Allied Public Adjusters, Inc. vs. G.D. Baca, Inc.

Although their notice of motion/demurrer does not comply with subdivision (a) of CRC 3.1320, defendants are demurring generally and specially on the ground of uncertainty to all three causes of action plaintiff’s SAC, which are for breach of contract, fraud, and violation of Bus. & Prof. Code section 17200. Defendants contend that all three causes of action are defective because they are based on an unenforceable contract provision for exclusivity/noncompetition. Plaintiff opposes the demurrer.

In the introductory portion of the second amended complaint, plaintiff alleges that, on or around January 10, 2025, plaintiff and defendants entered into a written agreement whereby defendants would provide consulting services for plaintiff to develop an outside sales department in exchange for payment. (SAC, ¶ 8.) Plaintiff alleges that the term of the contract would be 12 consecutive months, and total payment would be $300,000. (SAC, ¶ 8.) Plaintiff attaches a copy of the contract to the SAC as Exhibit A.

Plaintiff then quotes section 1.3 of the contract, which, among other things, states that, with the exception of pending claims, the Service Provider, i.e., defendants, “shall not perform similar or identical services to any other or different person or entity in the insurance adjusting industry or in competition with [plaintiff], or act itself as a public insurance adjuster, or in any manner competitive to [plaintiff]” and that “Service Provider shall perform the Services exclusively for and on behalf of [plaintiff] pursuant to the terms of this Agreement.” (SAC, ¶ 9.)

Plaintiff alleges that plaintiff made its first payment to defendants shortly after execution of the contract and that defendants then asked that execution of the services be delayed so they could act as public insurance adjusters with respect to wildfire claims in Southern California. (SAC, ¶ 12.) Plaintiff alleges that, by not disclosing their competing engagements, not referring the claims to plaintiff, and diverting them for their own benefit, defendants “directly competed with Plaintiff during the Contract term, performed identical services in the insurance adjusting industry, and breached both the exclusivity portion of Section 1.3 and the referral requirements of the Contract, all while accepting compensation from Plaintiff and delaying performance of their contractual obligations.” (SAC, ¶ 13.)

Plaintiff’s first cause of action for breach of contract is short, i.e., it consists of four paragraphs, including one that incorporates the prior allegations by reference. In this cause of action, plaintiff alleges that defendants breached the contract in two ways: (1) by failing to perform the consulting and development services; and (2)

by engaging as public insurance adjusters in direct competition with plaintiff. (SAC, ¶ 16.)

Defendants contend that this cause of action fails because, among other things, the restraint on competition in section 1.3 of the complaint is unenforceable under Bus. & Prof. Code § 16600. Subdivision (a) of section 16600 provides that “[e]xcept as provided in this chapter, every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.” Defendants therefore contend that they could not have breached the agreement by engaging in work as public insurance adjusters as alleged.

In opposing the demurrer, plaintiff contends that the restriction on competition in the agreement is permitted because the restriction was only for the term of the contract. It also contends that because defendants were providing services for it and given access to its trade secrets and other proprietary information, it should be expected to have defendants’ loyalty. In making this argument, plaintiff cites cases involving employers and employees, including Techno Lite, Inc. v. Emcod (2020) 44 Cal.App.5th 462, which stated the following at p. 471:

“Business and Professions Code section 16600 has consistently been interpreted as invalidating any employment agreement that unreasonably interferes with an employee’s ability to compete with an employer after his or her employment ends. [Citation.] However, the statute does not affect limitations on an employee’s conduct or duties while employed. ‘While California law does permit an employee to seek other employment and even to make some “preparations to compete” before resigning [citation], California law does not authorize an employee to transfer his loyalty to a competitor. During the term of employment, an employer is entitled to its employees’ “undivided loyalty.” [Citation.]’ [Citation.]” [Citation.]

Plaintiff acknowledges that defendants are not employees but independent contractors and contends that it is a difference without distinction, but this is inaccurate. According to Ixchel Pharma, LLC v. Biogen, Inc. (2020) 9 Cal.5th 1130, which is cited by defendants in both their moving and reply papers, section 16600 is applicable to business contracts. Specifically, that case stated the following at pp. 1149-1150:

As an initial matter, we agree with the parties that section 16600 applies to business contracts. The chapter of the Business and Professions Code containing section 16600

excepts from section 16600’s coverage certain noncompetition agreements upon the sale of goodwill or of ownership interest in a business [citation] and upon the dissolution or dissociation from a partnership [citation] or limited liability corporation [citation]. If section 16600 did not apply to business contracts, these exceptions would be unnecessary. Indeed, California courts have frequently analyzed whether contracts involving business dealings are void under section 16600. [Citations.]

Thus, as defendants contend, plaintiff cannot enforce the restraint on competition in the agreement and it cannot serve as the basis of the purported breach.

To the extent that plaintiff contends that the contract was breached because defendants failed to perform the consulting and development services, it has not alleged facts supporting this conclusion. Plaintiff has only alleged that defendants asked that performance be delayed.

Plaintiff’s second cause of action for fraud is nine paragraphs long, including a paragraph that incorporates by reference all prior allegations. Defendants contend that this cause of action is not pled with the specificity required for a fraud claim. They also contend that the cause of action does not contain facts showing that they did not intend to perform their promises when they made them or that plaintiff reasonably relied on the promise.

Defendants are correct. Plaintiff alleges conclusions instead of facts. It simply alleges that “[a]t the times that Defendants made the above-described representations to Plaintiff, Defendants had no intention of performing those promises” (SAC, ¶ 19) and that “[t]he promises were made by Defendants with the intent to induce Plaintiff to enter into the Contract, from which Defendants could gain profits and benefits for themselves” (SAC, ¶ 21). These allegations are insufficient to support a claim for fraud against defendants.

Plaintiff’s third cause of action for violation of Bus. & Prof. Code § 17200 seeks injunctive relief against defendants as well as disgorgement and restitution of revenues, but plaintiff never identifies the conduct that amounts to the unlawful business practices. Rather, after describing unfair business competition in general terms (see SAC at ¶¶ 28-32), plaintiff simply alleges that defendants violated the UCL “through their unlawful, unfair, and fraudulent business practices” and that their actions “are ongoing and present a continuing threat that Plaintiff and the public will continue to be harmed by these unfair business practices” (SAC, ¶

33.) These allegations are insufficient to show that defendants engaged in a violation of the Unlawful Competition Law.

The demurrer as to all three causes of action is sustained with 20 days’ leave to amend.

Counsel for the parties are reminded to follow the California Rules of Court when submitting pleadings and motions.