216 F. Supp. 3d 1012
N.D. Cal.2016Background
- Plaintiff E.D.C. Technologies, Inc. (EDC) develops an Internet-based hot water management system; Jason Pavlos was its lead operations technician who wrote code and installed controllers.
- While employed, Pavlos and co-defendant Jim Seidel allegedly developed a competing venture (GreenBox) using EDC hardware, software specifications, and confidential information; Pavlos was later terminated and worked for GreenBox.
- EDC sued defendants under the CFAA and SCA (federal claims) and several California state-law claims, including breach of contract (Count 5) and breach of duty of loyalty (Count 7).
- Pavlos moved to dismiss Counts 5 and 7 under Rule 12(b)(6), arguing (1) the Confidentiality Agreement is invalid as an unlawful non-compete under Cal. Bus. & Prof. Code § 16600, and (2) he owed no duty of loyalty because he was not a fiduciary or managerial employee.
- The Confidentiality Agreement restricts use of confidential information and prohibits planning/organizing competing business activity, soliciting employees, and soliciting customers.
- The court denied the motion to dismiss as to both counts, finding EDC sufficiently pleaded a contract and that ordinary employees, including Pavlos, owe a duty of loyalty to their employer.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Breach of contract (Count 5) — existence and enforceability of Confidentiality Agreement | EDC: valid confidentiality agreement protects trade secrets; Pavlos violated it by using EDC property and confidential information and soliciting employees/customers | Pavlos: Agreement is effectively a non-compete/non-solicit invalid under Cal. Bus. & Prof. Code § 16600; some provisions do not reference confidential information and thus are void | Court: Denied dismissal. At pleading stage EDC adequately alleged a contract and breaches; parsing or invalidating provisions is premature; severance doctrine may preserve contract to protect trade secrets |
| Breach of duty of loyalty (Count 7) — whether Pavlos owed duty of loyalty | EDC: Pavlos, as lead operations technician/employee, owed a duty of loyalty and breached it by developing a competing business while employed | Pavlos: Duty of loyalty requires a fiduciary or managerial role; lower-level employees owe no such duty | Court: Denied dismissal. Citing Restatement and Ninth Circuit precedent, court held ordinary employees owe a duty of loyalty; EDC pleaded relationship, breaches, and damages sufficiently |
Key Cases Cited
- Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (standards for pleading plausibility)
- Ashcroft v. Iqbal, 556 U.S. 662 (scope of plausible pleading and inapplicability of conclusory allegations)
- Oasis West Realty, LLC v. Goldman, 51 Cal.4th 811 (elements of breach of contract under California law)
- Edwards v. Arthur Andersen LLP, 44 Cal.4th 937 (§ 16600 prohibits restraints on engaging in lawful business; courts generally condemn noncompetes)
- Muggill v. Reuben H. Donnelley Corp., 62 Cal.2d 239 (exception to § 16600 for reasonable protection of trade secrets/confidential information)
- Metro Traffic Control, Inc. v. Shadow Traffic Network, 22 Cal.App.4th 853 (application of trade-secret exception to restraints)
- Gordon v. Landau, 49 Cal.2d 690 (enforceability of agreements not to use confidential customer lists)
- Eckard Brandes, Inc. v. Riley, 338 F.3d 1082 (Ninth Circuit discussion recognizing duty of loyalty for ordinary employees)
- Dollar Tree Stores Inc. v. Toyama Partners LLC, 875 F.Supp.2d 1058 (doctrine of severance to preserve enforceable contract provisions)