Arbitration — while a former employee may demand that the former employer arbitrate its claims of trade secret theft against him, the new employer who allegedly received the secrets cannot claim any right to arbitrate the claims against it
The First District, Division Five, has held agreement signed by an employee agreeing to arbitrate claims related to his employment cannot be utilized by the employee’s new employer to force the former employer to arbitrate claims against it related to theft of trade secrets. (Mattson v. Applied (October 30, 2023) A165378.) Defendant Applied is a competitor of plaintiff Mattson and hired at least 14 former employees of Mattson, including co-defendant Lai, who eventually admitted that he emailed himself documents from his tenure at Mattson before he left for Applied. Mattson sued both Lai and Applied, and the defense moved to compel arbitration pursuant to the employment agreement signed by Lai and Mattson.
Plaintiff alleged causes of action for 1) misappropriation under the Uniform Trade Secrets Act against each defendant, and, as against employee Lai, breach of his employment agreement. Of course, at the time the agreement with Mattson was signed, there was no employment or other sort of contractual relationship between Lai and Applied.
The Hon. Evelio M. Grillo, Judge Presiding, of the Superior Court of Alameda County ruled that while Lai could compel arbitration, Applied had no right to compel former employer Mattson to arbitrate. The trial court also issued a broad preliminary injunction regarding any use of trade secrets. Moreover, the trial court declined to stay litigation of the claims of Mattson against Applied until the claims against Lai could arbitrated.
Justice Burns and a unanimous court upheld the first two of these trial court orders. Even though Applied could claim no contractural privity, it argued that “equitable estoppel” prevented Mattson from refusing arbitration of its claims against Applied. This argument was rejected by the First District because, inter alia, former employer Mattson made no attempt to apply any portion of the employment agreement with Lai against new employer Allied:
Equitable estoppel provides a limited exception to this general rule. When a signatory to a contract asserts claims against a non-signatory that rely upon, or are inextricably bound up with, the contract terms, the non-signatory may invoke an arbitration clause in the same contract.
This makes sense. As a matter of fairness, when a party to a contract seeks to hold a non-signatory defendant liable for obligations imposed by the contract, the party cannot evade an arbitration clause in the contract simply because the defendant is a non-signatory. It’s a two-way street.
Keeping this policy in mind helps define the limits of the rule. It is not enough that a complaint simply refers to a contract; the claims must be founded on the contract. Nor is it sufficient that a complaint alleges collusion between a signatory and non-signatory defendant, or that the controversy would not have occurred but for the existence of the contract, provided the contract is not the basis for the claims against the non-signatory. In these situations, the policy rationale for equitable estoppel—"relying on an agreement for one purpose while disavowing the arbitration clause of the agreement”—does not exist. (Id., pp. 5-6; citations omitted and emphasis added.)
The Mattson court therefore relied upon a federal case, Waymo LLC v. Uber Techs., Inc. (Fed. Cir. 2017) 870 F. 3d 1342, at 1343-1344) where, likewise, the claims of misappropriation against the new employer did not rely upon the employee's contract with the former employer.
The appellate court also upheld the injunction against Applied, finding the trial court had a reasonable basis for granting its order. However, it overturned the trial court’s order denying the request to stay the litigation to first permit the completion of the arbitration with Lai. As the First District pointed out, California's Code of Civil Procedure section 1281.4 provides a “stay” in these circumstances “shall” be granted:
If a court of competent jurisdiction. . . has ordered arbitration of a controversy which is an issue involved in an action or proceeding pending before a court of this State, the court . . . shall . . . stay the action or proceeding until an arbitration is had in accordance with the order to arbitrate. (Id., p. 12.)
Tips for practitioners
Equitable estoppel is often misapplied by counsel, not only because it is an equitable concept that relies heavily upon how the facts of a particular case are to be interpreted. The concept is also applied in a sloppy and/or cursory way because counsel wrongly presume the concept is entirely malleable because it involves "equity;" therefore, counsel mistakenly focus more on what they believe are the sympathies in their particular case rather than the limitations of the doctrine set forth by case law.
However, the key concept in equitable estoppel may be said to be the parameters of "estoppel" and not the broader concept of equity.
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