USS-POSCO Industries v. Case: Employer Can Require Employees to Repay Educational Expenses

The introduction to USS-POSCO Industries v. Case (Cal.App. 1/26/16) gives a good summary of the case, so here it is (with a couple of edits):

Defendant and appellant Floyd Case [a union employee] voluntarily enrolled in a three-year, employer-sponsored educational program [that was the subject of an MOU between the employer and the union]. He agreed in writing that if he quit his job within 30 months of completing the program, he would reimburse his employer, USS-POSCO Industries (UPI), a prorated portion of program costs. Two months after completing the program, Case went to work for another employer. When he refused to reimburse UPI, the company sued for breach of contract and unjust enrichment. Case cross-complained, asserting the reimbursement agreement was unenforceable and UPI had violated the Labor Code and other statutory provisions in seeking reimbursement.

The trial court granted UPI’s motion for summary judgment on both its complaint and Case’s cross-complaint, and subsequently granted UPI’s motion for attorney fees for defeating Case’s wage claims. In granting the fee motion, the court applied the version of Labor Code section 218.5 in effect at the time of the summary judgment proceedings, rather than the version in effect at the time it awarded fees, which permits fees to a prevailing employer only when the employee’s wage claims have been brought in “bad faith.”

We affirm the summary judgment, but reverse and remand the attorney fees award. Under California Supreme Court precedent, statutory provisions that alter the recovery of attorney fees are deemed procedural in nature and apply to pending litigation.

The Court explained as follows:

The employer's voluntary, optional training program did not implicate Labor Code section 2802, which requires employers to indemnify employees for necessary expenditures or losses, or 450, which prohibits employers from requiring employees to patronize them. Case did not have to take the course, and UPI did not force him to do so. The Court distinguished In re Acknowledgment Cases (Cal.App. 8/12/15) (discussed here), in which the Court refused to allow the City of Los Angeles to recoup certain employer-mandated training expenses. Nor did the program implicate Labor Code sections 401 et seq., which prohibit the taking of certain bonds from employees.

The program did not violate Business and Professions Code 16600, which voids "every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind." Case volunteered for the program and agreed to repay the training costs if he left UPI. The agreement did not prohibit or even limit him from working elsewhere, which he in fact did. It only required him to re-pay a prorated part of the training costs.

The agreement did not violate agreement did not violate sections 158(a)(5) and 159(a) of the National Labor Relations Act (NLRA), which prohibit employers from refusing to bargain collectively with employee representatives and provide that such representatives are the employees' sole bargaining agents. "An employee’s separate individual contract that is consistent with [a] collective bargaining agreement may be enforced." Case's MOU expressly authorized the reimbursement agreement, so the agreement was consistent with the MOU. 

The agreement did not lack consideration. UPI continued to pay Case his wages while enrolled in the program. In addition, Case received the training and, in consideration, agreed to repay a portion of the costs if he left. "That either Case or UPI could have terminated the agreement by ending the employment relationship at some point during the educational program does not render illusory the parties’ bargained-for exchange...." 

The agreement was not procedurally unconscionable. It was negotiated between UPI and the union, parties with equivalent bargaining power. The reimbursement provision was not a surprise, and Case could have obtained the training elsewhere if he so chose. 

Even if the agreement had been procedurally unconscionable, it was not substantively unconscionable. There was no evidence that the union colluded with UPI to overstate the training cost, and the agreement required Case to repay only a portion of it. 

Finally, the agreement did not violate Labor Code sections 221 to 223, which prohibit employers from recouping, withholding, or secretly paying less than agreed wages. 

UPI could not recover its attorney fees and costs from Case under the version of Labor Code section 218.5, which governs attorney fee awards in actions for the nonpayment of wages. Effective January 1, 2014, section 218.5 allows employers to collect such fees " only if the court finds that the employee brought the court action in bad faith." Although nothing in the legislative history indicated an intent to apply the amendment retroactively, under California law, "a new statute authorizing an award of attorney fees" or a statute "increasing or decreasing litigation costs, including attorneys’ fees" applies to actions pending at the time of enactment. This case was pending when the legislature amended section 218.5, and in fact the amendment went into effect before the trial court awarded UPI its fees. The court erred in not applying it. On remand, UPI would have to show bad faith to recover its fees. 

The opinion is available here. 

Golden v. California Emergency Physicians: Ninth Circuit Addresses "No Employment" Clauses and Business and Professions Code Section 16600

In Golden v. California Emergency Physicians, ___ F.3d ___ (9th Cir. 4/8/15), plaintiff Donald Golden, M.D., was affiliated with defendant California Emergency Physicians Medical Group (CEP), "a large consortium of over 1000 physicians that manages or staffs many emergency rooms, inpatient clinics, and other facilities in California and other, mostly Western states." Golden sued CEP for numerous causes of action, and the parties settled before trial.

On the record before the Court, Golden waived any and all rights to employment with CEP or at any facility that CEP may own or with which it may contract in the future. When the parties reduced the agreement to writing, Golden refused to sign and attempted to have the agreement set aside. The district court rejected this effort, and Golden appealed. The Ninth Circuit reversed, holding as follows:

Section 16600 of the California Business and Professions Code instructs 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.” Section 16600 does not merely prohibit covenants not to compete. It is broadly drawn, with limited exceptions, to void all contracts that restrain the lawful pursuit of a profession, trade, or business.

On this basis, the Ninth Circuit reversed the district court and remanded for the district court to "determine in the first instance whether the no-employment provision constitutes a restraint of a substantial character to Dr. Golden’s medical practice."

The opinion is available here.

Angelica Textile Services v. Park: Employer Could State Non-Trade Secret Claims Against Former Officer

In Angelica Textile Services, Inc. v. Park (10/15/13) --- Cal.App.4th ---, an employer, Angelica, sued a former officer, Park, and his new employer for misappropriating trade secrets, violating the Unfair Competition Law (Cal. Bus. & Prof. Code 17200), interfering with business relationships, breaching his employment contract, converting documents, and breaching his fiduciary duties. Angelica alleged that Park disparaged it to a local bank and, in negotiating new contracts with two of its large customers, gave the customers cancellation rights that are not customary in the industry and that permitted those customers to shortly thereafter take their business to Park's new employer.

Before trial, the court dismissed Angelica's claims, other than its claim for violation of the Uniform Trade Secret Act (UTSA). Cal. Civil Code section 3426 et seq. The Court found that all non-UTSA claims were based on the alleged misappropriation of trade secrets and were therefore preempted by UTSA. A jury then found for the defendants on the trade secret claim.

The Court of Appeal reversed the judgment as to the non-UTSA causes of action. It held:

The UTSA did not preempt Angelica's non-UTSA claims. Slip op. at 10-16.

Breach of contract claims, even when they are based on misappropriation or misuse of a trade secret, are not displaced by UTSA. Slip op. at 15. Angelica's breach of contract claim was not based on any misappropriation of a trade secret but on Park's violation of a noncompetition agreement and was outside the scope of UTSA displacement on that basis as well. Ibid.

Angelica's claims for breach of fiduciary duty, unfair competition, and interference with business relations also alleged Park's violation of a noncompetition agreement and were outside the scope of UTSA displacement. Slip op. at 16. Angelica's conversion claim alleged that Park took non-trade secret documents and was not displaced by the UTSA. Slip op. at 16.  

Business and Professions Code section 16600, which limits the use of non-competition agreements, "does not affect limitations on an employee's conduct or duties while employed." Slip op. at 17. As a corporate officer, Park owed Angelica "broad fiduciary duties" while employed there, and section 16600 did not apply. Ibid. 

The opinion is available here. 

Nitro-Lift Technologies v. Howard: SCOTUS Holds That Trial Court Erred In Declaring Employees' Non-Competition Agreements Void, Should Have Allowed Arbitrator To Rule

Nitro-Lift Technologies, L.L.C. v. Howard (11/26/12) may be the only per curiam arbitration case that we see out of the United States Supreme Court this term or at any time in the near future.

Two employees entered into a confidentiality and noncompetition agreement with Nitro-Lift that contained an arbitration clause. The employees quit and went to work for a competitor. Nitro-Lift demanded arbitration, and the employees filed suit in court, seeking declaratory relief and an injunction to prevent enforcement of the agreement. The trial court dismissed the complaint, finding that the con­tract contained a valid arbitration clause, under which an arbitrator, and not the court, must settle the dispute.

The Oklahoma Supreme Court reversed, holding that despite the “[U. S.] Supreme Court cases on which the employers rely,” the “existence of an arbitration agreement in an employment contract does not prohibit judicial review of the underlying agreement.” Slip op. at 2. The Court then held the agreements void as contrary to Oklahoma public policy. Slip op. at 3.  The U.S. Supreme Court reversed, holding:

1. The Court had jurisdiction because Nitro-Lift relied on Supreme Court authority construing the Federal Arbitration Act ("FAA"). Slip op. at 3. 
2. The Oklahoma Supreme Court's decision misconstrued the FAA: "attacks on the validity of the con­tract, as distinct from attacks on the validity of the arbi­tration clause itself, are to be resolved 'by the arbitrator in the first instance, not by a federal or state court.'" Slip op. at 4. The trial court found the arbitration clause enforceable, and it was for the arbitrator to decide whether the contract as a whole was valid. Ibid. 
3. The Court also should have allowed the arbitrator to decide whether the noncompetition agreement was enforceable. Ibid. Oklahoma's laws against enforcement of noncompetition clauses must yield to federal law on enforcement of arbitration agreements. Slip op. at 5. "Hence, it is for the arbitrator to decide in the first instance whether the covenants not to compete are valid as a matter of applicable state law." Ibid. 

I know that some people reacted very strongly to this decision when it came down, but I do not find it surprising. The Court did not overturn Oklahoma's public policy against noncompetition agreements. The Court simply held that the arbitrator, rather than the courts, should determine the validity of the noncompetition agreements in the first instance.  

The opinion is available here.

Fillpoint, LLC v. Maas: Court Finds Employee's Non-Competition Agreement Unenforceable

In Fillpoint v. Maas (8/24/12) --- Cal.App.4th ---, an employee who held stock in his employer sold that stock to a company purchasing the employer.  He signed a stock purchase agreement, which contained a three-year covenant not to compete. 

He also signed an employment agreement containing a one-year covenant not to compete, which would become operative when employee's employment with the employer ended.  The employee resigned from the employer three years after its acquisition by the purchaser. About six months later, he began working for a competitor. Fillpoint, which had acquired the employer from the purchaser, sued the employee for breaching his employment agreement, and also sued his new employer for interference with contract. The trial court granted the defendants' nonsuit motion, and the Court of Appeal affirmed.

The Court held that the covenant not to compete executed in connection with the sale of the employee's stock was enforceable under Labor Code section 16601.  Slip op. at 7-9.  

It also held that the employment agreement must be read in conjunction with the stock purchase agreement.  Slip op. at 9-14. The Court explained: 

In this case, both the purchase agreement and the employment agreement contained covenants not to compete, but those covenants were not identical.... The two agreements were between the same parties; although the purchase agreement was between Handleman and Maas, and the employment agreement was between Crave and Maas, Crave was owned by Handleman after the acquisition.  Both agreements referenced each other, and the employment agreement contained an integration clause providing that in the event of any conflicts between the terms of the two agreements, the terms of the purchase agreement would prevail.  Based on these facts, we conclude the purchase agreement and the employment agreement must be read together as an integrated agreement. The trial court erred in concluding the purchase agreement and the employment agreement must be read separately.  

Slip op. at 13-14.  

Regardless, the Court concluded that the non-competition agreement contained in the employment agreement was not enforceable.  Slip op. at 14-16.  

The purchase agreement's covenant was focused on protecting the acquired goodwill for a limited period of time.  The employment agreement's covenant targeted an employee's fundamental right to pursue his or her profession. 

Slip op. at 16.  In addition, the Court held that the non-solicitation terms found in the employment agreement were overly broad and were not enforceable.  Ibid.  

The opinion is available here. 

NewLife Sciences v. Weinstock: Court Did Not Err in Granting Trade Secret Injunction as Discovery Sanction

In NewLife Sciences v. Weinstock (July 15, 2011) 197 Cal.App.4th 676, a medical device corporation brought a trade secret action against the device's inventor for trade secret and other claims, including an injunction to enforce a non-competition agreement. Following a number of discovery disputes, the court (Los Angeles Superior, Judge Charles F. Palmer) entered issue sanctions against the inventor. Relying on the issue sanctions, the Court later granted a preliminary injunction against the inventor, prohibiting him from competing against the corporation. After further discovery disputes, the court entered terminating sanctions.

On appeal from the order granting the order granting the preliminary injunction, the Court held that the trial court did not abuse its discretion in granting the preliminary injunction based on the issue sanctions.

Weinstock argues that the court erred in relying on the issue sanctions rather than holding a hearing to determine, without regard to the sanctions, whether the noncompete agreement was enforceable. He argues that had the court not granted the issue sanctions, it would have determined that the noncompete clause was invalid and unenforceable and would have found that NLS did not demonstrate a probability of success on the merits. Essentially, Weinstock argues that the court should have ignored the issue sanctions and determined the issues anew. This misunderstands the nature of issue sanctions. Such sanctions for discovery abuse may be proper even when inconsistent evidence is available, leaving the jury with a misimpression as to actual facts, because the sanctions “effectively remove[ ] from the jury's consideration evidence favorable to the offending party's position, or ... deem [ ] issues in favor of the aggrieved party even though the offending party has strong evidence to the contrary. Such is the natural consequence of serious discovery violations.” (Karlsson v. Ford Motor Co., supra, 140 Cal.App.4th at 1220, fn. 11, 45 Cal.Rptr.3d 265.) The court did not abuse its discretion in relying on the issue sanctions in granting the preliminary injunction.

The issue sanctions established that Weinstock knowingly breached his employment contract, including the noncompete clause, and engaged in unfair competition; that the employment contract and the noncompete clause were enforceable; that Weinstock used the TMR machine in doing so, and without the proper supervision of a physician; and that NLS suffered damages. These issues having been deemed determined against Weinstock, the court was entitled to consider them in determining NLS's likelihood of success. Given that the determined issues virtually assured that NLS would prevail at trial, there was a very strong showing of likelihood of success on its claim that Weinstock had violated the enforceable noncompete clause and had used the TMR device in doing so, to the detriment of NLS.

Slip op. at 10.

The opinion is available here.

Court of Appeal Holds That Employee Can Sue for Wrongful Termination Based on Invalid Non-Competition Agreement

Silguero v. Creteguard, Inc. (July 30, 2010) --- Cal.Rptr.3d ----, 2010 WL 2978222, caught my eye, even though it's not a wage and hour case or a class action.

This case presents the question of whether a terminated employee working in the area of sales has a viable claim for wrongful termination in violation of public policy under Tameny v. Atlantic Richfield Co. (1980) 27 Cal.3d 167, 164 Cal.Rptr. 839, 610 P.2d 1330 (Tameny) against her subsequent employer when the employee's former employer contacts the employee's subsequent employer and informs it that the employee had signed an agreement with the former employer which prohibited the employee “from all sales activities for 18 months following either departure or termination,” and the subsequent employer terminated the employee's employment out of “respect and understanding with colleagues in the same industry,” notwithstanding its belief that “non-compete clauses are not legally enforceable here in California .”

Because of Business and Professions Code section 16600's legislative declaration of California's “settled legislative policy in favor of open competition and employee mobility” (Edwards v. Arthur Andersen LLP (2008) 44 Cal.4th 937, 946, 81 Cal.Rptr.3d 282, 189 P.3d 285 (Edwards)), we conclude that the employee has a viable Tameny claim. Accordingly, the judgment entered after the trial court sustained without leave to amend the subsequent employer defendants' demurrer to the second amended complaint will be reversed.

Slip op. at 1.