Case Name: Shang Lai v. IP-Semantics LLC, et al.
Case No.: 1-14-CV-270429

This is a business dispute involving defendant and cross-complainant IP-Semantics LLC (“IP”); its former business associate, plaintiff and cross-defendant Shang Lai (“Lai”); and Lai’s company, cross-defendant Gigasource. On September 10, 2014, Lai filed this action for breach of contract and related claims against IP. On November 7, 2014, IP cross-complained against Lai and Gigasource (collectively, “Cross-Defendants”), asserting claims for: (1) breach of contract (against Lai); (2) misappropriation of trade secrets (against Cross-Defendants); (3) conversion (against Cross-Defendants); (4) intentional interference with prospective economic advantage (against Cross-Defendants); (5) breach of covenant of good faith and fair dealing (against Lai); (6) fraud by intentional misrepresentation (against Lai); (7) fraud by concealment (against Lai); (8) intentional misrepresentation (against Lai); (9) negligent misrepresentation (against Lai); (10) unconscionability (against Lai); (12) unfair competition (against Cross-Defendants); and (13) declaratory relief (against Cross-Defendants).

On December 18, 2014, Cross-Defendants demurred to the first through ninth and twelfth through thirteenth claims in the cross-complaint on the grounds that each of these causes of action fails to state a claim (Code Civ. Proc. (“CCP”), § 430.10, subd. (e)) and the first cause of action fails to state whether the contract at issue is written, oral, or implied by conduct (CCP, § 430.10, subd. (g)). Cross-Defendants also moved to strike IP’s answer and cross-complaint on the ground that they were filed as a single document in violation of CCP section 428.40. (CCP, § 436, subds. (a) and (b).) On January 27, 2015, IP filed papers in opposition to both motions.

I. Motion to Strike

Cross-Defendants contend that IP’s answer and cross-complaint should be stricken because they were filed as a single document in violation of CCP section 428.40, which requires that a cross-complaint be a “separate document.”

To avoid confusion from the integration of cross-claims with affirmative defenses, section 428.40 requires that a cross-complaint be complete and sufficient in itself, unaided by averments of the answer. (See Luse v. Peters (1933) 219 Cal. 625, 630.) Here, IP’s cross-claims each incorporate the allegations of the entirety of IP’s answer/cross-complaint, including affirmative allegations pleaded in support of IP’s affirmative defenses. Thus, IP’s cross-complaint violates both the letter and the intent of section 428.40, and Cross-Defendants’ motion to strike both versions of IP’s combined answer/cross-complaint is GRANTED WITH 10 DAYS’ LEAVE TO AMEND.

Although it need not do so in light of this ruling, the Court will address Cross-Defendants’ demurrer to avoid the need for multiple rounds of pleadings and motions. In doing so, the Court will assume that IP intended to support its cross-claims with the allegations contained in the general “facts” section of its answer/cross-complaint in combination with the allegations contained in the cross-claims themselves.

II. Demurrer to the First Cause of Action for Breach of Contract and the Fifth Cause of Action for Breach of the Implied Covenant of Good Faith and Fair Dealing

The demurrer to the first cause of action is SUSTAINED WITH 10 DAYS’ LEAVE TO AMEND for failure to state a claim. (See Heritage Pacific Financial, LLC v. Monroy (2013) 215 Cal.App.4th 972, 993 [written contract must be pleaded by its terms set out verbatim or by its legal effect, with the substance of the relevant terms alleged].) While the cross-complaint sets forth alleged breaches of the parties’ agreement, all of the relevant terms of the agreement are not evident from these allegations. Furthermore, although IP contends that the agreement at issue is attached to Lai’s complaint, the cross-complaint does not so allege.

The demurrer to the fifth cause of action is also SUSTAINED WITH 10 DAYS’ LEAVE TO AMEND, since a claim for breach of the implied covenant of good faith and fair dealing requires the plaintiff to allege the terms of the underlying contract. (See Guz v. Bechtel National, Inc. (2000) 24 Cal.4th 317, 349-350.)

III. Demurrer to the Second Cause of Action for Misappropriation of Trade Secrets

In the second cause of action, IP references both the breach of a “written agreement whereby Lai promised to protect confidential information” (Cross-Complaint, ¶ 33) and Lai’s “misappropriation of trade secrets” (id., ¶ 37).

Again, to the extent that this claim is premised upon Lai’s asserted breach of contract, IP fails to set forth the terms of the contract at issue. (See Heritage Pacific Financial, LLC v. Monroy, supra, 215 Cal.App.4th at p. 993.)

To the extent that the claim is truly one for trade secret misappropriation, IP alleges only that certain categories of information were “confidential,” which is inadequate to state a claim on this theory. (See Civ. Code § 3426.1, subd. (d) [“‘Trade secret’ means information …that: (1) Derives independent economic value … from not being generally known to the public…; and (2) Is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.”]; Hirel Connectors, Inc. v. DOD of the United States (C.D. Cal., Apr. 14, 2003, No. CV 01-11069 DT (BQRx)) 2003 U.S. Dist. LEXIS 28852, *27-34 [complaint must identify trade secrets and include allegations that the plaintiff derived independent economic value from them and made reasonable efforts to maintain their secrecy].) Particularly given that IP combines contractual and trade secret theories of liability in a single claim, it is impossible to determine which categories of information IP alleges are trade secrets as opposed to information that Lai was contractually obligated not to disclose.

The demurrer to the second cause of action for misappropriation of trade secrets is accordingly SUSTAINED WITH 10 DAYS’ LEAVE TO AMEND.

IV. Demurrer to the Third Cause of Action for Conversion

The demurrer to the third cause of action for conversion is SUSTAINED WITH 10 DAYS’ LEAVE TO AMEND. (See IB Melchior v. New Line Productions, Inc. (2003) 106 Cal.App.4th 779, 792 [“Conversion requires interference with tangible rather than intangible property. [Citation.] Interference with intangible property would constitute plagiarism or misappropriation.”]; Cross-Complaint, ¶ 41 [alleging that IP converted “providers and customers” and “confidential information”].) Again, to the extent that this claim arises from Lai’s alleged breach of contract, IP fails to plead the terms of the contract at issue.

V. Demurrer to the Fourth Cause of Action for Intentional Interference with Prospective Economic Advantage

The demurrer to the fourth cause of action is SUSTAINED WITH 10 DAYS’ LEAVE TO AMEND. To state a claim for intentional interference with prospective economic advantage, IP must identify the specific relationship or relationships disrupted by Cross-Defendants and plead facts establishing a probability of future economic benefit to IP associated therewith. (See Korea Supply Co. v. Lockheed Martin Corp. (2003) 29 Cal.4th 1134, 1164 [plaintiff “must allege the existence of an economic relationship with some third party that contains the probability of future economic benefit to the plaintiff”]; see also Am. Rena Int’l Corp. v. Sis-Joyce Int’l Co. (9th Cir. 2013) 534 F. App’x. 633, 636 [claim requires “the existence of at least one specific economic relationship between plaintiffs and third parties that may economically benefit plaintiffs”].) Here, IP alleges that Lai signed a contract with “CETECOM” and “concealed design wins such as Lexense win [sic],” but does not explain its own relationship to these entities. (Cross-Complaint, ¶ 12.)

VI. Demurrer to the Sixth Through Ninth Causes of Action for Fraud and Negligent Misrepresentation

The demurrer to the sixth through ninth causes of action is SUSTAINED WITH 10 DAYS’ LEAVE TO AMEND. Fraud and negligent misrepresentation must be pleaded with particularity and by facts that show how, when, where, to whom, and by what means the representations were tendered. (See Charnay v. Cobert (2006) 145 Cal.App.4th 170, 185, fn. 14.) IP’s allegations lack this detail.

VII. The Twelfth Cause of Action for Unfair Competition

The demurrer to the twelfth cause of action is SUSTAINED WITH 10 DAYS’ LEAVE TO AMEND. (See Krantz v. BT Visual Images, LLC (2001) 89 Cal.App.4th 164, 178 [where claim for “relief under the unfair competition law (Bus. & Prof. Code, §17200 et seq.)” is based upon conduct alleged in support of preceding claims for relief, it will “stand or fall depending on the fate of the antecedent substantive causes of action”].)

VIII. The Thirteenth Cause of Action for Declaratory Relief

The demurrer to the thirteenth cause of action for declaratory relief is SUSTAINED WITH 10 DAYS’ LEAVE TO AMEND. Based on the allegations of the cross-complaint as currently pleaded, the Court finds that declaratory relief is not “necessary or proper at the time under all the circumstances.” (See Code Civ. Proc., § 1061; Cal. Ins. Guar. Ass’n v. Super. Ct. (Jakes at the Shore, Inc.) (1991) 231 Cal.App.3d 1617, 1624 [the object of the declaratory relief statute is to afford a new form of relief where needed and not to furnish a litigant with a second cause of action for the determination of identical issues]; Cardellini v. Casey (1986) 181 Cal.App.3d 389, 396 [claim for declaratory relief inappropriate where the rights of the complaining party “have crystallized into a cause of action for past wrongs” and “no continuing relationship exists to justify a declaration of future rights”]; Otay Land Co. v. Royal Indem. Co. (2008) 169 Cal.App.4th 556, 562563 [on demurrer, courts will evaluate whether the factual allegations of a complaint for declaratory relief reveal that an actual controversy exists between the parties; determination that declaratory relief is not necessary or proper under the circumstances is discretionary].)

IX. Request for Judicial Notice

Cross-Defendants’ request for judicial notice, submitted with their reply papers, is DENIED. Email correspondence between the parties is not an appropriate subject of judicial notice.