employees” provision of the “Agreement” at “F” states in pertinent part that “During the term of my employment and for one (1) year thereafter, I will not encourage or solicit any employee of the Company to leave the Company for any reason or to accept employment with any other company.  As part of this restriction, I will not interview or provide any input to any third party regarding any such person during the period in question.”  Emphasis added.

 

The notion that one at-will employee may not “encourage” another at-will employee to “accept” other, perhaps better employment, while both are still employed by Plaintiff, or that a former employee who has exercised his or her right to go to work for a competitor may not provide “any input to any third party” regarding his/her former co-workers and cannot interview a former co-worker if they choose to inquire about employment opportunities with the same competitor for an entire year after leaving Plaintiff’s employ goes beyond any necessary protection of trade secrets or confidential information, is not narrowly tailored and infringes upon employees’ rights to compete and to free speech.  “‘Anti-solicitation covenants are void as unlawful business restraints except where their enforcement is necessary to protect trade secrets.’”  Thompson v. Impaxx, Inc. (2003) 113 Cal App 4^th 1425, 1429, quoting Moss, Adams & Co. v. Shilling (1986) 179 Cal App 3d 124, 129.  This renders the entire “Agreement” void.  California courts do not reform employment agreements with overbroad covenants.  “Generally, courts reform contracts only where the parties have made a mistake, and not for the purpose of saving an illegal contract.  Illegal contracts are void.  . . .  [T]he policy of [Bus. & Prof. Code §16600] would be undermined by doing so.  Employers could insert broad, facially illegal covenants not to compete in their employment contracts.  Many, perhaps most, employees would honor these clauses without consulting counsel or challenging the clause in court, thus directly undermining the statutory policy favoring competition.  Employers would have no disincentive to use the broad, illegal clauses if permitted to retreat to a narrow, lawful construction in the event of litigation.”  Kolani v. Gluska (1998) 64 Cal App 4^th 402, 407-408, internal citations omitted.

 

The Individual Defendants’ Motion to Strike allegations regarding breaches of the duty of loyalty from the 2^nd, 3^rd, 4^th, 5^th, 6^th and 7^th cause of action is DENIED.  “[W]e have no intention of creating a procedural ‘line item veto’ for the civil defendant.”  PH II, Inc. v. Superior Court (1995) 33 Cal.App.4^th 1680, 1683.

 

Defendant Nimble’s Demurrer and Motion to Strike

 

Defendant Nimble’s demurrer to the 1^st cause of action for Trade Secret Misappropriation on the ground that it fails to state sufficient facts “because (a) Plaintiff does not allege any specific facts evidencing actual or threatened misappropriation of trade secrets by Nimble directly and (b) the Complaint fails to establish the a basis for secondary liability,” Nimble Demurrer at 1:6-8, is OVERRULED.

 

“Under the [CUTSA], a prima facie claim for misappropriation of trade secrets requires the plaintiff to demonstrate: (1) the plaintiff owned a trade secret, (2) the defendant acquired, disclosed, or used the plaintiff’s trade secret through improper means, and (3) the defendant’s actions damaged the plaintiff.”  Sargent Fletcher, Inc. v. Able Corp. (2003) 110 Cal.App.4^th 1658, 1665.  A “trade secret” is defined as “information, including a formula, pattern, compilation, program, device, method, technique, or process, that: (1) Derives independent economic value, actual or potential, from not being generally known to the public or to other persons who can obtain economic value from its disclosure or use; and (2) Is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.”  Civ. Code §3426.1(d).

 

Nimble does not contend that Plaintiff has insufficiently described the alleged trade secrets or failed to allege its ownership and Plaintiff has sufficiently alleged the other elements of a prima facie misappropriation claim in the Complaint at 1-2, 26-37 and 71-75.  Plaintiff’s ability to prove those allegations are beyond the scope of a demurrer.

 

Defendant Nimble’s demurrer to the 7^th cause of action on the basis that it is preempted/superseded by CUTSA as alleged against it is SUSTAINED without leave to amend for the same reasons as the demurrer by Individual Defendant Weber discussed above.

Defendant Nimble’s Demurrer to the 8^th cause of action on the basis that it is also preempted/superseded by the CUTSA as alleged against it is SUSTAINED without leave to amend.  The allegations against Nimble in the Complaint at 130 cannot be reasonably distinguished from the allegations at 1-2, 26-37, and 71-75 that form the basis of the CUTSA claim against Nimble.

 

An additional and independent basis for sustaining Nimble’s demurrer to the 8^th cause of action is that the Complaint admits on its face that Nimble is a direct competitor of Plaintiff.  See Complaint at 26.  “When a plaintiff who claims to have suffered injury from a direct competitor’s ‘unfair’ act or practice invokes section 17200, the word ‘unfair’ in that section means conduct that threatens an incipient violation of an anti-trust law, or violates a policy or spirit of one of those laws because its effects are comparable to or the same as a violation of that law, or otherwise significantly threatens or harms competition.”  Cel-Tech Communications, Inc. v. Los Angeles Cellular Telephone Co. (1999) 20 Cal 4^th 163, 187.  The Supreme Court has thus expressly limited the conditions under which a business may bring an unfair competition claim against a business competitor, and the Complaint as presently stated contains no allegations of conduct that could be described as incipient violations of anti-trust law.

 

Defendant Nimble’s Motion to Strike portions of paragraph 121 and all of paragraph 122 is DENIED as Moot in light of the Court’s ruling on its’ demurrer to the 7^th cause of action.

 

Nimble’s Motion to Strike portions of paragraphs 3, 4, 33, 36, and 37 that allege acts by or refer to individuals not named as defendants is DENIED.  These allegations are not clearly irrelevant to the alleged misappropriation of trade secrets by Nimble.