Plaintiff sues seven executives and managers who left and formed competing company
In LGCY Power, LLC v. The Superior Court of Fresno County, the plaintiff was a Utah-based company that marketed and sold residential solar energy systems across the western part of the United States. In 2019, the company’s former sales manager and six other executives and managers left and formed a competing solar company.
The company filed a suit in Utah state court against all seven of them. It alleged numerous causes of action, including breach of their employment agreements, which had noncompetition, nonsolicitation and confidentiality provisions.
All of the defendants except for the sales manager brought a joint cross-complaint in Utah with claims such as an alleged breach of their employment agreements and a failure to pay wages and commissions. As for the sales manager, he filed a complaint in Fresno County Superior Court that made virtually identical claims as those in the Utah cross-complaint. The company objected to the Fresno complaint via a demurrer, arguing that California’s and Utah’s cross-complaint statutes barred the sales manager’s causes of action.
The Fresno County Superior Court, overruling the demurrer, determined that s. 925 of California’s Labor Code offered an exception to California’s compulsory cross-complaint statute, so the sales manager was permitted to bring his claims in California despite the pending related suit in Utah. Under s. 925, employers cannot force an employee residing and working primarily in California to agree, as an employment condition, to litigate a claim arising in California in a forum outside the state, or to waive their right to California law’s substantive protection relating to a controversy arising in California.
The company asked the Fresno court to vacate its order and to enter a new order sustaining its demurrer. The California Court of Appeal for the Fifth District denied the petition for writ of mandate filed by the company, which failed to show why the Fresno court was wrong to overrule its demurrer.
The appellate court agreed with the Fresno court’s decision that s. 925 provided an exception and was meant to apply in every case or controversy complying with the criteria under the law. Thus, an employee falling within s. 925’s scope could file a complaint in California alleging claims related to the causes of action that their employer had filed against them in a pending action in a sister state like Utah.
In response, the company raised a number of arguments. First, the sales manager’s contract was executed in January 2015 and was not modified after Jan. 1, 2017, the company said. Section 925 would only apply to contracts entered into, modified or extended on or after Jan. 1, 2017, the date when the law took effect.
However, the appellate court said that alleged oral modifications to the sales manager’s position, job responsibilities and compensation structure, which occurred after that cut-off date, brought his employment agreement within the scope of s. 925.
Second, the company argued that the sales manager was an independent contractor, not an employee, and s. 925 only applied to an employee. To this, the appellate court said that the company forfeited this argument when it failed to present it under a separate heading of its memorandum. Third, the sales manager timely manifested an intent to void his employment agreement, the appellate court held.
Lastly, the appellate court disagreed with the company’s argument that, if a related action was filed first and was still pending in a sister state like Utah, the “full faith and credit” clause of the U.S. Constitution would compel the California court to extend credit to and apply the sister state’s compulsory cross-complaint statute.
Learn more about laws impacting the workplace during Employment Law Masterclass California on June 14.