Crst Van Expedited, Inc. v. Werner Enterprises, Inc., Doing Business in California as C.L. Werner, Inc., Crst Van Expedited, Inc. v. Werner Enterprises, Inc., Doing Business in California as C.L. Werner, Inc.

Citations: 479 F.3d 1099; 25 I.E.R. Cas. (BNA) 1393; 2007 U.S. App. LEXIS 5944Docket: 04-56809

Court: Court of Appeals for the Ninth Circuit; March 15, 2007; Federal Appellate Court

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CRST Van Expedited, Inc. appealed against Werner Enterprises, Inc., alleging that Werner intentionally interfered with CRST's employment contracts by soliciting and hiring truck drivers trained by CRST, who had signed contracts with the company. CRST also claimed violations of California's Unfair Competition Law and interference with prospective economic advantage. Additionally, CRST had informally withdrawn a claim of trade secret misappropriation. The district court dismissed CRST's complaint under Federal Rule of Civil Procedure 12(b)(6) without providing a detailed rationale and awarded attorneys' fees to Werner for CRST's bad faith in filing the trade secret claim. The Ninth Circuit reversed the dismissal of CRST's complaint but upheld the award of attorneys' fees to Werner. 

CRST's training program involves a three-phase driver training process, for which CRST covers costs upfront through a Pre-employment Driver Training Agreement. After completing the first two training phases, candidates may enter into a Driver Employment Contract with CRST, which outlines a one-year employment term, after which employment is at-will.

Termination of employment under the one-year contract is limited to three scenarios: 1) immediate termination by CRST for Due Cause, which includes breach of contract or failure to comply with company standards; 2) mutual agreement between CRST and the Employee; and 3) the death of the Employee. CRST retains the right to terminate without Due Cause, in which case the Employee is not liable for the $3,600 amount specified for breaches or Due Cause terminations. The Employee is required to commit full time to CRST and avoid conflicts of interest.

In February 2004, after one month of employment, drivers Spencer and Chatman applied for jobs at Werner, prompting CRST to notify Werner about existing contracts and noncompetition clauses related to both drivers. CRST alleged that Werner had a pattern of soliciting employees trained at CRST's expense. 

CRST filed an original complaint in California Superior Court against Werner for intentional interference with contract, negligent interference, and violation of the Unfair Competition Law (UCL). After Werner removed the case to federal court and moved to dismiss, CRST amended its complaint to include additional claims: interference with prospective economic advantage and misappropriation of trade secrets. CRST sought various damages and a permanent injunction against further solicitations. Werner's counsel indicated that the misappropriation claim was brought in bad faith and would seek fees unless dismissed. CRST offered to dismiss this claim in exchange for a release, which Werner declined, leading to Werner’s renewed motion to dismiss the entire amended complaint. CRST subsequently opposed the motion but conceded readiness to dismiss the trade secrets claim.

The district court dismissed CRST's First Amended Complaint (FAC) in its entirety, with prejudice, without providing reasons, and later issued a written order that also lacked justification. CRST filed a timely appeal against this dismissal. Concurrently, Werner sought $55,655 in attorneys' fees, claiming CRST’s misappropriation of trade secrets claim was without merit and made in bad faith. The court awarded $8,750 in attorneys' fees, which CRST also appealed, leading to the consolidation of both appeals. 

CRST's appeals challenge the dismissal of Counts I (intentional interference with contract), III (violation of the UCL), and IV (interference with prospective economic advantage), along with the attorneys' fees ruling. The standard of review for the dismissal is de novo under Rule 12(b)(6), while the attorneys' fees grant is reviewed for abuse of discretion. 

Neither party invoked Iowa law nor moved to transfer the case to Iowa, opting instead to rely on California law in the dismissal motion. Consequently, CRST cannot raise the issue of Iowa law on appeal.

In Count I, CRST accuses Werner of intentionally interfering with its employment contracts, outlining that California law provides a remedy for such interference. The elements required for this tort include a valid contract, the defendant’s knowledge of it, intentional acts to induce a breach, actual breach or disruption, and resulting damages. CRST sufficiently alleged all five elements: the existence of the Spencer and Chatman contracts, Werner's knowledge of these contracts, intentional inducement of breach, the actual breach of the contracts, and damages incurred from unreimbursed training and recruitment costs.

CRST's employment contract specifies a one-year term during which employees Spencer and Chatman cannot be terminated without cause, thus establishing a non-at-will relationship for this period. Werner's alleged interference does not require CRST to prove an independently wrongful act, as the contract's terms impose obligations on both parties: if an employee breaches the contract or is terminated for cause, they owe CRST $3600; conversely, if CRST terminates without cause, the employee owes nothing. Werner's argument, based on California law, mistakenly claims that only specified term contracts under Cal. Lab. Code § 2924 can exist outside of at-will employment. However, the law allows for contractual flexibility to define termination rights beyond those specified in § 2924. The California Supreme Court in Guz v. Bechtel National Inc. confirmed that contracting parties have the freedom to establish any lawful terms regarding employment duration and termination. Therefore, CRST's contract limits termination rights, confirming that the first year of employment is not at-will. All elements of CRST's interference with contract claim are sufficiently alleged, necessitating the reversal of the district court's dismissal of Count I.

CRST's third cause of action under the California Unfair Competition Law (UCL), specifically Cal. Bus. Prof. Code § 17200 et seq., asserts that Werner has engaged in unlawful business practices by interfering with CRST's employment contracts. CRST seeks an injunction to stop Werner from soliciting its employees and to terminate those employees wrongfully solicited. The UCL allows injured parties to seek relief for "unlawful, unfair or fraudulent business acts." The California Supreme Court interprets "unlawful" broadly, encompassing any business practice prohibited by law. CRST's claims of intentional interference with its employment contracts meet the criteria for an unlawful act under the UCL, thereby justifying a reversal of the district court's dismissal of Count III.

Count IV concerns interference with prospective economic advantage, which requires proof of 1) an economic relationship likely to yield future benefits, 2) the defendant’s knowledge of this relationship, 3) intentional acts by the defendant to disrupt it, 4) actual disruption, and 5) resulting economic harm. Unlike interference with existing contracts, this claim necessitates demonstrating a wrongful act beyond the interference itself. The California Supreme Court has clarified that distinctions must be made between existing contracts and prospective economic relationships, emphasizing the need for heightened protection for formal agreements while recognizing the competitive nature of less formal relationships.

The Court determined that requiring a plaintiff to demonstrate a wrongful act in cases of alleged interference with prospective economic relations is not erroneous, as plaintiffs must prove that such interference was wrongful beyond the interference itself. CRST's employment contracts were deemed to establish an "economic relationship," which CRST claimed was disrupted by Werner's actions, leading to alleged harm. The core issue is whether CRST sufficiently alleged an independently wrongful act to support its claim of interference with prospective economic advantage. Guidance from California case law indicates that an independently wrongful act must be unlawful under existing legal standards. The California Supreme Court case Korea Supply illustrated that wrongful acts included unlawful solicitation, while another case, Stevenson Real Estate Servs. Inc. v. CB Richard Ellis Real Estate Servs. Inc., showed that interference contrary to industry rules could constitute wrongful interference.

The Court of Appeal upheld the judgment on the pleadings but permitted the broker to amend the complaint, clarifying that a violation of trade rules is not independently actionable. The court emphasized that the plaintiff could amend to specify that the trade rules involve sanctions or enforcement mechanisms, such as arbitration. Regarding the alleged violation of the Unfair Competition Law (UCL), the court determined that the plaintiff is not required to show conduct separate from the interference with prospective economic advantage; rather, the conduct must be wrongful for reasons beyond mere interference. The court found that the plaintiff had not adequately alleged unfair conduct in violation of antitrust principles, leading to a conclusion that the claim for interference with prospective economic advantage was insufficiently pleaded. However, it clarified that a plaintiff could allege unlawful acts related to the interference without needing additional independent actions. The court noted that the plaintiff had sufficiently alleged that the defendant’s actions violated the UCL, qualifying as an independently wrongful act. Consequently, the dismissal of the claim for interference with prospective economic advantage was reversed. The court acknowledged that this reasoning effectively merges the torts of intentional interference with existing contracts and prospective economic relations, despite prior distinctions made by California Supreme Court.

Della Penna does not address claims of contract interference alongside interference with prospective economic relations, nor does it consider the implications of invoking the Unfair Competition Law (UCL) when both torts and a UCL violation occur simultaneously. The requirement for an independently wrongful act under California law for intentional interference may be satisfied by a violation of the UCL. This interpretation allows allegations of interference with an existing contract to serve multiple purposes: as a basis for tort, a statutory violation, and further tort claims stemming from the statutory violation. California law aims to promote competitive freedom in the absence of contracts, but not all competitive actions are lawful. The alleged solicitation by Chatman and Spencer constitutes both a tort violation and a UCL breach.

Regarding attorneys' fees, CRST contests the district court's decision to impose fees related to Count V, which alleges misappropriation of trade secrets. California Civil Code § 3426.4 permits fee awards when claims are made in bad faith. The California Court of Appeal has clarified that "bad faith" entails both the objective meritlessness of the claim and the plaintiff's subjective intent. The district court appropriately applied § 3426.4 under the Erie doctrine, which mandates the application of state substantive law in federal diversity cases when there is no conflict with federal procedural rules. The statute serves a substantive state interest in preventing frivolous trade secret claims and does not conflict with federal rules, allowing the district court to sanction CRST for filing a claim in bad faith.

The district court's decision to award attorneys' fees to Werner was upheld, finding no abuse of discretion. The case referenced, Gemini, involved a jury rejecting claims of misappropriation of trade secrets and interference with economic advantage, and the California Court of Appeal affirmed the award of fees, emphasizing the need to deter specious claims under California Civil Code § 3426.4. In the current case, CRST failed to demonstrate that Werner used or disclosed any trade secrets, and the contracts presented did not support CRST's claims of trade secrets related to truck driving schools. Although CRST did not prove its purported trade secrets were worthless, there was also no evidence of their value, leading to the conclusion that CRST's claim was objectively specious. The district court inferred subjective bad faith from CRST's actions after being warned of the claim's weaknesses. The appellate court affirmed the award of attorneys' fees while reversing the district court's dismissal of CRST's claims related to intentional interference with contract and violations of the Unfair Competition Law (UCL), remanding the case for further proceedings. Each party will bear its own costs on appeal. Additionally, the Spencer employment contract is governed by California law, while the Chatman contract is governed by Iowa law, although Iowa law was not invoked in this case.

Chatman rejoined CRST and signed an employment contract on March 25, 2004, but left after one week to work for Werner. Under Federal Rule of Civil Procedure 15(a), a party may amend a pleading once before a responsive pleading is served. A Rule 12(b)(6) motion to dismiss does not constitute a responsive pleading that restricts the right to amend without court permission. Both CRST and Werner submitted letters under Federal Rule of Appellate Procedure 28(j) regarding supplemental authority, leading to Werner filing two "motions to strike" due to CRST's and its own overlong responses. Werner’s filings did not comply with the word or page limits, resulting in their being stricken. The California Supreme Court's definitions of "third party" in related cases differ, and Ninth Circuit precedent does not override more recent state court interpretations. CRST did not challenge the dismissal of its negligent interference with contract claim. The California Supreme Court has defined "unfair" conduct under the Unfair Competition Law (UCL) as actions that threaten antitrust violations or harm competition. CRST's claims regarding Werner's hiring of Chatman and Spencer illustrate a broader pattern of interference, sufficient to meet the UCL's criteria, as a business act or practice need not be a continuous conduct pattern.

The court refrained from determining whether CRST sufficiently alleged that Werner engaged in "unfair" business practices. The Court of Appeal focused solely on the UCL’s prohibition against "unfair" conduct without analyzing any "unlawful" conduct. It noted that statements from the Stevenson Real Estate case were dicta, which, while problematic for reliance, are generally binding for federal courts in diversity cases. The statute relevant to costs and attorneys' fees was amended in 2006, after the district court proceedings. CRST contended that the district court's issuance of an order drafted by Werner's counsel, without allowing CRST to review it, justified reversal. However, the court indicated it could affirm the district court's decision based on existing records, thus not addressing CRST's claims. Additionally, CRST's argument regarding the violation of Local Rules was not considered as it was raised too late in the proceedings.