Blueline Software Services, Inc. v. Systems America, Inc. et al

Filing 29

ORDER by Judge Edward M. Chen Denying 13 Defendant Mukunda's Motion to Dismiss. (emcsec, COURT STAFF) (Filed on 7/14/2017)

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UNITED STATES DISTRICT COURT

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NORTHERN DISTRICT OF CALIFORNIA

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BLUELINE SOFTWARE SERVICES, INC.,
Plaintiff,

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ORDER DENYING DEFENDANT
MUKUNDA’S MOTION TO DISMISS

v.

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Case No. 17-cv-01960-EMC

Docket No. 13
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SYSTEMS AMERICA, INC., et al.,
Defendants.

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For the Northern District of California

United States District Court

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I.

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INTRODUCTION/BACKGROUND

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According to the complaint, Plaintiff Blueline Software Services, Inc. (“Blueline”) had a

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contract with Defendant Systems America, Inc. (“Systems America”) whereby Systems America

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paid Blueline a fee for providing the services of its employee (Defendant and Movant Anil Kumar

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Mukunda) to Systems America‟s client, Infosys Ltd (“Infosys”). Docket No. 1 (Complaint) at ¶

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25; Ex. A to Complaint (Staffing Services Agreement). Mukunda knew of this contract between

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Systems America and Blueline and solicited and encouraged Systems America to violate its

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Services Agreement by hiring Mukunda directly and allowing him to continue providing services

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directly through Systems America to the client. Docket No. 1 at ¶¶ 3, 29, 46. On or about

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September 15, 2016, Mukunda resigned from Blueline. Id. at ¶ 26. After resigning from Blueline,

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Mukunda continued to provide services at Infosys through Systems America. Id. at ¶ 27. Plaintiff

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alleges that Mukunda intended to (and did) induce Systems America to breach its contract with

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Blueline and avoid paying Blueline its fee based on Mukunda‟s services to Infosys, Ltd. Id. at ¶¶

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29, 46.

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Plaintiff brought a single count of tortious interference with contract against Defendant
Mukunda. Id. at ¶¶ 45-47. Specifically, Blueline contends that Mukunda‟s resigning from

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Blueline and continuing to work for Infosys through Systems America interfered with Section 5.0

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of the Services Agreement, which provides:

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Notwithstanding anything contained herein, company [Systems
America] agrees that during the terms of this contract and for 2
years thereafter, it shall not directly or indirectly solicit and/or hire
on its payroll the designated contractor or any of the contractor‟s
consultants [Mukunda] that have been introduced to the company or
have worked on the company issued SOW.

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Id. at ¶ 23.

complaint under Fed. R. Civ. P. 12(b)(6). Docket No. 13. Mukunda moved “on the grounds that

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(1) Mukunda is being sued because he left employment with plaintiff . . . (Blueline) and accepted

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employment with defendant . . . (Systems America); and (2) Mukunda had a legal right to accept

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For the Northern District of California

Pending before the Court is Defendant‟s Mukunda‟s motion to dismiss Plaintiff‟s verified

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United States District Court

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employment with Systems America pursuant to California Business & Professions Code § 16600.”

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Docket No. 13 at 2. The Court DENIES the motion.
II.

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A.

DISCUSSION

Legal Standard
Fed. R. Civ. P. 12(b)(6) provides: “Every defense to a claim for relief in any pleading must

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be asserted in the responsive pleading if one is required. But a party may assert the following

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defenses by motion: (6) failure to state a claim upon which relief can be granted.” A motion to

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dismiss based on Rule 12(b)(6) challenges the legal sufficiency of the claims alleged. See Parks

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Sch. of Bus. v. Symington, 51 F.3d 1480, 1484 (9th Cir.1995). In considering such a motion, a

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court must take all allegations of material fact as true and construe them in the light most

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favorable to the nonmoving party, although “conclusory allegations of law and unwarranted

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inferences are insufficient to avoid a Rule 12(b)(6) dismissal.” Cousins v. Lockyer, 568 F.3d

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1063, 1067 (9th Cir. 2009). While “a complaint need not contain detailed factual allegations . . . it

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must plead „enough facts to state a claim to relief that is plausible on its face.‟” Id. “A claim has

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facial plausibility when the plaintiff pleads factual content that allows the court to draw the

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reasonable inference that the defendant is liable for the misconduct alleged.” Ashcroft v. Iqbal,

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556 U.S. 662, 129 S.Ct. 1937, 1949, 173 L.Ed.2d 868 (2009); see also Bell Atl. Corp. v. Twombly,
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550 U.S. 544, 556, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007). “The plausibility standard is not akin

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to a „probability requirement,‟ but it asks for more than sheer possibility that a defendant acted

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unlawfully.” Id.

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B.

Discussion
“The elements which a plaintiff must plead to state the cause of action for intentional

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interference with contractual relations are (1) a valid contract between plaintiff and a third party;

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(2) defendant‟s knowledge of this contract; (3) defendant‟s intentional acts designed to induce a

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breach or disruption of the contractual relationship; (4) actual breach or disruption of the

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contractual relationship; and (5) resulting damage.” Pacific Gas & Electric Co. v. Bear Stearns &

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Co., 50 Cal.3d 1118, 1126 (1990) (internal citations omitted).
Mukunda‟s motion focuses on the validity of the contractual restriction at issue. In order

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For the Northern District of California

United States District Court

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to prevail on this motion to dismiss, Mukunda must establish that Section 5.0 of the Services

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Agreement, the basis of Plaintiff‟s legal claim, is invalid under Business & Professions Code

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Section 16600. Section 16600 provides: “Except as provided in this chapter, every contract by

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which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is

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to that extent void.” The Court, for the reasons stated below, denies the motion. Docket No. 13 at

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3-5.

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In order to prevail, Mukunda must establish Section 5.0 is void. The Court cannot, at this
stage, make such a finding.
First, it is not at all clear that Section 5.0 is invalid under Section 16600. In Loral Corp. v.

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Moyes, 174 Cal. App. 3d 268, 219 Cal. Rptr. 836 (Ct. App. 1985), the California Court of Appeal

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found a noninterference agreement, analogous to Section 5.0, to be valid despite Section 16600.

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In Loral Corp., a corporation sued its former executive officer for breach of a noninterference

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agreement that restrains defendant from disrupting, damaging, impairing, or interfering with

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plaintiff‟s business by “raiding” its employees. Id. at 279. The court reasoned that the agreement

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only slightly affects the plaintiff‟s employees because they are not hampered from seeking

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employment with defendant‟s new employer; nor does the agreement prevent the plaintiff‟s

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employee from contacting the contracting defendant. The only option employees lost was the
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option of being contacted by the defendant first. Id. at 279-80. The court further reasoned that

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“[t]he restriction presumably was sought by plaintiffs in order to maintain a stable work force and

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enable the employer to remain in business.” Id. at 280. Thus, since the court found that the

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noninterference agreement “has the apparent impact of limiting Moyes‟ business practices in a

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small way in order to promote Conic‟s business, it did not find the noninterference agreement to

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be void on its face under Section 16600. Id.

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In concluding so, the Court of Appeal endorsed the reasoning of two cases from Georgia

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which upheld noninterference provisions, finding they are not void as an unlawful restraint of

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trade. Id. at 278-79. In Lane Co. v. Taylor, 174 Ga. App. 356, 330 S.E.2d 112 (1985),

prohibited her for one year post-termination from hiring employees or otherwise causing them to

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For the Northern District of California

an employer sued its former employee for, among other things, violating an agreement which

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United States District Court

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work for another employer. Id. at 356-57. The court observed that in Orkin Exterminating Co. v.

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Martin Co., 240 Ga. 662, 666, 242 S.E.2d 135 (1978), the Georgia Supreme Court announced:

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“Overly-restrictive covenants in employment contracts . . . which place a restraint upon the free

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movement of employees in the marketplace as opportunity, experience and competition permits is

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contrary to this court's view of fair competition.” Lane Co., 174 Ga. App. at 360. Since the

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limited restriction on “pirating” of employees was circumscribed by a one-year limitation and it

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restricts the actions of only the defendant former employee, the Court found that the covenant was

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not too broad in scope and was a valid measure to protect legitimate business interests. Id. In

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Harrison v. Sarah Conventry, Inc., 228 Ga. 169, 184 S.E.2d 448 (1971), also cited in Loral Corp.,

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an employer sued its former employees for violating the agreement which provided that, during

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employment and for two years post-termination, they would not disclose the identity of the

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employees nor attempt to induce them to leave the plaintiff company. Id. at 169-70. The court

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upheld the agreement, distinguishing cases involving noncompetition agreements without

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territorial limitations. Id. at 170-71. The court found that the agreement did not impose an

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unlawful restraint of trade because the defendants were free to work for a competitor so long as

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they did not interfere with their former employer‟s contractual relationships with the defendants or

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divulge the names of former coworkers. Id. at 171.
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Loral Corp.‟s citation to and endorsement of the Georgia cases are instructive. Although

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Systems America from not only soliciting Plaintiff‟s employees (as in Loral Corp.) but also from

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hiring them, the Georgia cases upheld broader restrictions which did ban hiring of the plaintiff‟s

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employees at least for a certain time period or within certain territorial limits. Here, Section 5.0

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forbids Systems America from soliciting and/or hiring contractors or contractor‟s consultants (like

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Mukunda) that during the terms of the contract and for two years thereafter. Docket No. 1 at ¶ 23.

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The restraint in trade effectuated by Section 5.0 seems modest when compared to the importance

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of restricting pirating of employees given the nature of Blueline‟s business – providing personnel

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services to its customers. Threats to deplete its prime resource – personnel – strike at the core of

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its ability to compete. For purposes of a Rule 12(b)(6) motion, the Court cannot find as a matter

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For the Northern District of California

Section 5.0 is broader in scope than the restrictive covenant in Loral Corp. in that Section 5.0 bars

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United States District Court

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of law Section 5.0 to be invalid.1
To be sure, the case at bar is unusual because Blueline has brought suit against not only the

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business, but against the employee himself. The chilling effect on competition may be more

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severe when cases are filed against those being hired, in addition to those that do the hiring, and an

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argument can be made that such a suit strikes at the heart of Section 16600.
Nonetheless, regardless of whether a suit against a former employee is permissible in the

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face of Section 16600, Plaintiff has made clear it is not suing Mukunda simply for working for

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Systems America. Rather, it is suing Mukunda because he actively solicited and encouraged

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Systems America to violate its Services Agreement in direct competition with Blueline and in

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violation of Section 5.0. Docket No. 1 at ¶¶ 3, 29, 46. It is on this basis that Plaintiff grounds its

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narrowly defined claim against Mukunda.

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For the foregoing reasons, the Court DENIES Defendant Mukunda‟s motion to dismiss. It

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does so without prejudice to the parties‟ development of the facts that might better inform the legal

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Further, it is noteworthy that a claim of interference with contract (as alleged herein) is easier to
establish than a claim for interference with prospective economic advantage. See Reeves v.
Hanlon, 33 Cal. 4th 1140, 1152, 95 P.3d 513, 519-20 (2004) (observing that “while many of the
elements of the two torts are similar, a plaintiff seeking to recover for interference with
prospective economic advantage must also plead and prove that the defendant engaged in an
independently wrongful act in disrupting the relationship”).
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analysis pertaining to the application of Section 16600, including further analysis of what would

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constitute sufficient encouragement by Mukunda so as to lose the protection, if any, of Section

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16600.

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This order disposes of Docket No. 13.

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IT IS SO ORDERED.

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Dated: July 14, 2017
______________________________________
EDWARD M. CHEN
United States District Judge

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For the Northern District of California

United States District Court

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