Demurrer & Motion to Strike (Judge Maureen A. Folan)

Case Name: ??? PSI Systems, Inc. v. Popout, Inc., et al.

Case No.:??????? 16-CV-293332

Currently before the Court are the following motions: (1) defendant Popout, Inc.?s (?Defendant?) demurrer to the complaint of plaintiff PSI Systems, Inc. (?Plaintiff?); (2) Defendant?s motion to strike portions of the complaint; and (3) Plaintiff?s motion to seal portions of Defendant?s request for judicial notice.

  1. Factual and Procedural Background

This is an action arising from a contract dispute. Plaintiff asserts five causes of action against Defendant for (1) breach of contract, (2) breach of the covenant of good faith and fair dealing, (3) intentional interference with contractual relations, (4) intentional interference with prospective economic relations; and (5) injunctive relief.

In its complaint, Plaintiff alleges the following: Plaintiff is an approved PC Postage Provider for the United States Postal Service (?USPS?) and has invested significant resources in developing the Endicia Label Server (?ELS?), its propriety web-based application programming interface (?API?). (Compl., ?? 5, 8.)

On April 17, 2014, Plaintiff and Defendant entered into a written agreement providing Defendant with a license to use the ELS. (Compl., ? 9.) In furtherance of this agreement, Plaintiff provided Defendant with access to its valuable trade secrets. (Compl., ? 10.) In recognition of this exposure, Defendant agreed to refrain from contacting or working directly with USPS with respect to the ELS (section 3.8), contracting with its competitors who offer the same or substantially similar licenses to those provided by Plaintiff (section 5.5), using or disclosing Plaintiff?s trade secrets (section 7.1), and identifying Plaintiff in its advertising, sales, promotional, or other publicly available materials without its approval (section 9). (Compl., ?? 11-14.) On March 17, 2016, Defendant issued a press release identifying itself as an official USPS ePostage vendor, identified Plaintiff without receiving its approval, and disparaged the quality of the ELS. (Compl., ?? 20-21, 25.) In addition, Plaintiff discovered that Defendant breached the agreement by developing a substantially similar API based on its confidential technology, working directly with the USPS, and becoming a direct competitor. (Compl., ?? 22-24, 33.)

On April 17, 2016, Defendant filed the instant demurrer and motion to strike portions of the complaint. That same day, Plaintiff filed a motion to seal portions of Defendant?s request for judicial notice. On May 6, 2014, Plaintiff filed its oppositions to the demurrer and motion to strike. Defendant filed its reply in support of its demurrer and motion to strike on May 12, 2016.

  1. Request for Judicial Notice

??????????? Defendant asks the Court to take judicial notice of the USPS Domestic Mail Manual. The request is GRANTED. (See Ahrens v. Sup. Ct. (1988) 197 Cal.App.3d 1134, 1141 [stating that ?judicial notice of documents contained in the Federal Register is mandated under Evidence Code section 451, subdivision (b)?].)

Defendant also requests judicial notice of the contract between the parties under Evidence Code section 452, subdivision (h). That subdivision ?is intended to cover facts which are not reasonably subject to dispute and are easily verified? such as ?facts which are widely accepted as established by experts and specialists in the natural, physical, and social sciences which can be verified by reference to treatises, encyclopedias, almanacs and the like or by persons learned in the subject matter.? (Gould v. Maryland Sound Industries, Inc. (1995) 31 Cal.App.4th 1137, 1145.) Since there are no ?sources of reasonably indisputable accuracy such as treatises or encyclopedias to which the court can turn to resolve the issue?, a court may not take judicial notice of the existence and terms of a contract under this subdivision. (Id. at pp. 1145-1146.)

Accordingly, Defendant?s request for judicial notice of the parties? contract under Evidence Code section 452, subdivision (h) is DENIED.

III. Demurrer to the Complaint

??????????? Defendant demurs to each cause of action on the ground of failure to state sufficient facts to constitute a cause of action. (See Code Civ. Proc., ? 452, subd. (e).)

  1. First Cause of Action

??????????? Defendant contends that the first cause of action for breach of contract fails on the following bases: (1) it did not breach sections 3.8 and 5.5 of the contract if those sections are properly construed in the context of the entire agreement; (2) Plaintiff cannot allege non-speculative damages for violation of section 9 of the agreement; (3) the allegations concerning its purported possession and use of Plaintiff?s trade secrets in violation of section 7.1 of the agreement are conclusory; and (4) the provisions of the contract are unenforceable under Business and Professions Code section 16600.

  1. Interpretation of Sections 3.8 and 5.5

??????????? Defendant asserts that it did not violate sections 3.8 and 5.5 if those provisions are considered in the context of the entire contract, of which it asks the Court to take judicial notice. Since its request for judicial notice is denied and the Court may not consider matters extrinsic to the complaint, the Court cannot determine at this juncture whether Defendant violated these provisions. (See Donabedian v. Mercury Ins. Co. (2004) 116 Cal.App.4th 968, 994 [stating that the court cannot consider matter outside the pleadings or that is not subject to judicial notice on demurrer].) Accordingly, the first cause of action is not subject to demurrer on this basis.

  1. Section 9

Defendant contends that the complaint does not allege ?non-speculative? damages resulting from the purported violation of section 9. This argument lacks merit because the complaint sufficiently alleges general damages. (See Colvig v. RKO General, Inc. (1965) 232 Cal.App.2d 56, 69 [stating that damages resulting from a breach of contract may be pleaded generally because ?[t]he question as to how general damages from the breach of contract have arisen otherwise than as disclosed by the general allegation of damages, is the subject of evidence, rather than pleading?].) Accordingly, Plaintiff adequately alleges damages and, therefore, the first cause of action is not subject to demurrer on this basis.

  1. Section 7.1

Defendant argues that the complaint does not allege sufficient facts to constitute a breach of section 7.1 of the contract because the allegations concerning Plaintiff?s trade secrets are conclusory.? This argument is persuasive.

?One who seeks to protect his trade secrets from wrongful use or disclosure does not have to spell out the details of the trade secret to avoid a demurrer to a complaint. To so require would mean that the complainant would have to destroy the very thing for which he sought protection by making public the secret itself. The plaintiff must nevertheless allege the ultimate facts showing the existence of a trade secret or other confidential data to state such a cause of action. An averment simply that the plaintiff has a secret process is a bare legal conclusion.? (Diodes, Inc. v. Franzen (1968) 260 Cal.App.2d 244, 252, internal citations omitted.)

Here, the complaint merely provides that ?[u]pon information and belief, [Defendant?s] development, integration and use of its own API was accomplished through the use and disclosure of [Plaintiff?s] Confidential Information and Trade Secrets, as those terms are defined in the Agreement.? (Compl., ? 34.) Since these allegations consist of no more than bare legal conclusions, the complaint fails to state sufficient facts to constitute a breach of contract based on the violation of section 7.1.

  1. Unenforceable Contract

Defendant claims that the contract is unenforceable under Business and Professions Code section 16600, which states that ?[e]xcept as provided in this chapter, every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.?[1] This section ?evinces a settled legislative policy in favor of open competition?? and ?protects the important legal right of persons to engage in business and occupations of their choosing.? (Edwards v. Arthur Andersen LLP (2008) 44 Cal.4th 937, 946, internal citations omitted.)

Defendant apparently contends that section 5.5 renders the agreement unenforceable under the Business and Professions Code.[2] As alleged in the complaint, that section provides that that Defendant agreed to ?a period of ?exclusivity? during which [it] would not work with any of [Plaintiff?s] competitors with respect to any license and/or service which are the same or substantially similar to the license and/or services provided by [Plaintiff]? and Defendant breached this agreement ?by developing its own API in direct competition with? [Plaintiff?s] API,? in the process becoming Defendant?s ?competitor.? (Compl., ?? 12, 32.) As such, Defendant asserts that section 5.5 operated as an enforceable covenant not to compete.

In opposition, Plaintiff argues that this provision is enforceable because it is intended to prevent a competitor from using its confidential information and trade secrets. Plaintiff?s argument is not well-taken. In D?sa v. Playhut, Inc. (2000) 85 Cal.App.4th 927, 935, the Court of Appeal rejected a similar argument concerning a provision preventing an employee from rendering services to a competitor for one year. The court explained that: ?While it is true that a covenant not to compete will not be viewed as a violation of section 16600 if it is necessary to protect the employer?s trade secrets, and while it is true that employers have the right to protect proprietary and property rights which are subject to protection under the law of unfair competition, we do not perceive the intended purpose of the instant covenant not to compete to be the protection of [the defendant?s] property, trade secrets, and other proprietary information since (1) it is the other provisions of the agreement that are meant to provide such protection, and (2) the covenant not to compete only places a one-year limitation on plaintiff?s activities whereas these other provisions are not so limited.? (Ibid., internal citations omitted.)

Here, interpreting Section 5.5 as a provision protecting Plaintiff?s property, trade secrets, and other proprietary information fails for the same reasons discussed in D?sa, supra. In particular, the complaint alleges that another provision, section 7.1, prohibits Defendant from using or disclosing Plaintiff?s trade secrets, and the imposition of a temporal limitation, the period of ?exclusivity,? suggests that the provision is not intended to continue in perpetuity as a provision protecting a company?s trade secrets would. Accordingly, as currently alleged, section 5.5 is unenforceable as an unenforceable covenant not to compete.[3]

  1. Conclusion

In sum, the complaint fails to allege a cause of action based on the violation of sections 5.5 and 7.1. However, since the complaint adequately alleges a cause of action for breach of contract based on the violation of sections 3.8 and 9 of the parties? agreement, the demurrer to the first cause of action is OVERRULED. (See Kong v. City of Hawaiian Gardens Redevelopment Agency (2003) 108 Cal.App.4th 1028, 1047 [stating that ?[a] demurrer cannot rightfully be sustained to a part of a cause of action?]; PH II, Inc. v. Sup. Ct. (1995) 33 Cal.App.4th 1680, 1682 [same].)

  1. Second Cause of Action

??????????? Defendant contends that the second cause of action for breach of the covenant of good faith and fair dealing fails because it is duplicative of the first cause of action for breach of contract. This argument is well-taken. ?[B]reach of the implied covenant of good faith and fair dealing involves something beyond breach of the contractual duty itself.? ?(Congleton v. National Union Fire Ins. Co. (1987) 189 Cal.App.3d 51, 59, emphasis added.) ?In pleading a cause of action for breach of the implied covenant, ?if the allegations do not go beyond the statement of a mere contract breach and, relying on the same alleged acts, simply seek the same damages or other relief already claimed in a companion contract cause of action, they may be disregarded as superfluous as no additional claim is actually stated.??(Careau & Co. v. Security Pacific Business Credit, Inc. (1990) 222 Cal.App.3d 1371, 1395, emphasis added.) Here, the second cause of action is premised on the allegation that Defendant secretly developed its own API to replace and compete with Plaintiff?s API, which is substantially similar to the allegations in the first cause of action. (Compare Compl., ?? 32-33 with ? 40.) Therefore, no additional claim is stated and, the demurrer to second cause of action is SUSTAINED WITH 10 DAYS? LEAVE TO AMEND.

  1. Third Cause of Action

??????????? Defendant first argues that the third cause of action for intentional interference with contractual relations fails because Plaintiff does not allege that an actual contractual relationship was disrupted. Defendant is correct that ?[a]n essential element of a contract interference claim is proof that the defendant?s conduct actually disrupted or breached the plaintiff?s contract.? (Woods v. Fox Broadcasting Sub., Inc. (2005) 129 Cal.App.4th 344, 356.) However, to satisfy this element, a plaintiff need only allege that the defendant?s interference caused an actual or inevitable breach of the third-party contract or made the plaintiff?s performance of that contract more costly or burdensome.?(Pacific Gas & Electric Co. v. Bear Stearns & Co. (1990) 50 Cal.3d 1118, 1129.) ?Here, the complaint specifically alleges that Defendant?s conduct made its performance under its contracts with other partners and customers more expensive. (Compl., ? 47.) Accordingly, the complaint states sufficient facts to allege an actual breach or disruption of its contract with third parties.

Next, Defendant argues that this cause of action fails because it is solely based on its alleged breach of contract and, therefore, a remedy in tort is unavailable. (See JRS Products, Inc. v. Matsushita Elec. Corp. of America (2004) 115 Cal.App.4th 168, 183 [stating that a ?breach of contract claim cannot be transmuted into tort liability by claiming that the breach interfered with the promisee?s business].) This argument lacks merit because the third cause of action is based on Defendant?s disparagement of the ELS, not a breach of the contract between the parties. (Compl., ? 47.) In reply, Defendant contends that this theory is untenable because Plaintiff does not allege any otherwise wrongful conduct, such as a cause of action for defamation. Plaintiff, however, is not required to allege a cause of action for defamation because ?[p]roof [that] the interfering conduct was wrongful, independent from the interference itself, is not required to recover for interference with contractual relations.? (Sole Energy Co. v. Petrominerals Corp. (2005) 128 Cal.App.4th 212, 238.)

In light of the foregoing, the demurrer to the third cause of action is OVERRULED.

  1. Fourth Cause of Action

??????????? Defendant claims that the fourth cause of action for intentional interference with prospective economic relations fails because this cause of action is also based on its alleged breach of contract and, therefore, tort remedies are unavailable. (See JRS Products, Inc., supra, 115 Cal.App.4th at p. 183.) This argument lacks merit because the fourth cause of action is based on Defendant?s development of its own API based on the use of Plaintiff?s trade secrets. (Compl., ? 55; see also Angelica Textile Services, Inc. v. Park (2013) 220 Cal.App.4th 495, 508 [indicating that a breach of contract cause of action based on a violation of a noncompetition agreement is entirely independent of a cause of action for misappropriation of a trade secret].) Accordingly, the demurrer to the fourth cause of action is OVERRULED.

  1. Fifth Cause of Action

While Defendant demurs to the fifth cause of action for preliminary and permanent injunctive relief, it does not address this cause of action in its memorandum of points and authority. Accordingly, the demurrer to the fifth cause of action is OVERRULED.

  1. Motion to Strike Portions of the Complaint

??????????? Defendant moves to strike portions of the complaint on the grounds that it contains irrelevant, false, and improper matters and is not drawn in conformity with the law. (See Code Civ. Proc., ? 436.) In particular, it moves to strike allegations concerning its purported violation of sections 3.8, 5.5, and 9 because these allegations are insufficient to support a cause of action for breach of contract.

?[W]hen a substantive defect is clear from the face of a complaint, such as a violation of the applicable statute of limitations or a purported claim of right which is legally invalid, a defendant may attack that portion of the cause of action by filing a motion to strike.? (PH II, Inc., supra, 33 Cal.App.4th 1680, 1682-1683.) However, a court may not strike allegations of the pleadings essential to a cause of action. (See Quiroz v. Seventh Ave. Center (2006) 140 Cal.App.4th 1256, 1281.)

As previously discussed in connection with the first cause of action for breach of contract, section 5.5 constitutes an unenforceable covenant not to compete as currently alleged. Accordingly, since this defect is clear from the face of the complaint, the motion to strike the allegations concerning section 5.5 is GRANTED WITH 10 DAYS? LEAVE TO AMEND. (See Price v. Dames & Moore (2001) 92 Cal.App.4th 355, 360 [stating that leave to amend is routinely and liberally granted with respect to a motion to strike to provide the plaintiff with a chance to cure the defect in question].)

With respect to the allegations concerning sections 3.8 and 9, the demurrer to the first cause of action is overruled based in part on these allegations. Accordingly, since they are essential to the first cause of action, the motion to strike allegations concerning sections 3.8 and 9 is DENIED.

  1. Motion to Seal

Plaintiff seeks an order sealing portions of the agreement between the parties submitted in connection with Defendant?s request for judicial notice.

Court records are open to the public unless confidentiality is required by law. (Cal. Rules of Court, rule 2.550(c).) A party may not file a record under seal without a court order, and a court may not permit a record to be filed under seal based solely on the agreement or stipulation of the parties. (Cal. Rules of Court, rule 2.551(a).) The court may order that a record be filed under seal only if it expressly finds facts establishing that: (1) there exists an overriding interest that overcomes the right of public access to the record; (2) the overriding interest supports sealing the record; (3) there exists a substantial probability that the overriding interest will be prejudiced if the record is not sealed; (4) the proposed sealing is narrowly tailored; and (5) no less restrictive means exist to achieve the overriding interest. (Cal. Rules of Court, rule 2.551(d).)

In its moving papers, Plaintiff explains that the agreement between the parties contains confidential information related to its licensing terms and rates. As such, it establishes that the information is entitled to confidentiality. (See Universal City Studios, Inc. v. Sup. Ct. (2003) 110 Cal.App.4th 1273, 1285-1286 [stating that confidential matters relating to the business operations of a party may be sealed where public revelation of the information would interfere with the party?s ability to effectively compete in the marketplace].) Accordingly, the Court finds that (1) there exists an overriding interest that overcomes the right of public access to the redacted portions of the document at issue; (2) this interest supports sealing the unredacted document; (3) a substantial probability exists that the overriding interest will be prejudiced if the unredacted document is not sealed; (4) the proposed sealing is narrowly tailored; and (5) no less restrictive means exist to achieve the overriding interest.?(Cal. Rules of Court, rule 2.550(d).) Therefore, Plaintiff?s motion to seal is GRANTED.

Footnotes:

[1] The chapter excepts noncompetition agreements in the sale or dissolution of corporations, partnerships, and limited liability corporations. (Bus. & Prof. Code, ?? 16601-16602.5.)

[2] While Defendant does not specifically identify which provision it contends render the contract unenforceable under Business and Professions Code section 16600, Defendant indicates in its memorandum of points and authorities that ?Article 3.8 is not a covenant not to compete? and contrasts that provision with section 5.5. (Mem. Ps & As., p. 9:5-7.)

[3] The Court notes that an unenforceable covenant not to compete will not necessarily render an entire contract unenforceable. (See Zajicek v. Kool Vent Metal Awning Corp. of America (9th Cir. 1960) 283 F.2d 127, 133 [severing covenant where the licensees enjoyed the benefits of the contract]; Winston Research Corp. v. Minnesota Min. & Mfg. Co. (9th Cir. 1965) 350 F.2d 134, 140 [same].)