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Philip C. Hartstein v. Rembrandt Ip Solutions


July 30, 2012



For the Northern District of California court


Plaintiff Philip C. Hartstein ("Plaintiff") brings this action for declaratory relief to invalidate the covenant not to compete in his employment agreement with Defendant Rembrandt IP Solutions, LLC ("Defendant"). Plaintiff asserts that the covenant is contrary to California Business and Professions Code section 16600. The case 20 was initially filed in the Superior Court of the State of 21 California in and for the County of San Mateo but was subsequently 22 removed to federal court. ECF No. 1 ("Not. of Removal"). 23

Plaintiff now moves to remand on the ground that the amount in 24 controversy is less than the jurisdictional minimum of $75,000. 25

ECF No. 21 ("MTR"). Additionally, Defendant moves to dismiss for 26 improper venue under Federal Rule of Civil Procedure 12(b)(3) on 27 the ground that Plaintiff's employment agreement includes a 28 mandatory forum selection clause which calls for exclusive jurisdiction in Pennsylvania. ECF No. 5 ("MTD"). Both motions are 2 fully briefed. ECF Nos. 22 ("MTR Opp'n"), 23 ("MTD Opp'n"), 24 3 Rule 7-1(b), the Court finds this matter appropriate for 5 determination without oral argument. As detailed below, the Court DENIES Plaintiff's Motion to Remand and GRANTS Defendant's Motion 7 to Dismiss for improper venue. 8 9

Defendant is a Delaware limited liability company ("LLC") with a principal place of business in Pennsylvania. ECF No. 3 ("Compl.") ¶ 2. Defendant's sole member is its parent, Rembrandt IP Management, LLC ("RIPM"). RIPM also has only one member -- an individual who resides in and is a citizen of Pennsylvania. ECF 15 opportunities for RIPM, which is engaged in the management of funds focused on investing in intellectual property and related 18 opportunities across a broad spectrum of industries, technologies, 19 and business methods, including generating revenues from patents.

On December 23, 2009, Plaintiff, a resident of San Mateo, California, entered into the Employment Agreement with Defendant.

("Reply ISO MTD"), 25 ("Reply ISO MTR"). Pursuant to Civil Local 4


No. 19 ¶¶ 2-3. Defendant identifies and develops business Compl. Ex. A ("Empl. Agr."). 21

Compl. ¶¶ 3, 7; Empl. Agr. The Employment Agreement contains a 24 non-compete provision that restricts Plaintiff from directly or 25 indirectly working for a competitor of Defendant for a period of 26 one year from the termination of his employment unless he first 27 obtains the written consent of the CEO or President of Defendant. 28

Empl. Agr. ¶ 4(a). Additionally, the Employment Agreement bars Plaintiff from disclosing Defendant's trade secrets and 2 confidential information to third parties. Id. ¶ 9. The 3 Employment Agreement also contains a forum selection clause which 4 provides: "[Plaintiff] and [Defendant] submit to the exclusive 5 jurisdiction of the state courts located in Montgomery County, 6 Pennsylvania and to the Federal courts located in Philadelphia, 7 Pennsylvania as to all actions and proceedings relating in any way 8 to this Agreement and/or [Plaintiff]'s relationship with 9 [Defendant]." Id. ¶ 15. 10

Plaintiff worked as Defendant's Managing Director of Business Development from January 1, 2010 through March 5, 2012. ECF No. 22-1 ("Wood Decl.") ¶ 5.*fn1 In his last year of employment with Defendant, Plaintiff earned an annual salary "well in excess" of $75,000. Id. ¶ 6; Not. of Removal ¶ 8. Plaintiff "was jointly responsible for all aspects of [Defendant's] business development efforts, including interaction with patent owners located throughout the United States and the identification of prospective 18 patent investment opportunities." Wood Decl. ¶ 5. Plaintiff was 19 one of only two employees at the company with direct responsibility 20 for generating patent investment leads and opportunities. Id. 21

From March 2011 through February 2012, Plaintiff managed or 22 generated more than one hundred unique investment leads. Id. ¶ 9. 23

The potential expected profit from Plaintiff's leads is in the 24 millions of dollars. Id. ¶ 10. 25

On March 5, 2012, Plaintiff informed Defendant that he was 26 resigning from the company and requested that Defendant waive the 27 non-compete provision in the Employment Agreement. Compl. ¶ 9.

Defendant indicated that it intended to enforce the provision. Id.

After leaving Defendant, Plaintiff began employment as Vice 4 President and Portfolio Manager at IPNav. Wood Decl. Ex. A. 5 ("IPNav Press Release"). Plaintiff's new job responsibilities are 6 similar to his responsibilities with Defendant. See id. Defendant 7 and IPNav compete for many of the same patent portfolios and 8 investment opportunities. Id. ¶ 15. 9

Also on March 5, 2012, Plaintiff filed the instant action in 10 the Superior Court of the State of California in and for the County of San Mateo. Plaintiff seeks a judicial declaration that the non- compete provision is invalid and contrary to section 16600 of the California Business and Professions Code. Compl. ¶ 14. He also seeks a preliminary and permanent injunction barring Defendants from enforcing the non-compete provision. Id.

Complaint, Plaintiff alleges that he intends to comply with all other provisions of the Employment Agreement and that he has not 18 misappropriated and has no intention of misappropriating 19 Defendant's trade secrets or confidential information. Id. ¶ 10. 20

On May 4, 2012, Defendant removed the action to federal court 21 on diversity grounds. In the Notice of Removal, Defendant asserts, 22 on information and belief, that Plaintiff is earning an annual 23 salary in excess of $75,000 with his new employer. Id. Defendant 24 also asserts that the value of its trade secrets and other 25 confidential information known to Plaintiff exceeds $75,000. Id. ¶ 26


The Court first addresses Plaintiff's Motion to Remand to 3 determine whether it has subject-matter jurisdiction to hear this 4 case. Concluding that the exercise of subject-matter jurisdiction 5 is proper, the Court then considers Defendant's Motion to Dismiss. 6

A. Motion to Remand

Plaintiff moves to remand this action back to state court on 8 the ground that Defendant has failed to establish that the amount 9 in controversy exceeds the jurisdictional minimum of $75,000. For 10 the reasons set forth below, the Court finds that Defendant has met its burden.

A defendant may remove a civil action filed in state court if the action could have been filed originally in federal court. 28 U.S.C. § 1441(a). A plaintiff may seek to have a case remanded to the state court from which it was removed if the district court lacks jurisdiction or if there is a defect in the removal procedure. Id. § 1447(c). The general removal statutes are 18 construed restrictively so as to limit removal jurisdiction. 19

Shamrock Oil & Gas Corp. v. Sheets, 313 U.S. 100, 108--09 (1941). 20

Federal jurisdiction "must be rejected if there is any doubt as to 21 the right of removal in the first instance." Duncan v. Stuetzle, 22 76 F.3d 1480, 1485 (9th Cir. 1996) (quotations omitted). The 23 burden of establishing federal jurisdiction for purposes of removal 24 is on the defendant. Valdez v. Allstate Ins. Co., 372 F.3d 1115, 25 1117 (9th Cir. 2004).

District courts may exercise diversity jurisdiction in the 27 first instance where "the matter in controversy exceeds the sum or 28 value of $75,000, exclusive of interest and costs" and there is complete diversity of citizenship between the plaintiff and 2 defendants. 28 U.S.C. § 1332(a). Upon removal, the defendant 3 bears the burden of showing that it is more likely than not that 4 Ins. Co., 116 F.3d 373, 377 (9th Cir. 1997). 6 7 well established that the amount in controversy is measured by the 8 value of the object of the litigation." Hunt v. Wash. State Apple 9 $75,000 is in controversy. See Singer v. State Farm Mut. Auto. 5

"In actions seeking declaratory or injunctive relief, it is Adver. Comm'n, 432 U.S. 333, 347 (1977). "The value of an 10 injunction may not be capable of precise determination, but precision is not required." Mailwaukee Mailing, Shipment and Equip., Inc. v. Neopost, Inc., 259 F. Supp. 2d 769, 772 (E.D. Wis. 2003). Where, as here, a plaintiff seeks to invalidate a non- competition clause, courts sometimes "look to the profits earned by the employer on business generated by the employee during the period immediately preceding his termination to determine the

amount in controversy." See Luna v. Kemira Specialty, Inc., 575 F. 18

Alternatively, courts have considered the Plaintiff's salary or the 20 likely financial impact of Plaintiff's competition during the non-21 compete period. See Davis v. Advanced Care Techs., Inc., CVS 06 22

Under any of these measures, the amount in controversy requirement 24 is satisfied here. 25

26 the employee -- RIPM's corporate counsel and secretary declares 27 that "the potential expected profit from many of Plaintiff's 28 investment leads, if acquired and developed, was in the millions of

Supp. 2d 1166, 1172 (C.D. Cal. 2008) (quotations omitted). 19

02449 DFL DAD, 2007 WL 1302736, at *2 (E.D. Cal. May 2, 2007). 23

With respect to the first measure -- the profits generated by

dollars." Wood Decl. ¶ 10.*fn2 Plaintiff essentially argues that 2 because the profitability of these leads cannot be precisely or 3 accurately measured until some future date, Plaintiff's value to 4

Defendant's business is too speculative to be considered for the 5 purposes of an amount in controversy determination. See Reply ISO 6

MTR at 3. This argument is unavailing. It is often difficult to 7 directly measure an employee's contribution to a business's profits 8 and revenues. However, that does not mean the employee's value to 9 the business is zero. Here, Plaintiff played a central and high-10 level role in Defendant's business operations since he was one of

only two employees with direct responsibility for generating

Defendant's patent investment leads and opportunities. See Wood

Decl. ¶¶ 3, 5. Based on Plaintiff's job responsibilities, the

estimate provided by RIPM's corporate counsel, and Plaintiff's

salary, see infra, the Court finds it more likely than not that

Plaintiff was worth over $75,000 to Defendant.*fn3

Plaintiff an annual salary well in excess of $75,000. Wood Decl. ¶ 3

Plaintiff's new salary with IPNav or one of Defendant's other 5 competitors would be comparable. Plaintiff's arguments against the 6 salary-based approach are unpersuasive. Plaintiff contends that 7

With respect to the salary-based approach, Defendant paid

6. Based on this evidence, it is more likely than not that 4

"reliance on a method that values the injunction to a future 8 employer is misplaced." MTR at 7. But the salary-based approach 9 assesses the value of the non-compete to Plaintiff, not his future 10 employer.*fn4 The non-compete provision effectively bars Plaintiff

from earning a salary in his chosen profession for one year. Thus,

considering the salary that Plaintiff could command from one of

Defendant's competitors is a simple and straightforward way to

value the object of this litigation. Plaintiff also argues that

this approach is difficult to apply because it requires Defendant

"to present competent evidence of the salary [Plaintiff] would make

if employed in a field outside the scope of the non-compete 18 covenant, and then compare this hypothetical salary to what 19

[Plaintiff] would make working in a field within the scope of the 20 non-compete covenant . . . ." Reply ISO MTR at 5. But the Court 21 need not compare hypothetical salaries. This is not an action for 22 damages and, thus, the Court need not determine whether Plaintiff 23 has attempted to mitigate his losses. The pertinent point is that 24 the non-compete provision prevents Plaintiff from earning a salary 25 in his chosen field. 26 27


2 trade secrets and confidential information known to Plaintiff. If 3

Plaintiff breaches the Employment Agreement and offers Defendant's 4 investment leads to a competitor, Defendant stands to lose millions 5 of dollars in expected revenues and profits. See Wood Decl. ¶¶ 8-6

The Court reaches the same conclusion as to the value of the

10. Further, Plaintiff has detailed knowledge of Defendant's 7 business models, which could have significant value to its 8 competitors. See id. at 11-12. Plaintiff argues that the value of 9 the non-compete to Defendant is zero since Plaintiff has not 10 misappropriated and has no intention of misappropriating

Defendant's trade secrets or confidential information. Reply at 6.

This argument lacks merit. Following his resignation, Plaintiff

accepted a position with one of Defendant's direct competitors.

See Wood Decl. ¶¶ 15-16; IPNav Press Release.*fn5 Regardless of

Plaintiff's stated intention, the possibility that he will share

Defendant's trade secrets and confidential information with this

competitor is very real. In any event, Plaintiff's argument goes 18 to the merits of his claims and, thus, should not be considered 19 before determining whether the Court has subject-matter 20 jurisdiction. See Davis, 2007 WL 1302736, at *2. 21 22 23

For these reasons, the Court finds that the jurisdictional

2 amount in controversy requirement has been met and, therefore, 3

DENIES Plaintiff's Motion to Remand. 4

B. Motion to Dismiss for Improper Venue


As the Court finds that it has subject-matter jurisdiction, it

6 may properly consider Defendant's Rule 12(b)(3) Motion to Dismiss 7 for improper venue. The gravamen of the motion is that the 8 mandatory forum selection clause in the Employment Agreement 9 requires that "all actions and proceedings relating in any way" to 10 the agreement be litigated in a Pennsylvania court. MTD at 1.

"In diversity cases, federal law governs the analysis of the

effect and scope of forum selection clauses." Jones v. GNC

Franchising, Inc., 211 F.3d 495, 497 (9th Cir. 2000). A motion to

dismiss for improper venue based upon a forum selection clause is governed by the rule set forth in M/S Bremen v. Zapata Off-Shore

Co., 407 U.S. 1 (1972). Id. In Bremen, the Supreme Court held

that a forum selection clause is presumptively valid and should 18 control unless a party can "clearly show that enforcement would be 19 unreasonable and unjust, or that the clause was invalid for such 20 reasons as fraud or overreaching." 407 U.S. at 15. The court also 21 stated that a forum selection clause should be held unenforceable 22

"if enforcement would contravene a strong public policy of the 23 forum in which suit is brought." Id. If the forum selection 24 clause is enforceable, the Court may either dismiss the action or 25 transfer the litigation to the parties' selected forum. See 28 26

U.S.C. § 1406(a). 27

Plaintiff argues that enforcement of the Pennsylvania forum

28 selection clause is unreasonable since it would contravene

California's strong public policy against covenants not to compete. 2

MTD Opp'n at 3. Plaintiff's argument proceeds as follows: 3

Plaintiff's case is sure to succeed in California because 4

California law disfavors covenants not to compete. See id. at 6. 5

On the other hand, if the Court enforces the forum selection clause 6 and the case proceeds in Pennsylvania, then Plaintiff is likely to 7 lose because Pennsylvania courts generally uphold covenants not to 8 compete. See id. Thus, enforcing the forum selection clause 9

"would deprive [Plaintiff] of the protection of his own 10 jurisdiction's laws and remedies." Id.

For the Northern District of California

court 11

The problem with Plaintiff's argument is that it does not

12 challenge the reasonableness of the forum selection clause itself,

C ct

i str i


only the reasonableness of its effect. A substantially similar

tates D

argument was raised and rejected in Manchester v. Arista Records, 15 Inc., 1981 U.S. Dist. LEXIS 18642 (C.D. Cal. Sept. 15, 1981). The

S ted 16 court reasoned: The plaintiff's analysis would unduly complicate the analysis of this issue in future cases. If the Court adopted plaintiff's argument, each court presented

with a forum selection clause issue would be forced to make a determination of the potential outcome of the

litigation on the merits in the transferee forum and to consider whether that outcome would conflict with a

strong public policy of the transferor forum. Although such a course might seem relatively simple in a case

such as this, in which there are no factual disputes presented, it would become complicated and uncertain

in cases involving complex legal questions or voluminous amounts of disputed issues of fact. Thus,

each Court presented with the issue would be involved in detailed speculation on the merits at the outset of

the action.

Manchester, 1981 U.S. Dist. Lexis 18642, at *15-16. 27

As Defendant points out, a number of other courts have

28 followed this reasoning and rejected the argument that the

enforcement of a forum selection clause would contravene 2

California's strong public policy against covenants not to compete. 3

See Loughlin v. Ventraq, Inc., 10-CV-2624-IEG BGS, 2011 WL 1303641, 4 at *7 (S.D. Cal. Apr. 5, 2011); Mahoney v. Depuy Orthopaedics, 5

8, 2007); Swenson v. T-Mobile USA, Inc., 415 F. Supp. 2d 1101, 1104 7

05463 JSW, 2009 WL 330934, at *4 (N.D. Cal. Feb. 10, 2009) ("a 9 party challenging enforcement of a forum selection clause may not 10 base its challenge on choice of law analysis"). The Court finds

this line of authority to be persuasive.

Plaintiff unsuccessfully attempts to distinguish this

authority from the instant action. MTD Opp'n at 7-9. While there

are minor distinctions in the facts, the holdings of Manchester and Defendant's other cases clearly apply here. Plaintiff also argues

that the Ninth Circuit's decision in Jones demands a contrary

result. That case is inapposite. In Jones, the court found that a 18

Pennsylvania forum selection clause in a franchise agreement 19 contravened section 20040.5 of the California Business and 20

Professions Code, which provides that "[a] provision in a franchise 21 agreement restricting venue to a forum outside this state is void 22 with respect to any claim arising under or relating to a franchise 23 agreement involving a franchise business operating within this 24 state." Jones, 211 F.3d at 498-99. Thus, in Jones, the issue was 25 whether the forum selection itself was contrary to California law. 26

In contrast, here, the issue is whether the Court should enforce 27 the forum selection clause because some other provision of the 28

Employment Agreement is purportedly contrary to California law.

Inc., CIVF 07-1321 AWI SMS, 2007 WL 3341389, at *8 (E.D. Cal. Nov. 6

(S.D. Cal. 2006); see also Besag v. Custom Decorators, Inc., CV08-8

Accordingly, the Court finds that the Pennsylvania forum

2 selection clause in the Employment Agreement is valid and 3 enforceable and GRANTS Defendant's Motion to Dismiss for improper 4 venue. 5 6


For the foregoing reasons, the Court DENIES Plaintiff Philip

C. Hartstein's Motion to Remand and GRANTS Defendant Rembrandt IP 9

Solutions, LLC's Motion to Dismiss for improper venue. This action 10 is DISMISSED without prejudice. Plaintiff may re-file the action

court 11

in another venue consistent with the forum selection clause of the

Employment Agreement.



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