Jan Marini Skin Research, Inc. v. Kohler

UNITED STATES BANKRUPTCY COURT
For The Northern District Of California
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
1
MEMORANDUM DECISION AND ORDER ON MOTION OF JMSR FOR SUMMARY JUDGMENT
UNITED STATES BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA
In re:
STEVEN PAUL KOHLER,
Debtor.
Case No. 04-54120-MM
Chapter 7
JAN MARINI SKIN RESEARCH, INC.,
Plaintiff,
vs.
STEVEN PAUL KOHLER,
Defendant.
Adv. No. 04-5336
MEMORANDUM DECISION AND
ORDER ON MOTION OF JAN MARINI
SKIN RESEARCH, INC. FOR
SUMMARY JUDGMENT
I NTRODUCTION
Before the court is the motion by the plaintiff, Jan Marini Skin Research, Inc. (“JMSR”), for
summary judgment on its claim for nondischargeability of a debt for willful and malicious injury under
11 U.S.C. § 523(a)(6). 	The plaintiff asks that the court apply collateral estoppel to a state court
judgment against the defendant, Steven Kohler, for misappropriation of trade secrets, inducing breach
of contract, and intentional interference with prospective economic advantage. The judgment and the
record on which the judgment is based are sufficient to support partial summary adjudication in the
plaintiff’s favor as to all issues except for malice.
The following constitutes
the order of the court. Signed November 06, 2008
Marilyn Morgan
U.S. Bankruptcy Judge
________________________________________
Entered on Docket
November 06, 2008
GLORIA L. FRANKLIN, CLERK
U.S BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA
Case: 04-05336 Doc# 57 Filed: 11/06/08 Entered: 11/06/08 15:46:17 Page 1 of 8

UNITED STATES BANKRUPTCY COURT
For The Northern District Of California
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
2
MEMORANDUM DECISION AND ORDER ON MOTION OF JMSR FOR SUMMARY JUDGMENT
BACKGROUND
In 1999, the plaintiff brought an action in state court against Kohler for claims arising from the
misappropriation of product formulas and customer lists in connection with a business venture that
Kohler started after he left JMSR’s employment. Following a four-month trial, a jury returned a verdict
against Kohler for three intentional torts: misappropriation of trade secrets, inducing breach of contract,
and intentional interference with prospective economic advantage. It awarded compensatory damages
of $76,000.
The jury did not consider whether the misappropriation of trade secrets was willful and malicious
for purposes of awarding attorneys’ fees because the issue was not submitted to the jury. However, it
specifically found that the plaintiff had not established by clear and convincing evidence that Kohler
had acted with malice, oppression, or fraud for purposes of awarding punitive damages. On appeal, the
judgment against Kohler was affirmed with some minor modifications that are not relevant to this
decision. The Superior Court judgment against Kohler is now final.
Kohler filed a chapter 7 petition on June 30, 2004 following the close of evidence but before the
entry of judgment; however, the plaintiff obtained an order granting retroactive relief from the automatic
stay of § 362(a) so it could prosecute the state court action to judgment. It thereafter commenced this
action to determine the dischargeability of the state court judgment.
JMSR has presented the state court judgment, the underlying complaint and answer, the jury
instructions, the appellate opinion, and portions of the record from the state court trial in support of its
request that I confer collateral estoppel effect to the judgment. The record shows that before Kohler
commenced his business venture, a co-defendant wrote to him that:
[W]e have a proprietary arrangement with Jan Marini Skin Research, Inc. 	Copying
patented ingredients and formulas would place both [us] and you in a position of legal
liability.
Counsel for JMSR also wrote to Kohler, as follows:
Information 	concerning 	JMSR’s 	suppliers, 	product 	formulas, 	and 	customers 	is
considered a valuable trade secret of JMSR.
Your use or attempted use of such information will not be tolerated by JMSR. Should
you persist in such use, then JMSR has instructed us to file a lawsuit against you seeking
direct, indirect, and punitive damages . . . .
Case: 04-05336 Doc# 57 Filed: 11/06/08 Entered: 11/06/08 15:46:17 Page 2 of 8

UNITED STATES BANKRUPTCY COURT
For The Northern District Of California
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
3
MEMORANDUM DECISION AND ORDER ON MOTION OF JMSR FOR SUMMARY JUDGMENT
Further, at trial, one of the witnesses testified that Kohler stated:
That they’re going to compete against Jan Marini, go after the same clients. They didn’t
care if she was hurt financially or if she was put out of business or her reputation was
ruined, to that effect. . . . [T]hey had stated that she was a very difficult person to work
for. They had called her some disparaging names and included the B name quite often.
Kohler countered with a declaration asserting that he never intended to harm or to act
maliciously toward JMSR, that he was unaware of the contractual obligations between JMSR and the
third party co-defendant that formed the basis for the misappropriation of trade secrets, and that he
believed in good faith that he was simply engaging in fair competition. He contends that his declaration
raises a triable issue of fact whether he acted willfully and maliciously. 	JMSR responds that the
declaration is a sham declaration that must be stricken and cannot be introduced to raise a triable issue
of material fact that would preclude summary judgment because the declaration directly contradicts
Kohler’s prior sworn testimony at trial.
LEGAL DISCUSSION
A. 	Summary Judgment Standard.
On summary judgment, the court must view all the evidence in the light most favorable to the
non-moving party. In re Barboza, ___ F.3d ___, 2008 WL 4307451, at p.4 (9th Cir. Sept. 23, 2008). It
may not grant summary judgment based on an assessment of the credibility of the evidence presented
in support of or in opposition to the motion. Id.
B. 	Collateral Estoppel Applies in Nondischargeability Proceedings.
JMSR asks that the court apply collateral estoppel to the state court tort judgment and findings
against Kohler to determine that his debt is nondischargeable under § 523(a)(6). Collateral estoppel
principles apply to bar relitigation in nondischargeability proceedings. Grogan v. Garner, 498 U.S. 279,
285 fn.11 (1991). In determining the collateral estoppel effect of a state court judgment, federal courts
must, as a matter of full faith and credit, apply that state’s law of collateral estoppel. In re Bugna, 33
F.3d 1054, 1057 (9th Cir. 1994). Under California law, collateral estoppel precludes relitigation of issues
argued and decided in prior proceedings. Lucido v. Superior Court, 51 Cal.3d 335, 341 (1990), cert.
denied, 500 U.S. 920 (1991). The party asserting the doctrine must establish: (1) the issue sought to
Case: 04-05336 Doc# 57 Filed: 11/06/08 Entered: 11/06/08 15:46:17 Page 3 of 8

UNITED STATES BANKRUPTCY COURT
For The Northern District Of California
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
4
MEMORANDUM DECISION AND ORDER ON MOTION OF JMSR FOR SUMMARY JUDGMENT
be precluded is identical to that decided in the former proceeding; (2) the issue must have been actually
litigated in the former proceeding; (3) it must have been necessarily decided in the former proceeding;
(4) the decision in the former proceeding must be final and on the merits; and (5) the party against
whom preclusion is sought is the same as, or in privity with, the party to the former proceeding. In re
Harmon, 250 F.3d 1240, 1245 (9th Cir. 2001). The parties do not dispute that the state court judgment
is final and on the merits and that Kohler is the same party to the former proceeding.
Section 523(a)(6) exempts from the discharge any debt for willful and malicious injury by the
debtor to another entity or to the property of another entity. To prevail on a claim under § 523(a)(6),
the plaintiff must establish by a preponderance of the evidence the following elements: (1) a wrongful
act, (2) done intentionally, (3) which necessarily causes injury, and (4) is done without just cause or
excuse. In re Bammer, 131 F.3d 788, 791 (9th Cir. 1997). Tortious conduct as defined by state law is
also a required element of a § 523(a)(6) claim. Lockerby v. Sierra, 535 F.3d 1038, 1040 (9thCir. 2008).
Indeed, the Supreme Court has indicated that this exception to discharge applies to intentional torts,
which the jury found. Kawaauhau Geiger, 523 U.S. 57, 61 (1998). Here, the only issue that the parties
dispute for purposes of this motion is whether the debtor’s conduct was willful and malicious. They do
not appear to dispute that all other elements of a § 523(a)(6) claim have been satisfied by the judgment
for collateral estoppel purposes.
C. 	JMSR Has Established That Kohler’s Conduct Was Willful.
JMSR asserts that the jury found Kohler’s conduct to be both willful and malicious. However,
courts must analyze the willful and malicious prongs of the dischargebability test separately. In re
Sicroff, 401 F.3d 1101, 1105 (9 th Cir. 2005), cert. denied, 545 U.S. 1139 (2005). 	A “willful” injury
under § 523(a)(6) is a “deliberate or intentional injury, not merely a deliberate or intentional act that
leads to injury.” Kawaauhau v Geiger, 523 U.S. at 61(emphasis in original). This requires a subjective
intent to inflict an injury or the belief that injury was substantially certain to occur as a result of the
conduct. In re Jercich, 238 F.3d 1202, 1208 (9th Cir. 2001), cert. denied, 533 U.S. 930 (2001).
Under California law, a prima facie claim for misappropriation of trade secrets requires that the
plaintiff demonstrate that: (1) (s)he owned a trade secret; (2) the defendant acquired, disclosed, or used
the plaintiff’s trade secret through improper means; and (3) the defendant’s actions damaged the
Case: 04-05336 Doc# 57 Filed: 11/06/08 Entered: 11/06/08 15:46:17 Page 4 of 8

UNITED STATES BANKRUPTCY COURT
For The Northern District Of California
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
5
MEMORANDUM DECISION AND ORDER ON MOTION OF JMSR FOR SUMMARY JUDGMENT
plaintiff. Cytodyn, Inc. v. Amerimmune Pharmaceuticals, Inc., 160 Cal. App. 4 th 288, 297 (Cal Ct. App.
(2d Dist.) 2008). 	A defendant who receives trade secret information from someone other than the
plaintiff is liable for trade secret misappropriation if the plaintiff can show that the defendant knew or
had reason to know that the information was a trade secret and that the use or disclosure was unlawful.
Steinberg Moorad & Dunn, Inc. v. Dunn, 2002 WL 31968234, at 24 (C.D. Cal. Dec. 26, 2002).
The jury instructions for misappropriation of trade secrets provide:
To recover any damages, Jan Marini Skin Research must prove . . . [t]hat
Defendants: (a) used improper means to acquire knowledge of the trade secret; or (b)
knew or had reason to know that their knowledge of the trade secret was either (1)
derived from or through a person who had used improper means to acquire it; or (2)
acquired under circumstances such that Defendants had a duty to maintain secrecy or
limit its use; or (3) derived from or through a person who owed a duty to the claiming
party to maintain its secrecy or limit its use.
Both counsel for JMSR and a co-defendant advised Kohler that the product formulas belonged
to JMSR and that use of the formulas would place him at risk of liability to JMSR for damages. The
evidence supports a finding that he had sctual knowledge that use of the trade secrets was unlawful.
Intentional interference with contractual relations requires proof of: (1) a valid contract between
plaintiff and a third party; (2) defendant’s knowledge of this contract; (3) defendant’s intentional acts
designed to induce a breach or disruption of the contractual relationship; (4) actual breach or disruption
of the contractual relationship; and (5) resulting damage. Reeves v. Hanlon, 33 Cal.4th 1140, 1148
(2004). Intentional interference with prospective economic advantage requires proof of the existence
of an economic relationship between the plaintiff and some third party with the probability of future
economic benefit. 	Id. at 1152. 	The plaintiff must also prove that the defendant’s interference was
wrongful by some measure beyond the fact of the interference itself. Della Penna v. Toyota Motor
Sales, USA, Inc., 11 Cal.4th 376, 393 (1995). For both torts, the requisite intent is the knowledge of
the relationship and the intent to interfere with or disrupt that relationship. Pacific Gas & Electric Co.
v. Bear Stearns & Co., 50 Cal.3d 1118, 1126 (1990).
The jury instructions included the following:
To establish this Inducing Breach of Contract claim, Jan Marini Skin Research
must prove . . . [t]hat . . . Kohler . . . intended to cause one or more of the persons listed
above to breach her contract. . . .
Case: 04-05336 Doc# 57 Filed: 11/06/08 Entered: 11/06/08 15:46:17 Page 5 of 8

UNITED STATES BANKRUPTCY COURT
For The Northern District Of California
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
6
MEMORANDUM DECISION AND ORDER ON MOTION OF JMSR FOR SUMMARY JUDGMENT
To establish its Intentional Interference with Prospective Economic Relations
claim, Jan Marini Skin Research must prove . . . [t]hat . . . Kohler . . . intended to disrupt
the relationship. . . .
The jury found Kohler liable for misappropriation of trade secrets, inducing breach of contract,
and intentional interference with prospective economic advantage. Based on the jury instructions, it
appears the jury verdict on the various tort claims subsumed findings that Kohler knew the information
was a trade secret, that he knew his use was unlawful, and that he intended to interfere with or disrupt
JMSR’s relationship with third parties. I find that the requisite knowledge for these torts is identical to
and satisfies the requirement of intent to inflict injury for a finding of willfulness under § 523(a)(6). For
collateral estoppel purposes, the issue of Kohler’s intent to injure was actually litigated and necessarily
decided in the state court action. Under that circumstance, the requirements of collateral estoppel are
satisfied, and relitigation of the issue of willfulness is precluded. See, e.g., Bugna, 33 F.3d at 1057.
D. 	A Genuine Issue of Material Fact Remains as to Malice.
A “malicious” injury involves: (1) a wrongful act, (2) done intentionally, (3) which necessarily
causes injury, and (4) is done without just cause or excuse. In re Su, 290 F.3d 1140, 1146-47 (9th Cir.
2002). Kohler points out that the jury specifically found that JMSR did not show that Kohler acted with
malice, oppression, or fraud under California Civil Code § 3294. However, for two reasons, I decline
to attach to that finding any particular significance that would preclude further litigation. First, the
definition of malice under California Civil Code § 3294 and under Bankruptcy Code § 523(a)(6) are
different. In re Branam, 226 B.R. 45, 52-53 (B.A.P. 9th Cir. 1998), aff’d, 205 F.3d 1350 (9th Cir. 1999).
“Malice,” as defined in California Civil Code § 3294(c)(1), “means conduct which is intended by the
defendants to cause injury to the plaintiff or despicable conduct which is carried on by the defendant
with a willful and conscious disregard of the rights or safety of others.” As indicated above, “malice”
under § 523(a)(6) involves a wrongful act that necessarily causes injury and that was done intentionally
and without just cause or excuse.
Second, the standard of proof for malice under California Civil Code § 3294 and Bankruptcy
Code § 523(a)(6) are different. Id. California Civil Code § 3294(c)(1) requires that malice be proven
by clear and convincing evidence before punitive damages may be awarded. However, the elements
of § 523(a)(6) must be proven by a preponderance of the evidence. Because the definition and standard
Case: 04-05336 Doc# 57 Filed: 11/06/08 Entered: 11/06/08 15:46:17 Page 6 of 8

UNITED STATES BANKRUPTCY COURT
For The Northern District Of California
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
7
MEMORANDUM DECISION AND ORDER ON MOTION OF JMSR FOR SUMMARY JUDGMENT
of proof differ, we don’t know whether the evidence of malice, oppression, or fraud, if any, might have
satisfied the lower preponderance standard. The party asserting preclusion must show with clarity and
certainty what was determined by the prior judgment. Clark v. Bear Stearns & Co., Inc., 966 F.2d 1318,
1321 (9th Cir. 1992). 	An examination of the record from the state court action, including the jury
instructions, demonstrates that the question whether Kohler’s conduct was malicious was not actually
litigated or necessarily decided in the prior action. 	For these reasons, collateral estoppel does not
preclude litigation of the issue of malice in this proceeding.
The question then arises whether there are sufficient facts from the state court record to support
summary judgment on the issue of malice. One witness at trial testified that Kohler stated that he would
compete with JMSR without regard to whether it was harmed financially, put out of business, or ruined.
JMSR urges that I strike Kohler’s declaration contradicting this testimony under the sham declaration
rule. However, the rule contemplates the exclusion of a declaration that contradicts the witness’ own
prior sworn testimony. See Cleveland v. Policy Management Systems Corp., 526 U.S. 795, 806 (1999);
Kennedy v. Allied Mutual Ins. Co., 952 F.2d 262, 266 (9th Cir. 1991). Because the sham declaration
rule should be applied with caution, I decline to extend it to exclude a declaration offered to contradict
the prior sworn testimony of other witnesses. 	Viewing the evidence in the light most favorable to
Kohler as the non-moving party, a genuine issue of material fact arises as to whether his conduct was
malicious. Consequently, that issue is reserved for trial.
CONCLUSION
Based on the foregoing, partial summary adjudication is granted in favor of JMSR as to all issues
under § 523(a)(6) other than malice.
Good cause appearing, IT IS SO ORDERED.
* * * END OF ORDER * * *
Case: 04-05336 Doc# 57 Filed: 11/06/08 Entered: 11/06/08 15:46:17 Page 7 of 8

UNITED STATES BANKRUPTCY COURT
For The Northern District Of California
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
8
MEMORANDUM DECISION AND ORDER ON MOTION OF JMSR FOR SUMMARY JUDGMENT
Adv. No. 04-5336
SERVICE LIST
STEPHANIE O SPARKS
HOGE FENTON JONES & APPEL INC
60 S MARKET ST SUITE 1400
SAN JOSE CA 95113-2396
J PHILIP MARTIN
KASTNER BANCHERO LLP
2465 E BAYSHORE RD SUITE 405
PALO ALTO CA 94303
Case: 04-05336 Doc# 57 Filed: 11/06/08 Entered: 11/06/08 15:46:17 Page 8 of 8