The opinion of the court was delivered by: Susan Illston United States District Judge For the Northern District of California
ORDER GRANTING IN PART AND DENYING IN PART PLAINTIFF'S MOTION FOR PARTIAL SUMMARY JUDGMENT; GRANTING DEFENDANT'S MOTION FOR PARTIAL SUMMARY JUDGMENT
On July 18, 2008, the Court heard argument on the parties' cross-motions for partial summary judgment. For the reasons set forth below, the Court GRANTS in part and DENIES in part plaintiff's motion, and GRANTS defendant's motion.
Plaintiff The Householder Group ("THG"), an Arizona Limited Liability Limited Partnership, filed this action on January 29, 2007 against defendant Randy Fuss. The complaint alleges that THG is a "financial planning and investment advisory firm, engaged in the business of selling life insurance, securities, mutual funds and other investment products, and providing related financial, retirement, investment and other advisory and consulting services." First Amended Complaint ¶ 6.
In June 2003, defendant Fuss met with representatives from THG to explore the possibility of working with THG. Fuss Decl. ¶¶ 2-4. Defendant decided to join THG, and on July 10, 2003, he signed an "Associate Confidentiality" agreement, which states in relevant part:
The undersigned ASSOCIATE agrees to keep confidential and not to use or to disclose to others either during or after the term of his/her association the confidential technology, computer software, proprietary information, customer lists, trade secrets, marketing and/or seminar materials, which he/she gains knowledge of through his/her association with THG except for any use or disclosure in the ordinary course of business during the term of his/her employment. Pl's Ex. 1. Between July and September 2003 defendant engaged in a number of tasks on behalf of Householder. These tasks included participating in conference calls, travel, leasing and furnishing office space, forming an S-corporation, memorizing the THG seminar script, reviewing and familiarizing himself with brokerage operations, recruiting and hiring an employee, and transferring securities and insurance licenses to SunAmerica Securities. Fuss Decl. ¶ 6. Defendant estimates that he spent approximately 350 hours and $41,000 of his own money to complete those tasks. Id. ¶ 7. In September 2003, THG flew defendant to Arizona for a mock sales presentation referred to as a "dry run" seminar. Id. ¶9. The two day event included a number of agenda items, the bulk of which was operations training and delivering a final dress rehearsal of the seminar. Id. ¶ 10. Defendant states that during a one hour meeting with Todd Bergeron, THG's Executive Vice President, Mr. Bergeron informed defendant for the first time that he was required to sign a Branch Office Agreement ("BOA") in order to affiliate with THG as a branch manager. Id. ¶ 11. Defendant signed the BOA, under which the parties agreed that defendant would work as an independent contractor for THG, and that defendant would establish, develop and operate a THG branch office in Santa Rosa, California. Pl's Ex. 9. Under the agreement, THG agreed to disclose to and license defendant to use THG's proprietary methods, The Householder Group trade name, and to provide training, consulting and support services during the term of the agreement to assist defendant with the development of the Santa Rosa branch office. Id. Several of the BOA's provisions are relevant to analyzing the instant motions. Section III of the BOA, "Consulting Services and Marketing Systems," states that the "services and intellectual property to be provided by THG . . . are of very significant value," and that "[t]he normal time period required for recoupment of the investment made by THG is thirty-six months during which THG will suffer losses occasioned by its forbearance in associating with other revenue producing investment advisors in the Branch Office area." Id. at 3. The BOA further provides that "[a]s payment for the services provided Manager by THG," Fuss agreed to pay Householder a "one time fee" of $150,000; both parties refer to this as the "Integration Fee." Id.
The BOA also contains several provisions related to confidentiality. One provision, "Proprietary and Confidential Information An[d] Use of Name," states, inter alia, The Manager agrees to keep confidential and not to use or to disclose to others, except his or her employees and Registered Representative assistants, either during or after the term of this AGREEMENT, the proprietary information, customer or prospect lists, computer database, marketing and/or seminar materials or other trade secrets which he/she gains knowledge of through the Manager's association with THG, or the Related Entities . . . . Id. Another provision, "Prohibited Uses and Damage From Uses of Certain Proprietary Information," states, inter alia, "Manager shall not, either directly or indirectly, either for himself/herself or any other person, corporation, firm, partnership or other entity, employ or utilize any of the proprietary information or trade secrets of THG for any purpose whatsoever." Id. at 4.
The BOA states that the term of the agreement is three years, "but it shall automatically be renew[ed] for succeeding periods of one year" unless either party provides timely written notification as specified in the BOA. Id. at 6. The BOA also contains a liquidated damages clause, which provides in relevant part:
Upon the termination of this AGREEMENT by Manager, Manager shall immediately pay to THG, as liquidated damages, a sum of money which is equal to sixty percent (60%) of the Manager's Gross Revenue generated during the last full year of this AGREEMENT. Id.
On January 13, 2004, the parties signed an "Addendum to Branch Office Agreement" in which Fuss and THG agreed that during the term of the agreement, payments toward satisfying a $30,000 loan, which Fuss had obtained from Householder's broker-dealer, AIG Financial Advisors ("AIG")*fn1 , would be deducted from Fuss' share of the revenues generated through the Santa Rosa branch until paid in full. FAC ¶ 17 & Ex. B. On June 30, 2006, prior to completing payment of the $150,000 integration fee and prior to the expiration of the term of the agreement, defendant gave written notice to THG of his immediate "resignation" from THG and from his affiliation with AIG. Id. ¶ 22. At that time, the Santa Rosa office had 118 customers, all of whom had been acquired while defendant was associated with THG. At some point around defendant's departure from THG, defendant sent a letter to all of the Santa Rosa THG customers informing them of his departure and soliciting their business. The letter stated, Dear _______, For quite a while I have been researching other independent broker dealers and comparing the quality of their broker support services with The Householder Group, AIG Financial Advisors and Pershing. I am pleased to announce that effective immediately I have changed broker dealers to Linsco/Private Ledger (LPL) and changed the name of our financial practice to Fuss Financial Group. Areas of significant improvement include client statements, online client access, tax reporting, technology and, for myself, greater access to research tools and support needed to manage your accounts more effectively.
Enclosed are all the forms needed to transition your accounts to Linsco/Private Ledger. Please sign and return in the envelope provided. If you have any questions or would like to schedule an appointment to discuss these changes, please do not hesitate to call Melissa, Troy or myself. All of our contact information will remain the same.
We are excited about this new support and look forward to servicing your financial needs for many years to come. Pl's Ex. 8. In response to defendant's solicitation, 115 of the 118 customers switched their accounts to Fuss Financial Group and Linsco/Private Ledger. Pl's Ex. 3 (Fuss Depo. at 98:1-10); Ex. 5 (response to Interrogatory No. 9). Defendant has submitted a declaration stating that THG never provided him with a "customer list." Fuss Decl. ¶ 15. Instead, defendant states that THG advised him to obtain customer prospect information from a third-party direct mail provider named Response Mail. Id. ¶ 13. Defendant states that THG representatives informed him that Response Mail would provide him with a list of high net worth individuals in the Santa Rosa area. Id. Defendant states that after joining THG, he stopped paying and using Response Mail because he concluded that Response Mail's prospect lists did not include adequate numbers of high net worth potential clients, and he also found the service was of poor quality. Id. ¶ 14. Defendant has also submitted a declaration from the CEO of Response Mail which states that the information defendant obtained from Response Mail was not THG proprietary information, and that anyone could purchase the lists by paying the appropriate fee. See Panaggio Decl. Defendant started using another direct mail vendor, Treat Designs. Fuss Decl. ¶ 14. Defendant paid all costs charged by both Response Mail and Treat Designs, and was never reimbursed for THG for these expenses. Id. Defendant paid in excess of $215,000 on the mailing lists and the seminar facilities.
Id. Defendant also states that shortly after affiliating with THG he stopped using portions of the THG Retirement Seminar and the THG sales process scripts. Id. ¶ 16. Defendant states that he eliminated and/or made modifications to certain seminar slides and made modifications to the sales process. Id. Defendant states that it was only after making these modifications that he began to grow his business. Id. ¶ 17. Defendant states that when he sent the letter quoted above, he "never used any information from any THG client database or list." Id. ¶ 18. After leaving THG, defendant sold his client base to a broker at defendant's new firm. Id. ¶ 19. THG alleges six causes of action in the first amended complaint: (1) breach of contract; (2) breach of implied covenant of good faith and fair dealing; (3) misappropriation; (4) intentional interference with contracts; (5) intentional interference with economic relations; and (6) unfair competition. THG seeks, inter alia, $78,147.20 (the unpaid balance on the Integration Fee); liquidated damages in the amount of $234,193.80, or alternatively for actual, general, special and consequential damages, including but not limited to loss of past and future profits in an amount not yet determined but in excess of $152,226.00; exemplary and punitive damages; a constructive trust against all revenues generated by defendant as a result of wrongful conduct; a disgorgement of profits; an accounting; and other injunctive relief. Defendant has alleged six counterclaims: (1) breach of contract; (2) breach of the implied covenant of good faith and fair dealing; (3) fraud; (4) fraudulent inducement; (5) unfair competition and deceptive practices; and (6) declaratory relief -- Branch Office Agreement. Fuss alleges that THG made false statements to Fuss to induce him to sign the BOA, and thus that the BOA is voidable as a ...