Pmc, Inc. v. Kadisha

• Citation: 93 Cal.Rptr.2d 663,78 Cal.App.4th 1368
• Decision Date: 14 March 2000
• Docket Number: No. B136095.,B136095.
• Parties: PMC, INC., et al., Plaintiffs and Appellants, v. Neil KADISHA et al., Defendants and Respondents.
• Court: California Court of Appeals

93 Cal.Rptr.2d 663

78 Cal.App.4th 1368

PMC, INC., et al., Plaintiffs and Appellants, v. Neil KADISHA et al., Defendants and Respondents.

No. B136095.

Court of Appeal, Second District, Division 5.

March 14, 2000.

As Modified on Denial of Rehearing April 7, 2000.

Review Denied June 21, 2000.^*

Christensen, Miller, Fink, Jacobs, Glaser, Weil & Shapiro, Louis R. Miller and Sean Riley, Los Angeles, for Plaintiffs and Appellants.

Littler Mendelson and Robert F. Millman, Douglas A. Wickham, Los Angeles, Scott M. Lidman, for Defendants and Respondents, Neil Kadisha, Benjamin Nazarian, Parviz Nazarian and Pioneer Private Equity Fund LLC.

TURNER, P.J.

I. INTRODUCTION

Plaintiffs, PMC, Inc. and Winkler Forming, Inc. (WFI), appeal from a summary judgment in favor of defendants Neil Kadisha, Benjamin Nazarian, Parviz Nazarian, and Pioneer Private Equity Fund LLC (Pioneer). The question presented is whether, as shareholders, officers and directors of a corporation, defendants can be held personally liable for misappropriation of trade secrets, unfair competition, or interference with prospective economic advantage. We hold that a corporate officer or director may be liable for an intentional tort if: (1) the officer or director purchased or invested in the corporation the principal assets of which were the result of unlawful conduct; (2) the officer or director took control of the corporation and appointed personnel to run the corporation, which was engaging in unlawful conduct; and (3) the officer or director did so with knowledge or, with respect to trade secret misappropriation, when she or he had reason to know, of the unlawful conduct. We find plaintiffs have raised a triable issue of material fact as to the individual defendants' active meaningful participation in, consent to, or approval of, the tortious conduct. Accordingly, we reverse the judgment.

II. STANDARD OF REVIEW

A summary judgment motion is directed to the issues framed by the pleadings. (Turner v. Anheuser-Busch, Inc. (1994) 7 Cal.4th 1238, 1252, 32 Cal.Rptr.2d 223, 876 P.2d 1022; Ann M. v. Pacific Plaza Shopping Center (1993) 6 Cal.4th 666, 673, 25 Cal.Rptr.2d 137, 863 P.2d 207.) A party may move for summary judgment "if it is contended that the action has no merit or that there is no defense to the action or proceeding." (Code Civ. Proc., § 437c, subd. (a).) Summary judgment is granted when "all the papers submitted show that there is no triable issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." (Code Civ. Proc., § 437c, subd. (c); Union Bank v. Superior Court (1995) 31 Cal.App.4th 573, 579, 37 Cal.Rptr.2d 653.) A defendant proves a claim has no merit if he or she establishes one or more of the elements of the cause of action cannot be separately established. (Code Civ. Proc., § 437c, subd. (n)(1); Ochoa v. California State University (1999) 72 Cal.App.4th 1300 1304, 85 Cal.Rptr.2d 768.) The following is a moving defendant's burden of proof: "A defendant ... has met his or her burden of showing that a cause of action has no merit if that party has shown that one or more elements of the cause of action, even if not separately pleaded, cannot be established, or that there is a complete defense to that cause of action. Once the defendant ... has met that burden, the burden shifts to the plaintiff ... to show that a triable issue of one or more material facts exists as to that cause of action or a defense thereto. The plaintiff ... may not rely upon the mere allegations or denials of its pleadings to show that a triable issue of material fact exists, but, instead, shall set forth the specific facts showing that a triable issue of material fact exists as to that cause of action or a defense thereto." (Code Civ. Proc., § 437c, subd. (o)(2); see Green v. Ralee Engineering Co. (1998) 19 Cal.4th 66, 72, 78 Cal.Rptr.2d 16, 960 P.2d 1046.) We review the trial court's decision to grant the summary judgment de novo. (Romano v. Rockwell Internat., Inc. (1996) 14 Cal.4th 479, 487, 59 Cal.Rptr.2d 20, 926 P.2d 1114; Bernson v. Browning-Ferris Industries (1994) 7 Cal.4th 926, 929, 30 Cal.Rptr.2d 440, 873 P.2d 613.)

III. THE SUMMARY JUDGMENT MOTION

Plaintiffs allege that Paul Winkler, a codefendant who is not a party to the present appeal, and others misappropriated corporate assets and trade secrets of WFI, their former employer, and used the misappropriated knowledge in a new competing business, Paul Winkler Plastics Corporation (PWP). PMC, Inc. is the majority shareholder of WFI. Parviz Nazarian and Benjamin Nazarian are father and son.¹ Neil Kadisha is Parviz Nazarian's son-in-law. Pioneer is the individual defendants' investment vehicle. Their interests in Pioneer are as follows: Mr. Kadisha-40 percent; Benjamin Nazarian-20 percent; and Parviz Nazarian (as general partner of Union Communications Company)-40 percent.

The codefendants, Paul Winkler, Christopher Winkler, Colin Winkler,² Craig Snedden, James Longstreth, Dean Brown, and John Bussey, were former WFI managers who joined PWP. Their positions with WFI were as follows: Paul Winkler, president; Christopher Winkler, director of sales; Colin Winkler, director of purchasing and scheduling; Mr. Snedden, vice president of sales; Mr. Longstreth, vice president of manufacturing; Mr. Brown, tooling department manager; and Mr. Bussey, responsible for management information systems and creation of computer codes and software that control machinery used in the manufacturing process. The codefendants are not parties to the present appeal. Both WFI and PWP are in the business of manufacturing plastic food containers.

Plaintiffs also allege the codefendants had, inter alia, "contacted major customers of WFI to solicit business based upon providing the same products [then] manufactured by WFI; taken with them WFI's confidential new and prospective customer lists, customer product specifications, and proprietary information, thereby allowing them to duplicate [WFI's] manufacturing processes; solicited key WFI employees to leave WFI's employ; and disparaged WFI to existing customers." After the initial misappropriation and other tortious conduct had allegedly occurred, and after plaintiffs filed this lawsuit against the codefendants, the present defendants invested in and became officers and directors of PWP. The individual defendants' initial $1.25 million investment in PWP through Pioneer was paid by them in proportion to their interests in Pioneer. Plaintiffs demanded in writing that defendants cease and desist from the ongoing use of WFI's confidential and proprietary information. Plaintiffs then amended their complaint to include the present defendants. Plaintiffs alleged defendants had, with knowledge or reason to know of the codefendants' prior wrongful conduct, refused to cease using the stolen assets and participated in, financed, directed, and authorized the ongoing illegal acts. Plaintiffs sought to hold defendants personally liable on causes of action for misappropriation of trade secrets, unfair competition,³ interference with prospective economic advantage, and "conspiracy."⁴

In their summary judgment motion, defendants asserted as a complete defense that they could not be held personally liable for their codefendants' misappropriation of WFI's trade secrets or other tortious conduct. In support of their summary judgment motion, the individual defendants filed declarations stating that at no time had they authorized or directed any PWP officer or employee to engage in any wrongful or unlawful activity, including the conduct alleged in plaintiffs' third amended complaint. Further, following receipt of a cease and desist demand from plaintiffs' counsel, defendants had investigated whether PWP was conducting business using any alleged trade secrets or other property of WFI. Based on information provided to them, including an expert's opinion, defendants found PWP was not engaged in any continuing wrongdoing. The evidence in support of the summary judgment motion was sufficient to shift the burden to plaintiffs. (Code Civ. Proc., § 437c, subd. (o)(2); Villa v. McFerren (1995) 35 Cal.App.4th 733, 749-751, 41 Cal.Rptr.2d 719; Union Bank v. Superior Court, supra, 31 Cal. App.4th at p. 593, 37 Cal.Rptr.2d 653.)

Plaintiffs contended a triable issue of material fact remained whether defendants had themselves personally engaged in tortious conduct. Plaintiffs argued defendants were subject to personal liability because of the following combined factors: defendants invested in PWP; defendants became majority shareholders, officers, and directors of PWP; defendants effectively took control of the corporation; defendants appointed personnel to run the corporation; and defendants knew or had reason to know that their codefendants had improperly acquired and were using WFI's trade secrets to compete with their former employer, had engaged in acts of unfair competition, and were interfering with WFI's prospective economic advantage.

Plaintiffs presented evidence defendants knew, before they invested in PWP, that: the codefendants had at first sought to buy WFI out at a cost of $27 million and later $40 million; there was a third-party offer to purchase WFI for $58 million; PWP was not a usual start-up venture but a continuation or replication of WFI; for an investment of approximately $1.5 million defendants could own a company that would be an "exact replicate of WFI"; PWP was headed by the former WFI management team; the codefendants expected to be producing and selling products in a very short time, within one month; the codefendants had solicited and received $12 million in sales commitments from WFI customers; WFI had developed hundreds of molds and mold inserts worth millions of dollars; the codefendants had used WFI computer specifications to develop PWP products; these products were virtually identical to those of WFI; the codefendants had hired away...