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Court of Appeal:
Company That Recruited Employee of Competitor Can’t Compel Arbitration
Opinion Says Arbitration Clause in Agreement Between the Hiree and His Former Employer Cannot Be Invoked by New Employer
By a MetNews Staff Writer
The Court of Appeal has held that where an employee of a high-technology company quit to go to work for a competitor that had wooed him and, before departing, emailed to his personal accounts trade secrets of the employer, the trial court did not err in denying the new employer, sued along with its recruit, an opportunity to piggy-back on an arbitration clause in the employment agreement with the first employer.
Justice Gordon B. Burns of the First District’s Div. Five authored the opinion, filed Wednesday. It affirms orders by Alameda Superior Court Judge Evelio M. Grillo except as to his denial of a motion by the new employer, Mattson Technology, Inc., to stay proceedings against it pending resolution of the arbitration between plaintiff Applied Materials, Inc. and its allegedly perfidious ex-employee, Canfeng Lai.
Lai—who purported to have sent the emails to himself to preserve “souvenirs” of his work—invoked the right to arbitrate the dispute, and its right was unchallenged. Mattson asserted that it, too, had a right to avoid the more cumbersome proceedings in court because the claims against it were intertwined with those against Lai.
Burns’s Opinion
Burns wrote:
“Generally, only signatories to a contract are bound by or may invoke its arbitration clause….
“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.”
However, he said, Applied was asserting that Mattson violated the Uniform Trade Secrets Act by swiping confidential information. That claim, Burns declared, was independent of the allegation that Lai had breached his contractual obligation to maintain confidentiality as to company secrets, explaining:
“Mattson points to the complaint’s allegation that Mattson ‘knew or had reason to know’ that the stolen information was subject to ongoing confidentiality obligations, but the complaint does not cite or rely on a contract for this allegation; the same obligations arise from statutory and common law….Accordingly, the policy rationale for estoppel does not apply. Applied is not selectively enforcing against Mattson the trade secret provisions of Lai’s employment contract while trying to avoid its arbitration clause.”
Reputational Harm
Mattson argued that the mere existence of a preliminary injunction barring it from making use of Applied’s trade secrets wrongfully causes harm to its reputation by implying that “some evidence exists that it engaged in wrongdoing.” Burns responded:
“The point is so broad it would apply equally any time a court temporarily enjoins any potential misappropriation pending trade secret litigation. In any event, it was within the court’s discretion to find on the evidence presented in this case that the potential harm to Applied from the disclosure or use of its trade secrets outweighed the potential harm to Mattson’s reputation.”
He noted that the Trade Secrets Act “authorizes the enjoining of threatened, as well as actual, misappropriation.”
Likelihood of Success
Grillo granted the preliminary injunction based on his determination that Applied had shown a likelihood of success.
Citing evidence in the record, Applied said in its appellate brief:
“Lai’s conduct was not an isolated incident by a rogue actor. His departure was the latest in a string of Applied employees leaving for Mattson under suspicious, apparently choreographed circumstances. In the eighteen months prior to Lai’s hiring, Mattson brought over sixteen Applied executives and/or key engineers….Most of these now-Mattson employees followed a similar playbook upon their resignation from Applied, wiping their Applied-issued phones of all data to obscure communications and shared information, and giving evasive (or outright false) answers during their exit interviews about their employment plans.”
Burns said there was “circumstantial proof” that Mattson was complicit in or knew of Lai’s pilfery of trade secrets.
“Interpreting this evidence in the light most favorable to Applied and indulging in all reasonable inferences in support of the trial court’s order…, the trial court’s evaluation of Applied’s likelihood of successfully establishing Mattson was involved in at least threatened misappropriation neither exceeded the bounds of reason nor contravened uncontradicted evidence,” he wrote.
Granting a Stay
Grillo erred in declining to stay proceedings against Mattson, Burns said. He cited Code of Civil Procedure §1281.4, which provides:
“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.”
He pointed out that “[t]he word ‘shall’ is mandatory, and wrote:
“We cannot agree that Applied’s claim against Mattson under the Act is independent of the same claim against Lai….The complaint makes no attempt to distinguish the factual bases for those claims; to the contrary, it relies on the same factual allegations against both defendants to depict a scheme whereby Mattson recruited Lai to provide it with Applied’s trade secrets. For good reason. To prevail on its misappropriation claim against Lai, Applied must prove he acquired its confidential information by improper means.”
Burns continued:
“To prevail against Mattson, Applied must essentially prove its competitor obtained its confidential information from Lai with actual or constructive knowledge that he obtained it improperly…or that he owed Applied a duty to maintain its secrecy…or that Mattson obtained the information by inducing Lai to breach that duty of secrecy….The trade secret claims against Lai and Mattson thus share common factual questions concerning Lai’s activities during his last week at Applied and Mattson’s alleged involvement in them.”
The case is Mattson Technology v. Applied Materials, 2023 S.O.S. 4008.
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