Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-caed-2_09-cv-03201/USCOURTS-caed-2_09-cv-03201-0/pdf.json

Parties Involved:
Fallen Leaf Industries, Inc.
Defendant
Robert F. Gale
Defendant
Robert G. Gale
Defendant
Sierra Environmental Technologies, Inc.
Plaintiff

Document Text:

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1

UNITED STATES DISTRICT COURT

EASTERN DISTRICT OF CALIFORNIA

SIERRA ENVIRONMENTAL No. 2:09-cv-03201-MCE-GGH

TECHNOLOGIES, INC.,

Plaintiff,

v. MEMORANDUM AND ORDER

ROBERT F. GALE, an individual,

FALLEN LEAF INDUSTRIES, INC.,

a California corporation, and

ROBERT G. GALE, an individual, 

Defendants.

----oo0oo----

Plaintiff Sierra Environmental Technologies, Inc. (“Sierra”

or Plaintiff”) seeks both monetary and injunctive relief from

Robert F. Gale, Fallen Leaf Industries, Inc., and Robert G. Gale

(collectively “Defendants”) for claims arising under the Computer

Fraud and Abuse Act (“CFFA”), 18 U.S.C. § 1030, and the Lanham

Act, 15 U.S.C. § 1051 et seq. 

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 The factual assertions in this section are based on the 1

allegations in Plaintiff’s Complaint unless otherwise specified.

2

In addition to those federal claims, Plaintiff alleges various

state law claims, including conversion, breach of fiduciary duty,

breach of non-competition agreements, breach of confidentiality

agreements, trade secret misappropriation, intentional

interference with contractual relations, intentional interference

with prospective economic advantage, negligent interference with

prospective economic advantage, and violations of the California

Unfair Business Practices Act as codified in California Business

and Professions Code § 17200, et seq.

Presently before the Court is Defendants’ Motion to Dismiss,

which argues both that Plaintiff’s claims should have been raised

by way of compulsory counterclaims in Defendants’ ongoing state

court proceedings, and that this Court should abstain from

exercising its jurisdiction in any event because important state

interests are implicated by the parties’ dispute. For the

reasons set forth below, Defendants’ Motion will be granted.

BACKGROUND1

Plaintiff Sierra Environmental Technologies, Inc. “provides

specialized engineering and consulting services to the building

cleaning services industry, and other business sectors.” Compl.

¶ 8. It “combines a variety of advanced engineering principles

with internally developed methodologies, insights and other knowhow to dramatically reduce labor costs in large commercial and

industrial settings.” Id. 

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3

In 2005, Defendant Robert F. Gale (“Bob Gale”) invested

substantial sums in Sierra. He became a project manager and

eventually was designated as Plaintiff’s Chief Financial Officer

(“CFO”). 

In January 2006, Plaintiff hired Bob Gale’s son, Robert G.

Gale (“Robert Gale”), on a part-time basis. In April 2007,

Robert Gale became a full-time project associate. 

In June 2008, Plaintiff removed Bob Gale from his position

as CFO, but he remained a shareholder, director, and creditor. 

Plaintiff alleges that sometime in 2008, Bob Gale started a

company called Lucent Cleaning Services. Lucent named Bob Gale

as its president. 

Defendant Bob Gale ultimately filed suit against Plaintiff

in Santa Clara County Superior Court on July 23, 2008 based on

alleged fraudulent misrepresentations made by Sierra. Bob Gale’s

allegations in that state lawsuit include fraud in the

inducement, promissory fraud (concealment), breach of fiduciary

duty, wrongful termination, rescission, unjust enrichment,

accounting, and constructive trust.

On October 17, 2008, Plaintiff terminated Robert Gale’s

employment. Plaintiff alleges that at the time of termination,

Robert was instructed to return a laptop computer which had been

issued to him, as well as all electronic files and property

belonging to Plaintiff. Plaintiff asserts that they sent

numerous requests for this information and that it was not

returned for months. 

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4

On June 12, 2009, Defendant Robert Gale also filed a civil

action against Plaintiff in Santa Clara County Superior Court. 

On December 8, 2009, a first amended complaint was filed on

Robert’s behalf based on non-payment of wages, waiting time

penalties under the California Labor Code, tortious discharge,

breach of the implied covenant of good faith and fair dealing,

violation of California Business and Professions Code § 17200,

and fraud.

ANALYSIS

A. Compulsory Counterclaims 

Defendants argue that “Sierra should have filed a crosscomplaint [in the state court actions] because [its claims are]

‘compulsory’ under California state law.” Defs.’ Memo. in Supp.

of Mot. to Dismiss, 7:14-15. Plaintiff counters that the present

federal case “raises an entirely different set of issues.” Pl.’s

Memo. in Opp. to Def.’s Mot. to Dismiss, 6:22. 

“The question whether the [Plaintiff’s] claims are

compulsory counterclaims which should have been pleaded in the

earlier...state court action is a question of state law.” 

Pochiro v. Prudential Ins. Co. of America, 827 F.2d 1246, 1249

(9th Cir. 1987). Pursuant to California Civil Procedure

§ 426.30(a), failure to raise compulsory claims by way of crosscomplaint bars a litigant from raising such claims in any other

action. The statute states as follows: 

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5

“if a party against whom a complaint has been filed and

served fails to allege in a cross-complaint any related

cause of action which (at the time of serving his

answer to the complaint) he has against the plaintiff,

such party may not thereafter in any other action

assert against the plaintiff the related cause of

action not pleaded.” 

Cal. Code Civ. Proc. § 426.30(a)(emphasis added). A “related

cause of action” is defined as a “cause of action which arises

out of the same transaction, occurrence, or series of

transactions or occurrences as the cause of action which the

plaintiff alleges in his complaint.” Cal. Code Civ. Pro.

§ 426.10. 

“The term ‘transaction’...is not confined to a single,

isolated act or occurrence...but may embrace a series of acts or

occurrences logically interrelated.” Saunders v. New Capital for

Small Businesses, Inc., 231 Cal. App. 2d 324, 336 (Ct. App.

1964). “The obvious intent of the Legislature in enacting this

statute was to provide for the settlement in a single action of

all conflicting claims between the parties arising out of the

same transaction and this to avoid multiplicity of actions and

conflicting judgments.” Id. at 334. In each instance

‘transaction’ has been liberally construed so as to effectuate

this purpose. Id. at 336. “It is noteworthy that this

interpretation of the term parallels the interpretation of the

same term found in the comparable Federal Rules of Civil

Procedure on compulsory counter-claims.” Id.

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6

Under federal law, compulsory counterclaims also encompass

cases that have been brought in federal court subsequent to a

case filing in state court. “Federal courts will not permit an

action to be maintained where the claims asserted should have

been brought as a compulsory counterclaim in an earlier action.” 

In re Crown Vantage, Inc., 421 F.3d 963, 973, n.7 (9th Cir.

2005)(citing Cheiker v. Prudential Insurance Co., 820 F.2d 334

(9th Cir. 1987)). 

Here, the causes of action alleged in the present federal

suit are “related” to the subject of the action in state court

filed nearly a year and a half beforehand. Plaintiff nonetheless

argues that this case involves “post-June 2008 misappropriation

of intellection property and other acts of interference of

defendants, which occurred after Bob Gale stopped working for

Sierra.” Pl.’s Memo. in Opp. to Def.’s Mot. to Dis. 7:1-3. 

This, however, is a distinction without a difference. The claims

in question all arise from Defendants’ employment with Sierra and

their eventual discharge from the company.

Plaintiff goes on to argue that even if the two lawsuits do

“arise out of the same common nucleus of operative facts, that

does not mean that the federal action must be dismissed in

deference to the state court action.” Id. at 7:4-6. That

contention ignores the fact that the purpose of compulsory

counterclaims is to require that reciprocal rights flowing from a

common source be determined in a single action. See Saunders,

231 Cal. App. 2d at 334. This avoids unnecessary and vexatious

litigation and ensures consistent judgments. Id. 

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7

This Court consequently declines to maintain this action on

grounds that the claims it makes could and should have been

litigated in the pending state court proceedings. 

B. Younger Abstention

Defendants also assert that the requirements for abstention

first recognized by the Supreme Court in Younger v. Harris, 401

U.S. 37, 41 (1971) are satisfied. 

“Under Younger abstention, federal courts may not grant

declaratory or injunctive relief that would interfere with state

criminal or civil proceedings.” San Remo Hotel v. City and

County of San Francisco, 145 F.3d 1095, 1103 (9th Cir. 1998). 

Absent extraordinary circumstances, Younger abstention is

required if the state proceedings are (1) ongoing, (2) implicate

important state interests, and (3) provide the plaintiff an

adequate opportunity to litigate federal claims. Middlesex

County Ethics Comm. v. Garden State Bar Ass’n, 457 U.S. 423, 432

(1982). 

In addition to these three threshold prerequisites, “there

is a vital and indispensable fourth element: the policies behind

the Younger doctrine must be implicated by the actions requested

of the federal court.” AmerisourceBergen Corp. v. Roden, 495

F.3d 1143, 1149 (9th Cir. 2007). 

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 According to the parties, on February 9, 2010, the Santa 2

Clara Country Superior Court heard Sierra’s Motion to Compel

Arbitration in the Bob Gale case. (Mot., 2:16-17, Opp’n, p. 2,

n.2). Defendants also indicate that a demurrer in the Robert

Gale action is scheduled to be heard on March 11, 2010 (Mot.,

2:18-19). 

8

“When the case is one in which the Younger doctrine applies,

the case must be dismissed.” H.C. ex rel. Gordon v. Koppel, 203

F.3d 610, 613 (9th Cir. 2000). Plaintiff “has the burden of

showing that state procedural law barred presentation of its

claims.” Communications Telesystems Intern. v. California Public

Utility Com’n, 196 F.3d 1011, 1020 (9th Cir. 1999) (internal

quotations omitted). 

In this case, Younger principles are implicated and the

Middlesex factors are satisfied. The state proceeding was

pending at the time Sierra filed its federal action, it raised

important state interests, and it afforded Sierra an adequate

opportunity to assert its constitutional challenges. Middlesex,

457 U.S. at 432-437. 

There is no dispute that two state court actions were

ongoing when Sierra filed its federal action and that Sierra had 2

an adequate opportunity to litigate federal issues in the state

proceeding. Therefore, the dispositive question is whether an

important state interest is implicated in this case. 

Defendants incorrectly focus on whether important state

interests are implicated in the federal case pending before this

Court. The proper inquiry, however, turns on whether important

state interests are implicated in the state proceeding. 

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9

“If the state’s interests in the proceeding are so important that

exercise of the federal judicial power would disregard the comity

between the states and the National Government,” abstention is

proper. Pennzoil Co. v. Texaco, Inc., 481 U.S. 1, 11 (1987). 

Qualifying areas of state interest encompass those interests that

the United States Constitution and our national traditions assign

primarily to the states. Harper v. Public Service Com’n of WVA,

396 F.3d 348, 352 (4th Cir. 2005). In looking at whether an

important state interest is at hand, “we inquire into the

substantiality of the State’s interest in its proceedings [and]

we do not look narrowly to its interests in the outcome of the

particular importance of the generic proceedings to the State.” 

New Orleans Public Service, Inc. v. Council of City of New

Orleans, 491 U.S. 350, 365 (1989) (emphasis previously added). 

All the claims at issue here fundamentally arise from the

Gales’ employment with Sierra. In the state action between Bob

Gale and Plaintiff, Bob Gale alleges fraud in the inducement,

promissory fraud, breach of fiduciary duty, wrongful termination,

rescission, unjust enrichment, accounting, and constructive trust. 

Similarly, Robert Gale’s state action includes claims for nonpayment of wages, waiting time penalties, tortious discharge,

breach of the implied covenant of good faith and fair dealing,

violation of the California Business and Professions Code, and

fraud. In the instant action, Plaintiff alleges, inter alia,

breach of fiduciary duty, breach of non-competition agreements,

breach of confidentiality agreements, trade secret misappropriation

and interference with contractual relations. All these causes of

action arise from Bob Gale and Robert Gale’s employment. 

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10

Employment is inherently a state interest. “Employment

status may implicate a state interest.” Allstate Ins. Co. v.

Hague, 449 U.S. 302, 314 (1981). The fact that Defendants allege

multiple employment-related causes of action in their state

actions consequently points to an important state interest. 

In addition to employment, Defendants contend in their

Motion and their Reply that two other important state interests

are also at stake: “California’s interest in protecting trade

secrets...[and] California’s interest in enforcing only valid

non-compete agreements.” Defs.’ Reply Br. in Supp. of Mot. to

Dis. 4:10-14 (emphasis previously added). Plaintiff, however,

asserts that these interests are solely at issue in the federal

case presently before this Court and therefore should not be

considered in the analysis of whether an important state interest

is present in the state proceedings. Contrary to Plaintiff’s

contention in this regard, the employment documents/agreements at

issue here have in fact been raised in the state court

proceedings. They implicate important state interests under the

Younger analysis. 

In Computer Economics Inc. v. Gartner Group, Inc., 50 F.

Supp. 2d 980, 991 (S.D. Cal. 1999), for example, the Court

examined whether the state’s interest in uniform enforcement of

its laws was outweighed by any federal countervailing federal

interests. The Court stated that it could not “identify any

countervailing federal interests outweighing the state’s

interest” in enforcement of California’s Trade Secret statutes. 

Id. at 992. 

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11

Additionally, the California Supreme Court recognized that

“California’s trade secret law undoubtedly serves a significant

government interest.” DVD Copy Control Ass’n, Inc. v. Bunner, 31

Cal. 4th 864, 880 (Cal. 2003). The DVD Court found that trade

secrets “have been recognized as a constitutionally protected

intangible property interest.” Id. (quoting ITT Telecom

Products Corp. v. Dooley, 214 Cal. App. 3d 307, 318 (Ct. App.

1989)). California unquestionably has an important state

interest in guarding against trade secret misappropriation, as

alleged in Plaintiff’s Sixth Claim for relief herein. Tellingly,

that claim is expressly based not on federal law but rather upon

a California statute, California Civil Code § 3426.1, et seq. 

Additionally, with respect to the non-competition agreement,

California has a strong public interest in determining whether

such agreements can be enforced. California Business and

Professions Code § 16600 provides, for example, that “every

contract by which anyone is restrained from engaging in a lawful

profession, trade, or business of any kind is to that extent

void.” California courts have held that this policy is

sufficiently strong to override a contractual non-compete

provision which designated another state’s laws controlling. 

Application Group, Inc. v. Hunter Group, Inc., 61 Cal. App.4th

881, 902 (Ct. App. 1998). Here, Plaintiff alleges that Bob Gale

entered into a Non-Competition Agreement prohibiting him from

competing against Sierra during any period in which he owned

stock and for two years after. Compl. ¶ 50 and 51. 

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12

Plaintiff also asserts that Bob Gale breached the Non-Competition

Agreement by entering into competition against Sierra and

interfering with the employment of Robert Gale. Compl. ¶ 53. 

California has a strong interest in adjudicating these claims. 

Finally, Defendant satisfies the fourth and final prong of

the Younger abstention analysis. “[O]nce the three Middlesex

elements are satisfied, the court does not automatically abstain,

but abstains only if there is a Younger-based reason to abstain -

i.e., if the court’s action would enjoin, or have the practical

effect of enjoining ongoing state court proceedings.” 

AmerisourceBergen Corp., 495 F.3d at 1149 (emphasis previously

added). Deciding the issues alleged in Plaintiff’s Complaint

herein could serve to enjoin the state court proceedings, either

explicitly or implicitly. Any concurrent consideration at both

the state and federal level would be problematic, and invokes the

very concerns of comity underlying Younger abstention. Although

Plaintiff contends that “[n]one of the relief requested by Sierra

in this action would have the effect of enjoining either of these

lawsuits” (Pl.’s Opp’n to Mot. to Dismiss 5:2-3), if this Court

were to award, for example, damages or injunctive relief to

Plaintiff in connection with its claims predicated under

California law, such an award would surely interfere with the

ongoing state proceedings. Younger-based abstention is

accordingly appropriate. 

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13

C. Other Issues 

Plaintiff further alleges that “[t]he State Court judgment

in the Robert F. and Robert G. cases will be res judicata on all

claims, state and federal, which could have been litigated in the

same proceeding.” Defs.’ Mem. in Supp. of Mot. to Dismiss, 5:16-

18. 

The court need not reach a decision on this issue. Res

judicata, as a “judge-made” rule, must yield to Federal Rule of

Civil Procedure 13(a), the compulsory counterclaim rule. Allan

Block Corp. v. County Materials Corp., 512 F.3d 912, 916 (7th

Cir. 2008). Rule 13(a) “is in effect a procedural implementation

of [the res judicata] doctrine. All Rule 13(a) does is command

that certain claims be pleaded as counterclaims. It does not

specify the consequences of failing to do so. Those consequences

are given by the doctrine of res judicata.” Id. 

Defendants also allege that a more definite statement

pursuant to Federal Rule of Civil Procedure 8(a) is warranted. 

Defendants assert that “Sierra has pleaded its case in a way that

fails to give fair notice of the claim it asserts and the grounds

upon which this rests.” Defs.’ Memo. in Supp. of Mot. to

Dismiss, 12:19-21 (internal quotations omitted). Because the

Court has already determined that Plaintiff’s lawsuit should be

dismissed for the reasons stated above, however, it is

unnecessary to address Defendants’ alternative claim that

Plaintiff should be ordered to provide a more definite statement

of its claims, and the Court declines to do so. 

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 Because oral argument was not be of material assistance, 3

the Court ordered this matter was deemed suitable for decision

without oral argument. Local Rule 230(g).

14

CONCLUSION

For the reasons set forth above, Defendants’ Motion to

Dismiss (Docket No. 8) is GRANTED. 

3

IT IS SO ORDERED.

Dated: March 10, 2010

_____________________________

MORRISON C. ENGLAND, JR.

UNITED STATES DISTRICT JUDGE

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