Applied Materials, Inc. v. Ejoule Int'l Ltd.

• Decision Date: 14 October 2022
• Docket Number: H046875
• Parties: APPLIED MATERIALS, INC., Plaintiff and Respondent, v. EJOULE INTERNATIONAL LTD et al., Defendants and Appellants.
• Court: California Court of Appeals Court of Appeals

APPLIED MATERIALS, INC., Plaintiff and Respondent,
v.
EJOULE INTERNATIONAL LTD et al., Defendants and Appellants.

H046875

California Court of Appeals, Sixth District

October 14, 2022

NOT TO BE PUBLISHED

(Santa Clara County Super. Ct. No. CV237790)

BAMATTRE-MANOUKIAN, ACTING P.J.

I. INTRODUCTION

In December 2012, Applied Materials, Inc. (Applied, or the Company) filed this trade secrets misappropriation case against four former employees. The former employees are Liang Y. Chen, Wei-Yung Hsu, Robert Ewald, and Donald Olgado (hereafter, collectively, the Employee Defendants), who each had written employment agreements. Each agreement included a provision concerning the employee's obligation to preserve the confidentiality of Applied's proprietary information and trade secrets. The agreements of Liang Chen, Hsu, and Ewald each provided that claims or controversies under the agreement would be subject to arbitration except for claims related to Applied's confidential information and trade secrets. Olgado's employment agreement contained no dispute resolution provision.

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Shortly after the action was filed, Liang Chen filed a motion to compel arbitration of the dispute pursuant to section 1292.4 of the Code of Civil Procedure,^[1] contending that under an August 2012 agreement with Applied (the Separation Agreement), the underlying dispute was subject to mandatory arbitration. Before Liang Chen's motion to compel arbitration was heard, the court below issued a stay of the litigation pursuant to Pacers, Inc. v. Super. Court (1984) 162 Cal.App.3d 686 (Pacers)) because of an ongoing criminal investigation of all Employee Defendants that was related to the civil action.

Nearly five years later, the court granted Applied's motion to lift the Pacers stay and to file a second amended complaint. That amended pleading contained significant new allegations and named two new defendants, appellants Jasmine Chin (Liang Chin's spouse), and a foreign entity, eJoule International Limited (eJoule Ltd.). Applied filed a third amended complaint in December 2018, naming eJoule, Inc., the wholly-owned California subsidiary of eJoule Ltd., as a new defendant. (Hereafter, eJoule Ltd. and eJoule, Inc., which are startup companies founded by Liang Chen, are collectively referred to as eJoule.)

eJoule and Jasmine Chen filed motions to compel arbitration in January 2019. They asserted that although they were not parties to Liang Chen's Separation Agreement that contained an arbitration provision, because Applied's claims against them arose out of obligations created by that agreement, the new claims were subject to the arbitration under the doctrine of equitable estoppel. The trial court lifted the stay to address Liang Chen's 2012 motion to compel arbitration in conjunction with the arbitration motions of eJoule and Jasmine Chen, and it received further briefing from Liang Chen and Applied.

On April 16, 2019, the trial court-in a lengthy order (the Order), which involved several steps of reasoning-denied all three motions to compel arbitration. The court

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applied the third-party exception under section 1281.2, subdivision (c) (§ 1281.2(c)), in exercising its discretion to deny arbitration. The court found that because California law governed under the terms of the Separation Agreement, and that section 1281.2(c) was not preempted by federal law, the statute potentially applied to the arbitration motions. It concluded further that the three elements of section 1281.2(c) were satisfied because (1) there was at least one defendant, Olgado, who was a "third party" not bound by an arbitration agreement but who might be affected by the arbitration proceeding involving other parties; (2) Applied's lawsuit against Olgado arose out of the same transaction or series of transactions as Applied's claims against Liang Chen; and (3) if the arbitration case were to proceed, there would be a possibility of rulings that would conflict with those in the court litigation against Olgado. Finally, the trial court, after considering the four statutory options, concluded that the best approach was to deny enforcement of the arbitration agreement and to require all parties to litigate the claims in court.

Four of the seven Defendants-eJoule, Ltd., eJoule, Inc., Liang Chen, and Jasmine Chen (collectively, Appellants)-appeal the Order. Addressing the components of the trial court's detailed ruling, we conclude that (1) the potential application of section 1281.2(c) was not preempted by federal law under the circumstances of this case; (2) the court correctly found that each of the three statutory elements under section 1281.2(c) was satisfied, including the finding that there was a third party, Olgado; and (3) the trial court did not abuse its discretion by concluding that, because of the possibility of conflicting rulings as between matters arbitrated and matters adjudicated in court, the appropriate solution was to deny the arbitration motions. Accordingly, we will affirm the April 16, 2019 Order denying the motions to compel arbitration.

II. PROCEDURAL BACKGROUND

A. Complaint

On December 13, 2012, Applied filed a complaint alleging three causes of action against the Employee Defendants (Liang Chen, Hsu, Ewald, and Olgado) for

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misappropriation of trade secrets (Civ. Code, § 3426.1 et seq.), breach of written contract, and breach of fiduciary duty/duty of loyalty. It was alleged in the complaint that each of the Employee Defendants was a senior executive and fiduciary of Applied, and each had signed written employment agreements containing provisions concerning the confidentiality of Applied's proprietary information and trade secrets to which they were exposed through their employment with the Company.

The confidential information at issue was described in the complaint as technology relating to MOCVD equipment and processes. MOCVD (metal organic chemical vapor deposition) is the system for the mass production of GaN (gallium nitride) layers. GaN is a kind of semiconductor material having application for power devices (such as wireless infrastructure, electric cars, and military electronics), and LEDs (light-emitting diodes). Applied referred internally to its research into MOCVD equipment and processes as" 'Project NEON' or 'Project NLighten'" (hereafter, "Project NEON/NLighten"). Applied referred to the research and development of its next generation MOCVD equipment and processes as" 'Project Paragon.' "

The Employee Defendants worked for Applied in the MOCVD group that focused on LED technology, and they had access to, and worked on technology and data involving Project NEON/NLighten and Project Paragon. In or about June 2012, "[the Employee] Defendants formed a plan to misappropriate and use" Applied MOCVID technology and processes for their personal benefit through the creation of their new company to further their objectives. In furtherance of this plan, the Employee Defendants prepared multiple investor presentations that included Applied's confidential information, and they used the presentations to solicit venture capital and private equity sources in China and other locations while they were still employed by Applied. The Employee Defendants took various measures to conceal their plan to misappropriate and use Applied's trade secrets.

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B. Employment Agreements

In connection with its application for a temporary restraining order filed at or about the time of the filing of the complaint,^[2] Applied submitted a declaration attaching copies of its employment agreements with each of the Employee Defendants. The respective employment agreements were dated November 30, 1992 (Olgado), March 10, 1995 (Liang Chen), December 13, 1999 (Ewald), and March 4, 2000 (Hsu). Each agreement contained provisions under which the employee acknowledged the existence of Applied's confidential information, the employee's obligations not to disclose such information outside of Applied either during or after the period of employment, and the employee's assignment to Applied of all patents, trade secrets, and inventions developed during the term of employment.

The employment agreements of Liang Chen, Hsu, and Ewald each contained a provision for the arbitration of disputes, with an express carve-out reading as follows: "This agreement to arbitrate shall not apply to claims for Worker's Compensation or unemployment compensation or to controversies or claims arising out of or related to misappropriation, misuse or unauthorized disclosure of APPLIED's trade secrets or confidential information."^[3] Olgado's employment agreement contained no arbitration provision.

C. Liang Chen's 2012 Motion to Compel Arbitration

On December 19, 2012, Liang Chen filed a motion to compel arbitration. Liang Chen argued that his Separation Agreement with the Company provided for the resolution of disputes by arbitration, and that the disputes alleged in the complaint were

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embraced by that arbitration agreement. He relied on paragraph 15 of the Separation Agreement, which provided in part: "Any dispute, controversy or claim arising under or in connection with this Agreement, or the breach of this Agreement, shall be settled exclusively by arbitration in accordance with the Employment Arbitration Rules of the American Arbitration Association ("AAA") now in effect . . . . Judgment upon the award rendered by the Arbitrator(s) may be entered in any court having jurisdiction of the matter. . . ." Hsu and Ewald joined in Liang Chen's motion to compel arbitration.

Applied opposed the motion. It argued that the arbitration provision did not apply, because Applied's lawsuit was based upon Liang Chen's breach of his 1995 employment agreement and his breach of fiduciary duties owed to the Company. Applied asserted that, since it had not sued Liang Chen for breach of the August 2012 Separation Agreement, his arbitration...