Antitrust Law Daily Wrap Up, STATE UNFAIR TRADE PRACTICES—E.D. Cal.: Fired employee’s California Labor Code claims adequately alleged, but UCL claim dismissed, (Apr 21, 2014)

By Marjorie Johnson, J.D.

A Morgan Stanley financial advisor who was discharged because his employer was dissatisfied that county board to which he was elected refused to provide assurances that his board membership would not create conflicts precluding the company from doing business with the board, stated plausible claims that the company violated the California Labor Code by precluding him from engaging in protected political activity. He was not required to have administratively exhausted his claims, nor were they precluded by California’s Anti-SLAPP statute, a federal district court in California ruled, denying the company’s motion to dismiss in part. However, he lacked standing to seek a declaratory ruling that the parties’ non-compete clause was unenforceable pursuant to California’s Unfair Competition Law (UCL) because the clause had expired and thus he would not suffer harm. He also failed to state a plausible claim under the UCL because he failed to assert a restitutionary remedy (Couch v Morgan Stanley & Co, April 18, 2014, O’Neill, L).

When the employee began working for Morgan Stanley, he agreed to transfer his existing clients and accounts to the company. He also signed a non-compete clause providing that if his employment ended, he could not initiate contact with a company client for one year, even if the client had been his originally. The company also agreed to pay him two significant bonuses over the course of several years, which were secured by two promissory notes allowing reimbursement if the employee was terminated.

Political activity. Prior to his hire, the employee informed the company that he intended to run for re-election to city council as well as for the county board of supervisors (county board). His future supervisor indicated that this would not be a problem and presented him with an “outside activity request” agreement approving his being a city council and county board member, subject to certain conditions. A few years later, he spoke with her again about his plan to run for the county board and she reiterated that it shouldn’t be a problem as long as he entered a request to engage in this activity, which he did.

After he was later elected to the county board, Morgan Stanley asked him to have an authorized individual from the board sign a form letter providing assurances that Morgan Stanley would not be precluded from doing business with the board as a result of the employee’s position as a member. After the board declined to execute the letter, Morgan Stanley notified the employee that he had to choose between his job and serving on the board. A month later he was discharged due to his county supervisor position. The company filed an arbitration claim relating to the repayment of the promissory notes, which was later dismissed because the employer satisfied those notes.

Plausible labor code violations. The court rejected Morgan Stanley’s assertion that the employee’s claim under the California Labor Code precluded him from engaging in protected political activity must be dismissed because he failed to exhaust administrative remedies since he never filed a timely complaint with the California Labor Commissioner. The company relied upon California Labor Code section 98.7(a), which provides that an employee who believes that he has been discriminated against in violation of any law under the jurisdiction of the Labor Commissioner may file a complaint with the division within six months after the occurrence of the violation. Prior to 2014, courts disagreed as to whether this language required an employee to exhaust administrative remedies prior to bringing suit for violations of the California Labor Code.

The key point of disagreement related to the courts’ interpretation of the California Supreme Court’s decision in Campbell v. Regents of Univ. of California, holding that an employee’s retaliatory discharge claim was properly dismissed because he failed to exhaust the employer’ internal complaint resolution process. However, in 2014, the state legislature adopted California Labor Code Sec. 244, which makes clear that an employee seeking to enforce his rights under any section of the Labor Code need not exhaust administrative remedies prior to bringing suit if that section does not expressly require it. It also adopted Sec. 98.7(g), which states that there is no requirement that an individual exhaust administrative remedies or procedures. Accordingly, the legislature has clearly spoken on the issue and the employee was not required to have exhausted administrative remedies.

No standing for declaratory relief. On the other hand, the employee lacked standing to seek a declaratory ruling that the parties’ non-compete clause was void and unenforceable pursuant to California Business and Professions Code. The court dismissed this claim due to lack of subject matter jurisdiction since there was no possibility that the non-compete could cause him harm since, by its terms, it expired either once he repaid all money owed to Morgan Stanley under the promissory notes or one year after his discharge. Here, both events had already occurred and there was nothing to suggest that the non-compete would ever become effective again. Accordingly, he lacked Article III standing to pursue his claim for declaratory relief.

No violation of the UCL. The employee also failed to state a plausible claim that Morgan Stanley’s prior use of the non-compete clause formed part of an unlawful business practice in violation of the California Business & Professions Code (UCL). Significantly, as a remedy, he sought the disgorgement of all money Morgan Stanley received from his original clients after his termination. However, the UCL’s remedies are generally limited to injunctive relief and restitution and the employee failed to allege facts showing that the disgorgement he sought was restitutionary in nature. There was no indication that he had a vested interest in the money the company received from his original clients after his discharge. Rather, he appeared to premise his “right” to this money on the logic that had it not been for the non-compete clause, he could have solicited his original clients, he could have reacquired their business, and the money earned by Morgan Stanley could have been his instead. This amounted to nothing more than an expectancy interest, not a vested one.

Anti-SLAPP doesn’t apply. Finally, the court refused to strike the employee’s California Labor Code claims under the anti-SLAPP statute since Morgan Stanley failed to establish that the claims arose from protected activity. Focusing on the form letter it sent to the county board, it had contended that it engaged in protected activity when it sought assurances that the employee’s election to the board would not create conflicts that would preclude it from doing business with the board. However, the graveman of the employee’s claims appeared to be that Morgan Stanley adopted an unofficial policy requiring the board to provide up-front assurances that the employee’s position on the board would not create any conflicts of interests with his position at Morgan Stanley and that he was forced to choose between the two jobs since this policy essentially precluded him from serving on the board while employed at Morgan Stanley. Thus, the act underlying the employee’s claims was not the fact that Morgan Stanley communicated with the board regarding conflicts of interests. Rather, it was the allegation that Morgan Stanley adopted an employment policy that precluded him from serving on the board. Accordingly, Morgan Stanley failed to show that its act constituted protected activity.

The case number is 1:14-cv-0010 (LJO-JLT).

Attorneys: Alexander Russell Wheeler (R. Rex Parris Law Firm) for David Couch. Mary Catherine Dollarhide (Paul Hastings) for Morgan Stanley & Co. Inc.

Companies: Morgan Stanley & Co., Inc.

Cases: StateUnfairTradePractices CaliforniaNews