California Employees Not Required to Litigate Out-of-State

California employees cannot be compelled to litigate claims against their employers in a different state. Employers also cannot force the waiver of the rights of employees who live and primarily work in California to the protections afforded by California’s labor provisions. In LGCY Power LLC v. Superior Court, Cal. Ct. App. Case No. F082353, the Court of Appeal considered whether a California employee’s California claim was barred by his employer’s pending lawsuit in Utah and should instead have been filed as a compulsory counterclaim in the Utah action.

Factual and Procedural Background

Michael Sewell started working for LGCY Power, LLC in Jan. 2015 as a solar sales representative. LGCY is a Delaware limited liability company that has its principal place of business located in Utah. At the time that Sewell began working for LGCY, he signed an employment contract that included his job duties and compensation schedule. The contract also included a provision that stated that the laws of the state of Utah governed and that any disputes between the employer and Sewell would be litigated in Utah. The contract also stated that Sewell was an independent contractor.

Sewell’s assigned territory was in California. He lived and worked in California and only went to Utah a couple of times per year for business meetings. In April of May of 2017, Sewell received a promotion and a pay increase. The agreement for his promotion and pay increase was made orally and not in writing, but he received both the promotion and the increased compensation.

In Aug. 2019, Sewell and six other executives and managers left LGCY, LLC. They opened a new solar company called Sunder Energy, LLC as a direct competitor to LGCY. The new company was also a Delaware limited liability company and had its principal place of business in Utah.

LGCY filed a lawsuit against Sewell and the other six managers and executives in Utah, alleging multiple causes of action, including intentional interference with contract, breach of employment contract, breach of good faith and fair dealing, breach of the Utah Trade Secrets Act, and breach of fiduciary duty. The defendants filed an answer to the Utah complaint on Nov. 18, 2019. Four of the other defendants filed a cross-claim against LGCY in Utah, alleging breach of contract and that LGCY failed to pay wages it owed to them under their states’ respective laws and that LGCY failed to pay the sales commissions they had earned.

On Dec. 18, 2019, Sewell and Michael Gutschmidt, who also lived in California, filed a motion in the Utah action asking to be dismissed as defendants in the lawsuit based on forum non conveniens and a lack of personal jurisdiction by the Utah court. They both argued that they had not lived or worked in Utah for multiple years and had never completed a sale in Utah on behalf of LGCY. Both argued they had instead lived in California since 2016 and had only minimal contacts with Utah for business meetings a couple of times per year. They also argued that LGCY chose to sue in Utah to avoid California’s strong protections of employees and its public policy against forum selection clauses in contracts.

LGCY opposed the motion, and the Utah court denied the motion to dismiss Sewell and Gutschmidt. The court did state that both defendants could raise the argument in a later filing. On June 18, 2020, Sewell and Gutschmidt filed a motion for summary judgment, which the Utah court also denied.

Sewell filed a lawsuit in Fresno County, California on May 22, 2020, against LGCY, LLC. He alleged several causes of action, including breach of contract, wage claims under California’s laws, and unjust enrichment. He asked for declaratory relief. He argued that LGCY had misclassified him as an independent contractor when he was actually an employee and that LGCY had failed to pay $80,000 in commissions that he had earned.

LGCY filed a demurrer to Sewell’s complaint and argued that it was a compulsory cross-claim that he should have filed in Utah in the Utah action instead of as an independent lawsuit against the company in California. It argued that under Utah Rule 13(a), Sewell was required to file his claims as a compulsory cross-claim in Utah and that his claim was also barred by California’s compulsory cross-claim statute.

Sewell opposed the demurrer and argued that Cal. Lab. Code § 925 is an exception to California’s compulsory cross-claim statute since it prohibits employers from compelling employees to litigate employment disputes in other states. He also argued that he did not have sufficient contacts with Utah for the court to have personal jurisdiction over him. The trial court denied LGCY’s demurrer and ruled that § 925 did create an exception to California’s compulsory cross-claim statute. While § 925 only applied prospectively to contracts entered into, modified, or extended after Jan. 1, 2017, the court found that Sewell’s employment contract was modified in April or May 2017 when he was promoted and his payment schedule was changed since both had been contemplated in the original 2015 contract. The court found that the contract had been orally modified and was fully executed following the effective date of § 925, so it applied to Sewell.

LGCY filed an appeal.

Issues: 1) Is California’s statute prohibiting employers from compelling employees to litigate claims outside of California an exception to the state’s compulsory cross-complaint statute? 2) Is California compelled to give full faith and fair credit to a statute in another state when there has been no final judgment in a pending action in that jurisdiction?

LGCY argued that § 925 did not create an exception to California’s compulsory cross-claim statute. It also argued that the California court was required to give full faith and fair credit to Utah’s compulsory cross-claim statute even if § 925 did create an exception to California’s law since there was already a pending lawsuit dealing with the same contractual dispute in Utah.

Rules: 1) Employers cannot compel employees to litigate their employment disputes in a forum outside of California or to waive their rights under California’s employment laws. 2) California’s compulsory cross-claims statute requires defendants to file any claims they have against plaintiffs as cross-claims in a pending action.

Under Cal. Lab. Code § 925, clauses in employment contracts that compel California employees to litigate employment disputes outside of the state or to waive their rights under California law are voidable. Under Cal. Civ. Proc. § 426.30, defendants in an action must file claims against plaintiffs in a pending action instead of as standalone claims.

Analysis

The Court of Appeal first considered whether § 925 creates an exception to California’s compulsory cross-claims statute. It noted that § 426.30(a) states that it applies unless another statute provides otherwise. The court noted that § 925 states otherwise, so it does create an exception to California’s compulsory cross-claims statute.

LGCY argued that § 925 only makes the choice of forum provisions voidable and does not make them void. It argued that for the provision in its contract to be deemed void, Sewell was first required to file an action and receive an order from the court declaring it was void before he could be protected under § 925. It also argued that he was an independent contractor and could not seek protection under the statute since it only applies to employees.

LGCY also argued that even if § 925 applied to Sewell, the California court should have dismissed Sewell’s claim because he should have filed it as a cross-claim in the Utah action. It argued that since the other defendants had filed cross-claims three months before Sewell’s California lawsuit in the Utah action, Sewell’s claim was barred. It argued that California was required to give full faith and credit to the pending lawsuit in Utah and that state’s compulsory cross-claims rule. It also claimed that § 925 didn’t apply to Sewell’s contract since he entered into it in 2015. Finally, LGCY argued that Sewell had not sought a court order to declare the contractual provision void and so couldn’t claim protection under § 925.

The court noted that Sewell did ask the court to declare the provision void when he filed his action in California and his response to the demurrer. It found that the trial court had already found the provision void by implication when it denied the demurrer. It found that LGCY’s argument that Sewell was not an employee was barred since LGCY did not include it as a separate heading in its appellate brief, so its argument was waived on appeal.

The court found that Sewell’s employment contract was modified when he was promoted in 2017 and received a new rate of pay. The court found that since the original employment contract detailed his job duties and his compensation, these changes modified the original agreement, and the oral agreement was fully executed when he received his new position and rate of compensation. This meant that § 925 did apply.

Finally, the court found that California was not required to give full faith and credit to the Utah compulsory cross-claims rule. It noted that the U.S. Supreme Court had previously found that states must give full faith and credit to final judgments in other states but not to pending cases. It also noted that the California court was not legally obligated to give full faith and credit to Utah’s compulsory cross-claims rule.

Conclusion

The Court of Appeal affirmed the trial court’s decision and granted Sewell his costs on appeal. The case was returned for further proceedings.

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