SIDNEY A. FITZWATER, District Judge.
In this removed action, plaintiffs ECL Group ("ECL") and IO Practiceware, Inc. ("IOPW") move to remand, and defendant Troy Mass ("Mass") moves for an opinion on choice of law, dismissal or transfer, dissolution of a state court temporary restraining order ("TRO"), and a briefing schedule on attorney's fees and other relief. For the reasons that follow, the court denies the motion to remand; grants Mass's motion for an opinion on choice of law to the extent of holding that California law applies; denies Mass's motion for dismissal or transfer; denies as moot Mass's motion for dissolution of the state court TRO (which has already expired); and denies without prejudice Mass's motion for a briefing schedule on attorney's fees and other relief.
Mass is a former top sales representative for ECL and IOPW, affiliated entities that offer software, practice management systems, and other services to ophthalmology and optometry offices. In June 2016 Mass signed an Employment, Confidentiality, Non-Solicitation and Non-Competition Agreement ("Employment Agreement") with ECL.
Emp. Agmt. ¶ 4.2(a) (first italics in original; second italics underlined in original). And it contains a confidentiality provision:
Emp. Agmt. ¶ 3.3(a).
This lawsuit arises from Mass's decision to leave his position with ECL and IOPW and join a direct competitor, Nextech Systems, LLC ("Nextech"). Before departing ECL and IOPW, Mass attended ECL and IOPW's national sales conference, an annual event where sales representatives learn about the companies' most recent confidential information and trade secrets. At the time the conference was held, Mass knew that he would begin work at Nextech the following week. After hearing rumors that Mass intended to gather confidential information from the conference for the benefit of Nextech, ECL and IOPW terminated Mass's employment. Mass began working for Nextech in August 2017, but he maintains that he is currently unemployed.
Shortly after Mass started working for Nextech, ECL and IOPW brought this lawsuit in Texas state court, alleging causes of action for common law breach of contract, breach of fiduciary duty, defamation, and misappropriation of trade secrets. They based their claims on Mass's access to confidential information and trade secrets through his Sales Representative position.
Mass timely removed the case to this court based on federal question jurisdiction, under 28 U.S.C. § 1331, and based on diversity jurisdiction, under 28 U.S.C. § 1332. Section 1332(a)(1) provides that the district court "shall have original jurisdiction of all civil actions where the matter in controversy exceeds the sum or value of $75,000, exclusive of interest and costs, and is between . . . citizens of different States[.]"
Before the case was removed, ECL and IOPW obtained a TRO against Mass from the Texas state court on August 31, 2017, which the court later extended through September 28, 2017. ECL and IOPW also applied to the state court for a temporary injunction ("preliminary injunction"). After the case was removed, this court entered a preliminary injunction application scheduling order and an order allowing expedited discovery. The parties are currently conducting discovery related to the preliminary injunction application. The state court TRO has expired under its own terms.
ECL and IOPW move to remand the case to state court. Mass opposes the motion and moves for an opinion on choice of law; dismissal or transfer of the case; dissolution of the state court TRO; and a briefing schedule on attorney's fees and other relief and brief in support.
The court first addresses ECL and IOPW's motion to remand. It need only decide whether it can exercise diversity jurisdiction.
As the removing party, Mass "has the burden of overcoming an initial presumption against jurisdiction and establishing that removal is proper." Carnes v. Data Return, L.L.C., 2005 WL 265167, at *1 (N.D. Tex. Feb.1, 2005) (Fitzwater, J.) (citing Howery v. Allstate Ins. Co., 243 F.3d 912, 916 (5th Cir. 2001)). "In general, defendants may remove a civil action if a federal court would have had original jurisdiction." De Aguilar v. Boeing Co., 47 F.3d 1404, 1408 (5th Cir. 1995) (citing 28 U.S.C. § 1441(a)). "Due regard for the rightful independence of state governments, which should actuate federal courts, requires that they scrupulously confine their own jurisdiction to the precise limits which (a federal) statute has defined." Victory Carriers, Inc. v. Law, 404 U.S. 202, 212 (1971) (quoting Healy v. Ratta, 292 U.S. 263, 270 (1934)). "The federal removal statute, 28 U.S.C. § 1441, is subject to strict construction because a defendant's use of that statute deprives a state court of a case properly before it and thereby implicates important federalism concerns." Frank v. Bear Stearns & Co., 128 F.3d 919, 922 (5th Cir. 1997) (citing Carpenter v. Wichita Falls Indep. Sch. Dist., 44 F.3d 362, 365 (5th Cir. 1995)). "[D]oubts regarding whether removal jurisdiction is proper should be resolved against federal jurisdiction." Acuna v. Brown & Root Inc., 200 F.3d 335, 339 (5th Cir. 2000).
Both sides agree that the parties are diverse citizens. Plaintiffs move to remand on the ground that Mass has neither asserted nor established that the amount in controversy exceeds the sum or value of $75,000, exclusive of interest and costs.
If the plaintiffs' state court petition demands monetary relief of a stated sum, that sum, if asserted in good faith, is deemed to be the amount in controversy. Dart Cherokee Basin Operating Co. v. Owens, ___ U.S. ___, 135 S.Ct. 547, 551 (2014). But when, as here, the plaintiffs' state court petition does not demand relief of a stated sum, the defendants' notice of removal must make "a plausible allegation that the amount in controversy exceeds the jurisdictional threshold." Id. at 554. No evidence is required unless and until the plaintiff contests, or the court questions, the allegation. See id. at 551, 554.
If the plaintiffs contest the allegation, then the defendant must prove by a preponderance of the evidence that the amount in controversy requirement has been satisfied. Id. at 554 (explaining that, if plaintiff contests defendant's allegation, then "both sides submit proof and the court decides, by a preponderance of the evidence, whether the amount-in-controversy requirement has been satisfied"); see also Allee Corp. v. Reynolds & Reynolds Co., 2015 WL 1914663, at *3 (N.D. Tex. Apr. 28, 2015) (Fitzwater, J.). The defendant's burden "is met if (1) it is apparent from the face of the petition that the claims are likely to exceed $75,000, or, alternatively, (2) the defendant sets forth summary judgment type evidence of facts in controversy that support a finding of the requisite amount." Manguno v. Prudential Prop. & Cas. Ins. Co., 276 F.3d 720, 723 (5th Cir. 2002) (internal quotation marks omitted). If the defendant can produce evidence sufficient to show by a preponderance of the evidence that the amount in controversy exceeds the jurisdictional threshold, the plaintiffs can defeat diversity jurisdiction only by showing to a legal certainty that the amount in controversy does not exceed the sum or value of $75,000, exclusive of interest and costs. See De Aguilar, 47 F.3d at 1412.
In the present case, it is not apparent from the face of the petition that the amount in controversy exceeds the sum or value of $75,000, exclusive of interest and costs. The court must therefore decide whether Mass has demonstrated by a preponderance of evidence that the amount in controversy requirement is met. Plaintiffs maintain that Mass has not established an amount in controversy in excess of the threshold amount of $75,000. They maintain that Mass cannot include the value of trade secrets or his salary when calculating the amount in controversy. They also contend that Mass has not shown that the amount in controversy, when including attorney's fees, exceeds the $75,000 threshold.
The court will assume arguendo that the value of ECL and IOPW's confidential information and trade secrets, breach of contract damages, attorney's fees, and defamation damages are not to be factored into the determination of the amount in controversy. Even so, Mass has shown by a preponderance of evidence that the value alone of enjoining his competitive activity exceeds the jurisdictional threshold.
Plaintiffs' state court petition seeks injunctive relief based on claims for breach of contract, misappropriation, and breach of fiduciary duty.
Brand Energy Sols., LLC v. Rakocy, 2016 WL 7476221, at *3 (E.D. La. Dec. 29, 2016) (citing 14AA Charles Alan Wright & Arthur R. Miller, Federal Practice and Procedure § 3708 (4th ed. 2016)). In the case of injunction against uncertain sales activity, courts typically look to "the profits earned by the employer on business generated by the employee during the period immediately preceding his termination." 14AA Wright & Miller, supra, § 3708 (citing Zep Mfg. Corp. v. Haber, 202 F.Supp. 847 (S.D. Tex. 1962)).
Here, plaintiffs do not contest Mass's assertion that he generated around $1 million in sales for ECL during his year at the company.
The burden now shifts to ECL and IOPW to show to a legal certainty that they cannot recover in excess of the jurisdictional threshold.
ECL and IOPW stipulate in their motion to remand that their damages do not exceed the sum of $74,999.00. In determining the amount in controversy, the court must evaluate the jurisdictional facts "as of the time the complaint is filed; subsequent events cannot serve to deprive the court of jurisdiction once it has attached." Ford v. United Parcel Serv., Inc. (Ohio), 2014 WL 4105965, at *4 (N.D. Tex. Aug. 21, 2014) (Fitzwater, C.J.) (citing St. Paul Reinsurance Co. v. Greenberg, 134 F.3d 1250, 1253-54 (5th Cir. 1998)). Because ECL and IOPW failed to limit their recovery to the jurisdictional threshold in their original petition and instead stipulated to limited recovery in their motion to remand, the court cannot consider their stipulation as a jurisdictional fact precluding removal. The Fifth Circuit does consider post-removal affidavits that clarify a petition that has previously left the jurisdictional question ambiguous. See Asociacion Nacional de Pescadores a Pequena Escala O Artesanales de Colombia (ANPAC) v. Dow Quimica de Colombia S.A., 988 F.2d 559, 565 (5th Cir. 1993), abrogated on other grounds by Marathon Oil Co. v. Ruhrgas, 145 F.3d 211 (5th Cir. 1998) ("Under those circumstances, the court is still examining the jurisdictional facts as of the time the case is removed, but the court is considering information submitted after removal."). But in this case, there is no such ambiguity. Therefore, the court will not consider plaintiffs' stipulation as evidence of the amount in controversy or as a binding stipulation precluding removal. Without this evidence, ECL and IOPW have not carried their burden to show to a legal certainty that they cannot recover in excess of the jurisdictional threshold. The court therefore holds that Mass has shown an amount in controversy sufficient to establish federal diversity jurisdiction, and it denies ECL and IOPW's motion to remand.
The court now turns to Mass's motion. In the first ground, Mass moves the court to decide that California law governs this lawsuit, despite the Employment Agreement's choice of law provision. ECL and IOPW maintain that the court should apply Texas law, as the Employment Agreement's choice of law clause provides.
Federal courts sitting in diversity apply the forum state's choice-of-law rules when determining the enforcement of contract provisions. Cardoni v. Prosperity Bank, 805 F.3d 573, 580 (5th Cir. 2015). Thus the court applies Texas choice-of-law rules, specifically the Restatement (Second) of Conflict of Laws ("Restatement") when conducting the choice of law analysis.
In this case, the Employment Agreement contains clauses establishing that Texas law governs disputes arising out of the contract and that such disputes will be adjudicated exclusively in a Texas (federal or state) forum. Under Texas law, choice of law agreements are, by default, enforceable. Id. at 581. A party may show that the choice of law provision is unenforceable by satisfying the standards of § 187(2) of the Restatement:
Restatement § 187 (1971). Mass contends that the choice of law provision is invalid under § 187(2)(b).
Cardoni, 805 F.3d at 582 (citing Exxon Mobil Corp. v. Drennen, 452 S.W.3d 319, 325-27 (Tex. 2014)).
Under the first prong, the court determines the "more significant relationship" based on a number of factors: (1) the place of contracting, (2) the place of negotiation of the contract, (3) the place of performance, (4) the location of the subject matter of the contract, and (5) the domicile, residence, nationality, place of incorporation and place of business of the parties. See Cardoni, 805 F.3d at 582 (citing Restatement § 188(2)). Under this multifactor test, the court looks to whether California or Texas has more contacts with the parties and the transaction at issue. See id. at 583 (comparing number and quality of contacts to the two states in question).
Mass is a resident and citizen of California. He primarily works in California, with a substantial number of his sales occurring in that state.
ECL and IOPW maintain that, although the location of performance of the obligation "alone is conclusive in determining what state's law is to apply," DeSantis v. Wackenhut Corp., 793 S.W.2d 670, 679 (Tex. 1990) (citing Restatement § 196 (1971)), this rule does not control where, as here, the contract anticipates performance in multiple states, see Sonat Expl. Co. v. Cudd Pressure Control, Inc., 271 S.W.3d 228, 234 (Tex. 2008) ("The rule [of § 196] applies if the major portion of the services called for by the contract is to be rendered in a single state and it is possible to identify this state at the time the contract is made."). In this case, neither the offer letter nor the Employment Agreement specifies where performance of services is to occur. See id. (holding that for rule of § 196 to apply, "[i]t is necessary that the contract should state where the major portion of the services is to be rendered or that this place can be inferred either from the contract's terms or from the nature of the services involved[.]"). But the description of Mass's role as a Strategic Business Executive anticipates a position in the "Western region of the USA based out of a home office close to a major airport," with 40-50% of the job involving travel. Mass initially covered Southern California, which is within one of several states in his sales territory.
The court considers next whether California has a materially greater interest than does Texas in whether the covenants in the Employment Agreement are enforceable.
Mass maintains that California has an interest in limiting non-competition covenants on employees residing within its borders. ECL and IOPW point to Texas' competing interest in maintaining uniformity in business contracts and protecting expectations of contracting parties.
Under Texas law
DeSantis, 793 S.W.2d at 677.
Based on this court's reading of Cardoni, 805 F.3d at 584, it concludes that California has a materially greater interest in this case. In Cardoni the Fifth Circuit held that even where one of the parties was a Texas-based corporation, Texas did not have a materially greater interest in promoting uniformity of employment contracts than did Oklahoma in the impact of noncompete clauses on employees living within its borders. Id. (citing DeSantis, 793 S.W.2d at 679). In the present case, the facts are similar. California has a strong interest in the issue as it relates to Mass, an employee residing within its borders. Texas has a countervailing interest in protecting freedom and uniformity of contract. See Drennen, 452 S.W.3d at 329 ("With Texas now hosting many of the world's largest corporations . . . we also value the ability of a company to maintain uniformity in its employment contracts across all employees, whether the individual employees reside in Texas or New York."). But here, ECL and IOPW are not headquartered in Texas. Thus Texas has an even weaker interest that it did in Cardoni, and the same factors that favored Oklahoma in that case favor California here. Accordingly, the court holds that California has a materially greater interest in the application of its law to this case.
The court now turns to the third prong under § 187(2)(b).
transaction.
DeSantis, 793 S.W.2d at 680.
Neither party disputes that California has a fundamental policy that favors protecting California residents from restrictive covenants that restrain their ability to work. See Cal. Bus. & Prof. Code § 16600 (West 2017) ("Except 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."). Texas, however, has adopted a more tolerant approach to restrictive covenants: an agreement not to compete is enforceable, provided it is reasonable. See DeSantis, 793 S.W.2d at 680 (citing Frankiewicz v. National Comp Assoc., 633 S.W.2d 505, 507 (Tex. 1982)) ("An agreement not to compete is in restraint of trade and will not be enforced unless it is reasonable."). Reasonability of restrictive covenants under Texas law is a matter of Texas public policy. DeSantis, 793 S.W.2d at 680. The court thus concludes that the application of Texas law, based on Texas policy concerns, to ECL and IOPW's contract claims would contravene California's own policy regarding restrictive covenants in employment agreements.
Because California law would apply in the absence of the choice-of-law provision, California has a materially greater interest than Texas, and California's fundamental public policy would be contravened by the application of Texas law, the parties' choice-of-law provision is invalid under § 187(2)(b) of the Restatement. The court therefore holds that California law governs the claims arising from Mass's Employment Agreement,
The court now turns to Mass's motion either to dismiss the case on venue grounds under Fed. R. Civ. P. 12(b)(3) or to transfer the case under 28 U.S.C. § 1406 to the Central District of California, Western Division (which includes Los Angeles County).
Section 1406(a) provides that "[t]he district court of a district in which is filed a case laying venue in the wrong division or district shall dismiss, or if it be in the interest of justice, transfer such case to any district or division in which it could have been brought." The "[d]efendant's only burden is to prove a defect in venue sufficient to enable the Court to dismiss or transfer the action." Sampson Indus., Inc. v. Amega Indus., Inc., 1998 WL 826907, at *2 (N.D. Tex. Nov. 18, 1998) (Solis, J.) (citing § 1406(a) (1993 & Supp.1998); Gorman v. Grand Casino of La., Inc.—Coushatta, 1 F.Supp.2d 656, 660 (E.D. Tex. 1998)). "Once venue is challenged by a defendant, the burden is on the plaintiff to prove that venue is proper in the judicial district in which the action was brought." Id. (citing Advanced Dynamics Corp. v. Mitech Corp., 729 F.Supp. 519 (N.D. Tex. 1990) (Belew, J.)). Therefore, the question presented is whether venue is proper in this court.
Rule 12(b)(3) authorizes a party to move to dismiss for "improper venue." For the purposes of § 1406(a) and Rule 12(b)(3), "[w]hether venue is `wrong' or `improper' depends exclusively on whether the court in which the case was brought satisfies the requirements of federal venue laws." Atl. Marine Const. Co. v. U.S. Dist. Court for W. Dist. of Texas, ___ U.S. ___, 134 S.Ct. 568, 573 (2013). This inquiry is generally governed by 28 U.S.C. § 1391, which states that, "[e]xcept as otherwise provided by law . . . this section shall govern the venue of all civil actions brought in" federal district courts. 28 U.S.C. § 1391(a)(1). Section 1391(b) specifies the districts in which venue is proper:
A civil action may be brought in—
28 U.S.C. § 1391. If a case does not fall within one of these districts, venue is improper, and the case must be dismissed or transferred under § 1406(a). Atl. Marine Constr. Co., 134 S. Ct. at 577. "Whether the parties' contract contains a forum-selection clause has no bearing on whether a case falls into one of the specified districts." Id. Thus the court may not dismiss under § 1406 or Rule 12(b)(3) a case filed in a district that falls within § 1391. Id.
Mass's sole argument for why venue is improper in Texas under Rule 12(b)(3) and § 1406(a) is that he voided the forum selection and choice-of-law clauses, which means that, pursuant to California Labor Code § 925, the case should be litigated in California. ECL and IOPW respond that, even without the forum selection clause, venue is proper in this court pursuant to § 1391(b)(2) because a "substantial part of the property that is the subject of the action" is situated in Texas. ECL and IOPW also maintain that this case is properly before this court because the forum selection clause is mandatory and valid.
The court agrees with ECL and IOPW that Texas is a valid venue under § 1391(b)(2). Mass does not dispute that computer servers storing confidential information and trade secrets are located in Texas.
Alternatively, the court holds that venue is proper because Texas is where "a substantial part of the events or omissions giving rise to the claim occurred." 28 U.S.C. § 1391(b)(2). Mass traveled to Texas to receive new employee training in July 2016. He also attended a training program for Strategy Business Executives in Texas in January 2016. See S & D Trading Acad., LLC v. AAFIS, Inc., 494 F.Supp.2d 558, 570 (S.D. Tex. 2007) (finding venue proper in Texas when defendants "likely learned at least some of the trade secrets" at training in Houston).
Because the sole inquiry under Rule 12(b)(3) and § 1406 is whether venue is proper under § 1391, the court need not reach Mass's argument that the Texas forum selection clause is invalid on the ground that it contravenes California policy as expressed in Cal. Lab. Code . § 925.
Mass also moves to dissolve the state court TRO, contending that it was issued improperly by a Texas court based on Texas law. He also moves the court to issue no further injunctions.
The court denies as moot Mass's motion to the extent it is addressed to the state court TRO, which expired on September 28, 2017. And the court denies the motion without prejudice insofar as it relates future injunctive relief, considering that ECL and IOPW's application for preliminary injunction is still pending in this court and venue is proper here.
Mass also maintains that he is entitled to attorney's fees based on California law
Accordingly, the court denies ECL and IOPW's motion to remand; grants Mass's motion for an opinion on choice of law to the extent of holding that California law applies to this lawsuit; denies Mass's motion for dismissal or transfer; denies as moot Mass's motion to dissolve the state court TRO; and denies without prejudice Mass's motion for a briefing schedule on attorney's fees and other relief.
Pet. ¶ 17.
Pet. ¶ 62.
Cal. Civ. Code § 1717 (West).
