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Align Technology, Inc. v. Tran

November 25, 2009


(Santa Clara County Super.Ct.No. CV104247). Trial Judge: Hon. James C. Emerson.

The opinion of the court was delivered by: Duffy, J.


California‟s compulsory cross-complaint statute prohibits a party from asserting a claim if, at the time the party answered a complaint in prior litigation, it failed to allege in a cross-complaint any then-existing, related cause of action against the plaintiff. (Code Civ. Proc., § 426.30, subd. (a).)*fn1 Few cases have construed the relatedness requirement of the compulsory cross-complaint statute. Accordingly, whether an unasserted claim is a "related" cause of action that is barred by section 426.30 can be a difficult question to answer.

In January 2008, appellant Align Technology, Inc. sued its former employee, Bao Tran,*fn2 for (among other things) breach of contract and conversion of patents belonging to the company. Tran demurred, claiming that the action was barred under the compulsory cross-complaint statute. He asserted that Align, in a prior state court action in San Francisco (the prior suit), had sued Tran, he had cross-complained for wrongful termination, and Align had failed to assert the current claims at the time it answered the cross-complaint. The court agreed that Align‟s claims were barred under section 426.30 because they should have been raised in the prior suit, and it sustained Tran‟s demurrer without leave to amend.

Align contends the claims asserted in the present action were not matters that it was required to assert as a compulsory cross-complaint in the prior suit. It argues that some of the claims were unknown at the time it answered Tran‟s cross-complaint and that the other claims were not "related" to Tran‟s cross-complaint; accordingly, none of the claims is barred because of Align‟s failure to allege them in the prior suit. Align argues further that the court abused its discretion by failing to grant Align leave to amend after sustaining Tran‟s demurrer.

We conclude that the allegations of the complaint included claims that were barred on their face by the compulsory cross-complaint statute because they were claims logically related to Tran‟s cross-complaint that should have been asserted in the prior suit. We hold further that, based upon certain allegations in the complaint and representations made by counsel both at the hearing on the demurrer and on appeal, Align may be able to assert claims against Tran that did not exist when it answered Tran‟s cross-complaint in the prior suit and would thus not be barred under section 426.30. Accordingly, Align should have been granted leave to amend. We will therefore reverse the judgment and remand the case with instructions that the court enter an order sustaining the demurrer with leave to amend.


I. Complaint

On January 25, 2008, Align filed its complaint, alleging 11 causes of action against Tran.*fn3 Align alleged*fn4 that it hired Tran in March 2000; his position was "Corporate Counsel-Technology and Licensing." His duties consisted of managing Align‟s intellectual property (including patents), drafting and prosecuting applications for patents, managing Align‟s licensing arrangements, and assisting in general legal matters. Tran was later promoted to the position of "Associate General Counsel and Director of Legal Affairs."

Tran signed an Employee Proprietary Information and Inventions Agreement (Inventions Agreement) in which he promised loyalty to Align and assigned to Align any interest in any inventions, except to the extent such assignment would be prohibited under Labor Code section 2870. Tran was also required under the agreement to disclose any inventions conceived by him or reduced to practice prior to his employment with Align; Tran advised Align that he had " "[n]o inventions or improvements‟ " predating his Align employment. Tran also agreed in writing in September 2000 to abide by Align‟s rules, policies and standards, including those set forth in the company‟s employee handbook. Lastly, in June 2004, Tran signed a document under which he "agreed to abide by and comply with Align‟s Code of Business Conduct and Ethics." That document provided that employees (1) should avoid actual or apparent conflicts of interest; (2) were prohibited from engaging in conduct interfering with their job duties or that otherwise conflicted with Align; (3) were prohibited from simultaneous employment with any of Align‟s competitors, suppliers, customers, or developers; (4) were prohibited from conduct that would enhance or support the position of an Align competitor; and (5) were required to disclose any interests that might be in conflict with Align‟s interests.

Align placed Tran on administrative leave in January 2005 after it learned that he had used Align‟s confidential information to assist a start-up competitor, OrthoClear, Inc. Align terminated Tran on February 3, 2005, and filed the prior suit against OrthoClear, Tran, and others at that time.

Align alleged in this action that Tran had committed acts during the course of his employment that were, inter alia, in breach of his contract with Align, a violation of his fiduciary duties and his duties of loyalty to the company, and a conversion of corporate property. In general, these actions consisted of Tran‟s (1) using company funds to apply to the United States Patent & Trademark Office (U.S.P.T.O.) for non-Align patents, including patents for Tran; (2) operating an unauthorized side business (Tran & Associates) in which he used Align‟s phone and computer systems to perform patent prosecution work for clients besides Align; and (3) misappropriating Align‟s property by applying for patents in his own name for inventions (i.e., methods of managing patent portfolios) that belonged to Align, in violation of his Invention Agreement. While he was employed by Align, Tran failed to disclose to his employer that he was operating a side business or that he had inventions belonging to Align that he was claiming as his own.

Align learned of Tran‟s side business from telephone calls received from at least 13 of his clients, including one call in June 2005 from an individual who indicated that Tran had been his company‟s intellectual property and patent attorney for three years. Align also determined from a forensic search of Tran‟s company computer (performed on a date not alleged) that he had used that computer to operate his side business (e.g., to generate invoices, patent applications to the U.S.P.T.O., legal correspondence and memoranda, and client engagement letters).

In June 2006, Align performed an analysis of patent applications filed with the U.S.P.T.O., which disclosed that between 2004 and 2005, Tran filed 53 applications on behalf of his business and only six on behalf of Align. In one such patent application that Tran prosecuted for a client through Tran‟s separate business, he copied verbatim the language contained in an Align patent application. There were two particular patent applications filed by Tran in his own name in March 2004 and September 2004, respectively, that involved methods of managing a patent portfolio, which patent applications should have been assigned to Align.

II. The Demurrer

Tran filed a demurrer to the complaint. Tran specified that the demurrer was being brought under section 430.10, subdivision (e), i.e., that the complaint "does not state facts sufficient to constitute a cause of action." The grounds for the demurrer were, inter alia, that the entire action was barred under (1) the compulsory cross-complaint statute, (2) the doctrine of retraxit, and (3) the one-year statute of limitations applicable to actions against attorneys (§ 340.6).*fn5 Tran included in the demurrer a request for judicial notice (§ 430.30, subd. (a); Evid. Code, § 452) of several pleadings from the prior suit, namely, Align‟s first amended complaint (the prior complaint), Tran‟s first amended cross-complaint against Align (hereafter, the Tran cross-complaint, or cross-complaint), and Align‟s answer to the Tran cross-complaint. Tran also asked the court to take judicial notice of the settlement agreement and mutual release (Settlement Agreement) entered into in October 2006 that settled, among other disputes, the prior suit.*fn6 That settlement resulted in the dismissal of the prior suit on October 18, 2006.

In his demurrer, Tran relied in part on the prior complaint. In the prior suit, Align sued OrthoClear, Muhammad Chishti (former Chief Executive Officer and cofounder of Align, and founder of OrthoClear), Tran, and five other former Align employees (who later became employees of OrthoClear). As it concerned Tran, Align alleged in the prior complaint, inter alia, that (1) Align hired Tran in 2000; (2) by virtue of his employment, Tran "designed, implemented and managed virtually every aspect of Align‟s intellectual property protection program"; (3) Tran (and the other defendants) "engaged in a systematic effort to misappropriate [Align‟s] Confidential Information for the purpose of unfairly competing with Align . . ." in breach of Tran‟s employment agreement with Align and his duty of loyalty owed to Align; (4) during a meeting in San Francisco in December 2004 involving Chishti, Tran, and other defendants, "[i]n response to questions about how OrthoClear could sell a product similar to the Invisalign System without infringing Align‟s patents, Tran assured the group that he was confident that OrthoClear could circumvent Align‟s patents";*fn7 and (5) Tran "made unauthorized charges to Align‟s account with the [U.S.P.T.O.]" Align asserted claims against Tran, inter alia, for unfair competition (in violation of Bus. & Prof. Code, § 17200 et seq.), trade secret misappropriation, breach of contract (the Inventions Agreement), conversion, and breach of loyalty (Lab. Code, §§ 2860 to 2863).

Tran also relied on his cross-complaint in the prior suit in support of his contention that Align‟s claims in this action were barred under section 426.30, subdivision (a). In that pleading, Tran alleged, inter alia, claims against Align for wrongful termination and for breach of contract. As to the latter claim, when Align terminated Tran, it also cancelled an agreement under which he had been granted options to purchase 40,600 shares of Align stock.

In support of his demurer, Tran also cited the filing in the prior suit by Align (on May 30, 2006) of its answer to the cross-complaint. Included among the affirmative defenses in that answer were that Tran‟s claims were barred under the doctrines of unclean hands and estoppel (based upon Tran‟s "own acts or omissions"). Align did not file a cross-complaint in response to the Tran cross-complaint or otherwise assert any claims against Tran beyond those Align raised in its prior complaint.

Align filed extensive opposition to the demurrer, including a request for judicial notice of other pleadings from the prior suit and two federal lawsuits it had filed in June 2005 and June 2006, respectively, in which OrthoClear (but not Tran) had been named as a defendant. After oral argument and submission of the matter, the court issued a formal order sustaining Tran‟s demurrer without leave to amend, concluding that the action was barred under the compulsory cross-complaint statute.*fn8 The court concluded that "the claims now being asserted against defendant Bao Tran are related claims ...

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