EDWARD M. CHEN, District Judge.
Plaintiffs Gold Coast Search Partners LLC ("Gold Coast"), Anna Brady, and Janelle Matthews (collectively, "Plaintiffs") filed suit seeking declaratory and injunctive relief. Brady and Matthews signed non-compete and non-solicitation covenants in a pre-employment agreement ("Employment Agreement") when they were former employees of Defendants Career Partners, Inc. ("CPI") and Brian O'Callaghan (collectively, "Defendants"). Plaintiffs' complaint seeks a declaratory judgment holding these covenants invalid. Plaintiffs also seek to enjoin Defendants from enforcing the Employment Agreement in an earlier-filed action before a New York state court.
Pending before the Court are two motions: Plaintiffs' preliminary injunction motion ("PI Mot.") and Defendants' motion to dismiss ("MTD"). The Court heard both motions in a consolidated hearing.
Pursuant to the reasons discussed below, Plaintiffs' preliminary injunction motion is
CPI is a New York corporation engaged in the business of talent recruitment for investment firms. Compl. ¶ 8. CPI's main office is in New York City. MTD at 3. It is in the business of recruiting pre- and post-MBA candidates with CPI's investment-firm clients. Id. Brady and Matthews began working as recruiters for CPI in its San Francisco, California office in September 2009 and March 2010, respectively. Compl. ¶ 15. Both separated from CPI in January 2019 to start their own company—Gold Coast, a professional recruiting firm for private equity firms and hedge funds. Id. ¶¶ 4, 15; PI Mot. at 6. When Brady and Matthews joined CPI, they signed the Employment Agreement containing the at-issue restrictive covenants. Compl. ¶ 4.
The Employment Agreement's non-compete covenant reads as follows:
Compl. ¶ 18 (emphasis added). The Employment Agreement also includes the following non-solicitation clause:
Compl. ¶ 19. The Employment Agreement defines "Customers" broadly to include past and present clients of CPI, which further includes the clients' agents and employees. Id. at ¶ 20. The Employment Agreement contains a New York choice-of-law provision. Id. ¶ 26. Brady and Matthews remained as California residents throughout their employment with CPI. PI Mot. at 3. On occasions during their employment with CPI, Brady and Matthews traveled to and performed services in New York.
After Plaintiffs began operating as Gold Coast, Defendants' counsel sent Plaintiffs correspondence requesting confirmation that Brady and Matthews would comply with the Employment Agreement. Id. at 4. Defendants received no response. Id. Around the same time, Plaintiffs opened an office in New York City (less than one mile away from CPI). Id. at 5. Defendants allege Plaintiffs caused at least one CPI customer to engage Gold Coast rather than CPI. MTD at 4.
Thereafter, Defendants filed suit in New York Supreme Court (the "New York Action") to enforce the restrictive covenants of the Employment Agreement, among other things. See Plaintiffs' Request for Judicial Notice ("RJN"), Ex. 1, at 14-22 (Defendants' complaint in New York seeks injunctive relief, breach of contract, theft of compensation, unfair competition, and tortious interference with contract).
On May 24, 2019, Defendants herein propounded 300 document requests in the New York Action, which requested information related to Plaintiffs' interactions with CPI's clients, among other things. PI Mot. at 7. On June 14, 2019, Plaintiffs herein (defendants in the New York Action) filed a motion to dismiss in the New York Action on forum non conveniens grounds, as well as on the merits. MTD at 4, fn 3. Plaintiffs have not contested personal jurisdiction in New York.
On July 31, 2019, the parties met for a preliminary conference in the New York Action. At this conference, the New York Supreme Court stayed the case pending the disposition of the motions before this Court. The parties also set November 7, 2019, as the hearing date before the New York Supreme Court for the pending motion to dismiss.
Defendants' New York Action commenced on April 25, 2019.
A party seeking a preliminary injunction must meet one of two variants of the same standard. Under the original Winter standard, a party must show "that he is likely to succeed on the merits, that he is likely to suffer irreparable harm in the absence of preliminary relief, that the balance of equities tips in his favor, and that an injunction is in the public interest." Winter v. NRDC, Inc., 555 U.S. 7, 20 (2008). Under the "sliding scale" variant of the Winter standard, "if a plaintiff can only show that there are `serious questions going to the merits'—a lesser showing than likelihood of success on the merits—then a preliminary injunction may still issue if the `balance of hardships tips sharply in the plaintiff's favor,' and the other two Winter factors are satisfied." All. for the Wild Rockies v. Pena, 865 F.3d 1211, 1217 (9th Cir. 2017) (quoting Shell Offshore, Inc. v. Greenpeace, Inc., 709 F.3d 1281,1291 (9th Cir. 2013)).
Plaintiffs seek to enjoin Defendants from the following four acts, as pled in their motion:
PI Mot. at 3. Defendants argue that the Anti-Injunction Act ("AIA") prohibits the Court from enjoining the New York Action, and that the requested preliminary injunction is also an improper restraint on speech.
The AIA prevents federal courts from granting "an injunction to stay proceedings in a State court except as expressly authorized by Act of Congress, or where necessary in aid of its jurisdiction, or to protect or effectuate its judgments." 28 U.S.C. § 2283. "Any doubts as to the propriety of a federal injunction against state court proceedings should be resolved in favor of permitting the state court to proceed in an orderly fashion to finally determine the controversy. The breadth of the Act's prohibition is broad." Atlantic Coast Line R.R. Co. v. Bhd. of Locomotive Eng'rs, 398 U.S. 281, 286-87 (1970). The threshold question is whether the injunction seeks to stay a state court proceeding. If so, the next question is whether an exception applies. The three exceptions to the AIA are for injunctions that: (1) Congress has expressly authorized; (2) are necessary in aid of the federal court's jurisdiction; or (3) are necessary to protect or effectuate the federal court's judgments. Bennett v. Medtronic, Inc., 285 F.3d 801, 805 (9th Cir. 2002), as amended on denial of reh'g (May 15, 2002). These exceptions are narrowly construed. Atlantic Coast., 398 U.S. at 287.
Defendants assert that the preliminary injunction motion, as written, would prevent Defendants from pursuing a parallel state court action because—pursuant to items (1) and (4) in Plaintiffs' requested injunctive relief—it seeks to prevent them from "[e]ngaging in any conduct to interfere with Plaintiffs' business, including threats of legal action" and "[p]rosecuting their claims against Plaintiffs in New York." Despite this, Plaintiffs argue that they are not requesting an order enjoining the New York Action, but, instead, seek an order enjoining the Defendants from enforcing the Employment Agreement against Plaintiffs.
However, Plaintiffs' distinction is without a difference. Enjoining Defendants from enforcing the Employment Agreement in New York, as Plaintiffs request, would have the effect of enjoining a parallel state court action—which the AIA prohibits. Bennett, 285 F.3d at 805. ("Ordering the parties not to proceed is tantamount to enjoining the proceedings.") Thus, Plaintiffs' request for preliminary injunction seeks to enjoin a parallel state court proceeding and falls within the ambit of the AIA.
The next inquiry is whether an exception applies. The Ninth Circuit's decision in Bennett is instructive of the AIA's application here. In Bennett, the Ninth Circuit reversed the lower court's grant of injunctive relief, which enjoined a parallel state court action in Tennessee.
At the hearing, counsel for Plaintiffs were unable to address how or why the AIA does not apply. Because the rights Plaintiffs are seeking to enforce are in personam (i.e., a judgment can be enforceable against them wherever they are), their request for a preliminary injunction to enjoin the New York Action violates the AIA, and no exception applies. See Bennett, 285 F.3d at 805 ("injunctions are permitted where an in personam action bears substantial similarity to an in rem action."). Accordingly, the requested relief in Plaintiffs' preliminary injunction motion that would effectively enjoin the New York Action is
The remaining requested relief is problematic for a different reason. Plaintiffs also seek to enjoin Defendants from (1) stating or claiming that Plaintiffs are prohibited from conducting their business or that they are violating any agreement with Defendants; and (2) stating or implying that Plaintiffs are bound by the Employment Agreement. Defendants contend this request is an improper prior restraint on speech.
Plaintiffs allege the speech is directed towards recruiting candidates—i.e., clients targeted by both Gold Coast and CPI. Because Plaintiffs seek to enjoin Defendants' speech before it occurs, the requested preliminary injunction functions as a prior restraint. See Allen v. Ghoulish Gallery, 2007 WL 1555739 *2 (S.D. Cal. May 23, 2007) (citing Smith v. Daily Mail Publishing Co., 433 U.S. 97, 103 (1979) ("An injunction enjoining speech and expression is an example of a prior restraint on speech."). Prior restraints are presumptively unconstitutional. See Organization for a Better Austin v. Keefe, 402 U.S. 415, 419 (1971) ("Any prior restraint on expression comes to this Court with a `heavy presumption' against its constitutional validity.") (citations omitted). Though the Supreme Court has never held that prior restraints are always unconstitutional as a matter of law, see Bantam Books, Inc. v. Sullivan, 372 U.S. 58, 71 (1963), only in "exceptional cases" may courts permit this "extraordinary remed[y]." CBS Inc. v. Davis, 510 U.S. 1315, 1317 (1994) (citing Nebraska Press Ass'n v. Stuart, 427 U.S. 539, 562 (1975)). Plaintiff has not established a sufficiently compelling justification for the prior restraint on speech sought herein. Since even potential danger to national security has been held insufficient to override prior restraint, Defendants' disparaging comments to potential Gold Coast clients likely do not pass muster. While the Court recognizes and is sympathetic to the unique nature of Plaintiffs' business profession, which could be threatened by the alleged slander, the Court has an obligation to delicately balance such interests with the constitutional right to free speech. See Nebraska Press Ass'n v. Stuart, 427 U.S. 539, 570 (1976) ("the guarantees of freedom of expression are not an absolute prohibition under all circumstances, but the barriers to prior restraint remain high and the presumption against its use continues intact.").
To be sure, commercial speech receives less protection under the First Amendment than non-commercial speech. Allen, WL 1555739, at *3 (citing U.S. v. Edge Broadcasting Co., 509 U.S. 418, 426 (1993). But even commercial speech enjoys protection against prior restraints. See, e.g., New.Net, Inc. v. Lavasoft, 356 F.Supp.2d 1071, 1088 (C.D. Cal. 2003) (preliminary injunction is not available for enjoining libelous statements, even for commercial speech and even where the false statements would likely cause injury to business or property.).
It is true that the "First Amendment offers no protection for false or deceptive commercial speech." Central Hudson Gas & Elec. Corp. v. Public Serv. Comm'n, 447 U.S. 557, 563 (1980). However, truthful commercial speech does enjoy meaningful First Amendment protection. Ohralik v. Ohio State Bar Ass'n, 436 U.S. 447, 456 (1978); Bd. of Trustees of State Univ. of New York v. Fox, 492 U.S. 469, 478 (1989). A preliminary injunction is not ideal for resolving the actual truth or falsity of Defendants' speech, particularly where the merits of the matter is already pending in another court.
Here, there are additional reasons that counsel against this Court issuing the injunction against speech sought by Plaintiffs. The content that Plaintiffs seek to censor concerns a publicly-filed lawsuit, the details of which are already made available to the public. An injunction from this Court would ostensibly function as a gag order issued by another court. The New York Supreme Court is better situated to address whether a prior restraint on speech is appropriate because it is intertwined with the litigation, which will require analyzing the truth of the speech Plaintiffs seek to restrain through their pending motion to dismiss. Accordingly, the remainder of their preliminary injunction motion is
Defendants' motion makes five requests. According to Defendants, the Court (1) should dismiss or stay this action under the Colorado River; (2) stay this action pursuant to its inherent powers under Landis; (3) dismiss the claim for injunctive relief; (4) dismiss the claim for declaratory relief; and/or (5) dismiss Defendant O'Callaghan entirely. As stated at the outset of this order, the Court will stay this action, thereby rendering the remainder of Defendants' motion moot.
Under Colorado River, a district court may decline to "exercise federal jurisdiction, in deference to pending, parallel state proceedings" when such a decision is justified by considerations "of wise judicial administration, giving regard to conservation of judicial resources and comprehensive disposition of litigation." Montanore Minerals Corp. v. Bakie, 867 F.3d 1160, 1165-66 (9th Cir. 2017). In exceptional circumstances, a federal court may decline to exercise federal jurisdiction where "the order to the parties to repair to the state court would clearly serve an important countervailing interest." Id. at 813.
The Ninth Circuit has articulated a balancing test that considers the following eight factors:
R.R. St. & Co. Inc. v. Transp. Ins. Co., 656 F.3d 966, 978 (9th Cir. 2011). However, these factors should not be evaluated as a "mechanical checklist" and "[a]ny doubt as to whether a factor exists should be resolved against a stay or dismissal." Seneca Ins. Co., Inc. v. Strange Land, Inc., 862 F.3d 835, 842 (9th Cir. 2017).
Defendants argue that the balance of factors under Colorado River weigh in favor of staying the instant action. Plaintiffs contend that abstention under Colorado River is only appropriate under exceptional circumstances, which are not present here. But Plaintiffs also acknowledge that a stay (instead of a dismissal) would ensure that the federal forum will remain open if the state forum proves to be inadequate. The following factors favor a stay.
The parties are in accord that no property is at stake. The parties also agree that federal law does not provide the rule of decision on the merits because state law governs whether the Employment Agreement is enforceable. These factors are either neutral or weigh in favor of a stay in this Court. Cf. R.R. St. & Co. Inc., 656 F.3d at 980.
Defendants concede that the Court is not an inconvenient form (nor is it the more convenient or only forum), so the factor is neutral. Plaintiffs argue that, under California law, it is the forum in which this lawsuit must be adjudicated because of California Labor Code section 925, which prohibits an employer from requiring its employees to sign a forum-selection or choice-of-law clause as a condition of employment. See Cal. Labor Code § 925(a)(1)-(2). Defendants dispute that Section 925 applies. Section 925 applies only to contracts entered, modified, or extended on or after January 1, 2017. Cal. Lab. Code § 925(f). Plaintiffs signed their contracts in 2010 but argue that there were modifications to their bonus structure after 2017. During the hearing, however, Plaintiffs' counsel were unable to persuade the Court as to why the New York Supreme Court cannot or should not resolve this issue.
Defendants believe this factor is the most important because it would avoid duplicative discovery, since both actions involve the enforceability of the Employment Agreement and discovery taken in one action certainly will be relevant to the other. It is indisputable that there is a threat of piecemeal litigation here—both actions require interpretation of the Employment Agreement and the litigation of the gateway issues of whether to apply California or New York law. The threat of piecemeal litigation is therefore significant enough to warrant weighing this factor in favor of a stay.
The Ninth Circuit considers two factors: (1) the filing dates and (2) the progress of both cases. R.R. St. & Co. Inc., 656 F.3d at 980. The New York Action commenced first; but the parties dispute how far it has progressed to date. To Defendants, the New York Action is further along because Plaintiffs fully briefed their motion to dismiss and responded (by objection) to their discovery requests. Plaintiffs concede that discovery in the New York Action is ongoing and that their motion to dismiss is fully briefed and set for hearing. The parties met on July 31, 2019 for a preliminary conference, under New York Uniform Civil Rules, and set the motion for oral argument on November 7, 2019. The progression of the New York Action favors a stay.
Here, each party accuses the other of forum shopping. The Ninth Circuit has affirmed a stay under the Colorado River doctrine "when it was readily apparent that the federal plaintiff was engaged in forum shopping." R.R. St. & Co. Inc., 656 F.3d at 981. Neither of the parties here appear guilty of bad faith forum shopping. Both filed lawsuits in the forum in which they believed was more opportunistic. The Ninth Circuit has not classified these actions as forum shopping. See R.R. St. & Co. Inc., 656 F.3d at 981. This is a neutral factor.
Under Colorado River, this factor requires the Court to consider "whether the state court proceedings can adequately protect the rights of the federal litigants[.]" Seneca Ins. Co., Inc., 862 F.3d at 845. This factor "pertains to whether there is an impediment to the state court protecting the litigants' federal rights . . . ." Id. Defendants make a strong showing that a New York court can adequately apply California law, when necessary. And, as discussed supra, the Court is not persuaded that the New York Supreme Court is inadequately equipped to interpret and/or apply California law.
As with the adequacy of the state court, Defendants convincingly show that the New York Action can resolve all the issues before this Court. The case at bar and the New York Action are substantially similar and parallel: both involve the same dispute over the Employment Agreement, and both will require an analysis of New York or California law. As such, despite the Colorado River doctrine's high bar, most factors here weigh in favor of a stay (with the remaining factors weighing neutrally). This matter is not one in which federal law plays a role, and whichever court litigates this case will inevitably look to choice-of-law and contract law, both of which are state law determinations.
During the hearing, the parties informed the Court that the oral argument on Plaintiffs' (plaintiffs herein; defendants therein) motion to dismiss in the New York Action is set for hearing on November 7, 2019, despite neither party seeking an earlier date. Yet, Plaintiffs came to the hearing with a high level of urgency and requested an injunction at least as to the duration of the "peak recruiting season," which began as early as the filing of this action and is expected to continue until mid- to late-September.
Accordingly, a stay is appropriate because of the foregoing factors so providing and because the very issues before the Court now are teed up for resolution in the New York Supreme Court on November 7, 2019—if not earlier. Defendants' request for a stay of this proceeding is therefore
The parties are ordered to report for a status conference specially set for November 27, 2019, at 9:30 a.m. Both parties are permitted to appear telephonically.
This order disposes of Docket Nos. 9 and 30.
