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Sierra Environmental Technologies, Inc. v. Gale


March 10, 2010


The opinion of the court was delivered by: Morrison C. England, Jr. United States District Judge


Plaintiff Sierra Environmental Technologies, Inc. ("Sierra" or Plaintiff") seeks both monetary and injunctive relief from Robert F. Gale, Fallen Leaf Industries, Inc., and Robert G. Gale (collectively "Defendants") for claims arising under the Computer Fraud and Abuse Act ("CFFA"), 18 U.S.C. § 1030, and the Lanham Act, 15 U.S.C. § 1051 et seq.

In addition to those federal claims, Plaintiff alleges various state law claims, including conversion, breach of fiduciary duty, breach of non-competition agreements, breach of confidentiality agreements, trade secret misappropriation, intentional interference with contractual relations, intentional interference with prospective economic advantage, negligent interference with prospective economic advantage, and violations of the California Unfair Business Practices Act as codified in California Business and Professions Code § 17200, et seq.

Presently before the Court is Defendants' Motion to Dismiss, which argues both that Plaintiff's claims should have been raised by way of compulsory counterclaims in Defendants' ongoing state court proceedings, and that this Court should abstain from exercising its jurisdiction in any event because important state interests are implicated by the parties' dispute. For the reasons set forth below, Defendants' Motion will be granted.


Plaintiff Sierra Environmental Technologies, Inc. "provides specialized engineering and consulting services to the building cleaning services industry, and other business sectors." Compl. ¶ 8. It "combines a variety of advanced engineering principles with internally developed methodologies, insights and other know-how to dramatically reduce labor costs in large commercial and industrial settings." Id.

In 2005, Defendant Robert F. Gale ("Bob Gale") invested substantial sums in Sierra. He became a project manager and eventually was designated as Plaintiff's Chief Financial Officer ("CFO").

In January 2006, Plaintiff hired Bob Gale's son, Robert G. Gale ("Robert Gale"), on a part-time basis. In April 2007, Robert Gale became a full-time project associate.

In June 2008, Plaintiff removed Bob Gale from his position as CFO, but he remained a shareholder, director, and creditor. Plaintiff alleges that sometime in 2008, Bob Gale started a company called Lucent Cleaning Services. Lucent named Bob Gale as its president.

Defendant Bob Gale ultimately filed suit against Plaintiff in Santa Clara County Superior Court on July 23, 2008 based on alleged fraudulent misrepresentations made by Sierra. Bob Gale's allegations in that state lawsuit include fraud in the inducement, promissory fraud (concealment), breach of fiduciary duty, wrongful termination, rescission, unjust enrichment, accounting, and constructive trust.

On October 17, 2008, Plaintiff terminated Robert Gale's employment. Plaintiff alleges that at the time of termination, Robert was instructed to return a laptop computer which had been issued to him, as well as all electronic files and property belonging to Plaintiff. Plaintiff asserts that they sent numerous requests for this information and that it was not returned for months.

On June 12, 2009, Defendant Robert Gale also filed a civil action against Plaintiff in Santa Clara County Superior Court. On December 8, 2009, a first amended complaint was filed on Robert's behalf based on non-payment of wages, waiting time penalties under the California Labor Code, tortious discharge, breach of the implied covenant of good faith and fair dealing, violation of California Business and Professions Code § 17200, and fraud.


A. Compulsory Counterclaims

Defendants argue that "Sierra should have filed a cross-complaint [in the state court actions] because [its claims are] 'compulsory' under California state law." Defs.' Memo. in Supp. of Mot. to Dismiss, 7:14-15. Plaintiff counters that the present federal case "raises an entirely different set of issues." Pl.'s Memo. in Opp. to Def.'s Mot. to Dismiss, 6:22.

"The question whether the [Plaintiff's] claims are compulsory counterclaims which should have been pleaded in the earlier...state court action is a question of state law." Pochiro v. Prudential Ins. Co. of America, 827 F.2d 1246, 1249 (9th Cir. 1987). Pursuant to California Civil Procedure § 426.30(a), failure to raise compulsory claims by way of cross-complaint bars a litigant from raising such claims in any other action. The statute states as follows:

"if a party against whom a complaint has been filed and served fails to allege in a cross-complaint any related cause of action which (at the time of serving his answer to the complaint) he has against the plaintiff, such party may not thereafter in any other action assert against the plaintiff the related cause of action not pleaded."

Cal. Code Civ. Proc. § 426.30(a)(emphasis added). A "related cause of action" is defined as a "cause of action which arises out of the same transaction, occurrence, or series of transactions or occurrences as the cause of action which the plaintiff alleges in his complaint." Cal. Code Civ. Pro. § 426.10.

"The term 'transaction' not confined to a single, isolated act or occurrence...but may embrace a series of acts or occurrences logically interrelated." Saunders v. New Capital for Small Businesses, Inc., 231 Cal. App. 2d 324, 336 (Ct. App. 1964). "The obvious intent of the Legislature in enacting this statute was to provide for the settlement in a single action of all conflicting claims between the parties arising out of the same transaction and this to avoid multiplicity of actions and conflicting judgments." Id. at 334. In each instance 'transaction' has been liberally construed so as to effectuate this purpose. Id. at 336. "It is noteworthy that this interpretation of the term parallels the interpretation of the same term found in the comparable Federal Rules of Civil Procedure on compulsory counter-claims." Id.

Under federal law, compulsory counterclaims also encompass cases that have been brought in federal court subsequent to a case filing in state court. "Federal courts will not permit an action to be maintained where the claims asserted should have been brought as a compulsory counterclaim in an earlier action." In re Crown Vantage, Inc., 421 F.3d 963, 973, n.7 (9th Cir. 2005)(citing Cheiker v. Prudential Insurance Co., 820 F.2d 334 (9th Cir. 1987)).

Here, the causes of action alleged in the present federal suit are "related" to the subject of the action in state court filed nearly a year and a half beforehand. Plaintiff nonetheless argues that this case involves "post-June 2008 misappropriation of intellection property and other acts of interference of defendants, which occurred after Bob Gale stopped working for Sierra." Pl.'s Memo. in Opp. to Def.'s Mot. to Dis. 7:1-3.

This, however, is a distinction without a difference. The claims in question all arise from Defendants' employment with Sierra and their eventual discharge from the company.

Plaintiff goes on to argue that even if the two lawsuits do "arise out of the same common nucleus of operative facts, that does not mean that the federal action must be dismissed in deference to the state court action." Id. at 7:4-6. That contention ignores the fact that the purpose of compulsory counterclaims is to require that reciprocal rights flowing from a common source be determined in a single action. See Saunders, 231 Cal. App. 2d at 334. This avoids unnecessary and vexatious litigation and ensures consistent judgments. Id.

This Court consequently declines to maintain this action on grounds that the claims it makes could and should have been litigated in the pending state court proceedings.

B. Younger Abstention

Defendants also assert that the requirements for abstention first recognized by the Supreme Court in Younger v. Harris, 401 U.S. 37, 41 (1971) are satisfied.

"Under Younger abstention, federal courts may not grant declaratory or injunctive relief that would interfere with state criminal or civil proceedings." San Remo Hotel v. City and County of San Francisco, 145 F.3d 1095, 1103 (9th Cir. 1998). Absent extraordinary circumstances, Younger abstention is required if the state proceedings are (1) ongoing, (2) implicate important state interests, and (3) provide the plaintiff an adequate opportunity to litigate federal claims. Middlesex County Ethics Comm. v. Garden State Bar Ass'n, 457 U.S. 423, 432 (1982).

In addition to these three threshold prerequisites, "there is a vital and indispensable fourth element: the policies behind the Younger doctrine must be implicated by the actions requested of the federal court." AmerisourceBergen Corp. v. Roden, 495 F.3d 1143, 1149 (9th Cir. 2007).

"When the case is one in which the Younger doctrine applies, the case must be dismissed." H.C. ex rel. Gordon v. Koppel, 203 F.3d 610, 613 (9th Cir. 2000). Plaintiff "has the burden of showing that state procedural law barred presentation of its claims." Communications Telesystems Intern. v. California Public Utility Com'n, 196 F.3d 1011, 1020 (9th Cir. 1999) (internal quotations omitted).

In this case, Younger principles are implicated and the Middlesex factors are satisfied. The state proceeding was pending at the time Sierra filed its federal action, it raised important state interests, and it afforded Sierra an adequate opportunity to assert its constitutional challenges. Middlesex, 457 U.S. at 432-437.

There is no dispute that two state court actions were ongoing*fn2 when Sierra filed its federal action and that Sierra had an adequate opportunity to litigate federal issues in the state proceeding. Therefore, the dispositive question is whether an important state interest is implicated in this case.

Defendants incorrectly focus on whether important state interests are implicated in the federal case pending before this Court. The proper inquiry, however, turns on whether important state interests are implicated in the state proceeding.

"If the state's interests in the proceeding are so important that exercise of the federal judicial power would disregard the comity between the states and the National Government," abstention is proper. Pennzoil Co. v. Texaco, Inc., 481 U.S. 1, 11 (1987). Qualifying areas of state interest encompass those interests that the United States Constitution and our national traditions assign primarily to the states. Harper v. Public Service Com'n of WVA, 396 F.3d 348, 352 (4th Cir. 2005). In looking at whether an important state interest is at hand, "we inquire into the substantiality of the State's interest in its proceedings [and] we do not look narrowly to its interests in the outcome of the particular importance of the generic proceedings to the State." New Orleans Public Service, Inc. v. Council of City of New Orleans, 491 U.S. 350, 365 (1989) (emphasis previously added).

All the claims at issue here fundamentally arise from the Gales' employment with Sierra. In the state action between Bob Gale and Plaintiff, Bob Gale alleges fraud in the inducement, promissory fraud, breach of fiduciary duty, wrongful termination, rescission, unjust enrichment, accounting, and constructive trust. Similarly, Robert Gale's state action includes claims for non-payment of wages, waiting time penalties, tortious discharge, breach of the implied covenant of good faith and fair dealing, violation of the California Business and Professions Code, and fraud. In the instant action, Plaintiff alleges, inter alia, breach of fiduciary duty, breach of non-competition agreements, breach of confidentiality agreements, trade secret misappropriation and interference with contractual relations. All these causes of action arise from Bob Gale and Robert Gale's employment.

Employment is inherently a state interest. "Employment status may implicate a state interest." Allstate Ins. Co. v. Hague, 449 U.S. 302, 314 (1981). The fact that Defendants allege multiple employment-related causes of action in their state actions consequently points to an important state interest.

In addition to employment, Defendants contend in their Motion and their Reply that two other important state interests are also at stake: "California's interest in protecting trade secrets...[and] California's interest in enforcing only valid non-compete agreements." Defs.' Reply Br. in Supp. of Mot. to Dis. 4:10-14 (emphasis previously added). Plaintiff, however, asserts that these interests are solely at issue in the federal case presently before this Court and therefore should not be considered in the analysis of whether an important state interest is present in the state proceedings. Contrary to Plaintiff's contention in this regard, the employment documents/agreements at issue here have in fact been raised in the state court proceedings. They implicate important state interests under the Younger analysis.

In Computer Economics Inc. v. Gartner Group, Inc., 50 F. Supp. 2d 980, 991 (S.D. Cal. 1999), for example, the Court examined whether the state's interest in uniform enforcement of its laws was outweighed by any federal countervailing federal interests. The Court stated that it could not "identify any countervailing federal interests outweighing the state's interest" in enforcement of California's Trade Secret statutes. Id. at 992.

Additionally, the California Supreme Court recognized that "California's trade secret law undoubtedly serves a significant government interest." DVD Copy Control Ass'n, Inc. v. Bunner, 31 Cal. 4th 864, 880 (Cal. 2003). The DVD Court found that trade secrets "have been recognized as a constitutionally protected intangible property interest." Id. (quoting ITT Telecom Products Corp. v. Dooley, 214 Cal. App. 3d 307, 318 (Ct. App. 1989)). California unquestionably has an important state interest in guarding against trade secret misappropriation, as alleged in Plaintiff's Sixth Claim for relief herein. Tellingly, that claim is expressly based not on federal law but rather upon a California statute, California Civil Code § 3426.1, et seq.

Additionally, with respect to the non-competition agreement, California has a strong public interest in determining whether such agreements can be enforced. California Business and Professions Code § 16600 provides, for example, that "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 held that this policy is sufficiently strong to override a contractual non-compete provision which designated another state's laws controlling. Application Group, Inc. v. Hunter Group, Inc., 61 Cal. App.4th 881, 902 (Ct. App. 1998). Here, Plaintiff alleges that Bob Gale entered into a Non-Competition Agreement prohibiting him from competing against Sierra during any period in which he owned stock and for two years after. Compl. ¶ 50 and 51.

Plaintiff also asserts that Bob Gale breached the Non-Competition Agreement by entering into competition against Sierra and interfering with the employment of Robert Gale. Compl. ¶ 53. California has a strong interest in adjudicating these claims.

Finally, Defendant satisfies the fourth and final prong of the Younger abstention analysis. "[O]nce the three Middlesex elements are satisfied, the court does not automatically abstain, but abstains only if there is a Younger-based reason to abstain -i.e., if the court's action would enjoin, or have the practical effect of enjoining ongoing state court proceedings." AmerisourceBergen Corp., 495 F.3d at 1149 (emphasis previously added). Deciding the issues alleged in Plaintiff's Complaint herein could serve to enjoin the state court proceedings, either explicitly or implicitly. Any concurrent consideration at both the state and federal level would be problematic, and invokes the very concerns of comity underlying Younger abstention. Although Plaintiff contends that "[n]one of the relief requested by Sierra in this action would have the effect of enjoining either of these lawsuits" (Pl.'s Opp'n to Mot. to Dismiss 5:2-3), if this Court were to award, for example, damages or injunctive relief to Plaintiff in connection with its claims predicated under California law, such an award would surely interfere with the ongoing state proceedings. Younger-based abstention is accordingly appropriate.

C. Other Issues

Plaintiff further alleges that "[t]he State Court judgment in the Robert F. and Robert G. cases will be res judicata on all claims, state and federal, which could have been litigated in the same proceeding." Defs.' Mem. in Supp. of Mot. to Dismiss, 5:16-18.

The court need not reach a decision on this issue. Res judicata, as a "judge-made" rule, must yield to Federal Rule of Civil Procedure 13(a), the compulsory counterclaim rule. Allan Block Corp. v. County Materials Corp., 512 F.3d 912, 916 (7th Cir. 2008). Rule 13(a) "is in effect a procedural implementation of [the res judicata] doctrine. All Rule 13(a) does is command that certain claims be pleaded as counterclaims. It does not specify the consequences of failing to do so. Those consequences are given by the doctrine of res judicata." Id.

Defendants also allege that a more definite statement pursuant to Federal Rule of Civil Procedure 8(a) is warranted. Defendants assert that "Sierra has pleaded its case in a way that fails to give fair notice of the claim it asserts and the grounds upon which this rests." Defs.' Memo. in Supp. of Mot. to Dismiss, 12:19-21 (internal quotations omitted). Because the Court has already determined that Plaintiff's lawsuit should be dismissed for the reasons stated above, however, it is unnecessary to address Defendants' alternative claim that Plaintiff should be ordered to provide a more definite statement of its claims, and the Court declines to do so.


For the reasons set forth above, Defendants' Motion to Dismiss (Docket No. 8) is GRANTED.*fn3


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