Nor-Cal Moving Services v. Paylocity Corp.

Background

Nor-Cal Moving Services contracted with Paylocity Corp. for employee payroll and time-tracking services. Nor-Cal alleged that Paylocity rounded employee time in violation of California law. Current and former Nor-Cal employees then sued Nor-Cal. After discovering Paylocity’s alleged rounding practice, Nor-Cal filed this action seeking recovery from Paylocity.

Paylocity asserted one counterclaim for breach of contract. It alleged that Nor-Cal breached the parties’ agreement by failing to review payroll runs and provide accurate inputs and data, failing to indemnify Paylocity for losses and expenses connected with the agreement or Paylocity’s duties, and filing this lawsuit outside the contract’s two-year limitations period.

Nor-Cal moved to strike the counterclaim under California’s anti-SLAPP statute. An anti-SLAPP motion is a procedure for challenging a claim based on activity protected by the rights to petition or free speech.

Choice of Law

The court applied California’s anti-SLAPP statute. Although the contract stated that it would be construed under Illinois law, the court concluded that anti-SLAPP laws are procedural under California choice-of-law principles. Because this case was based on diversity jurisdiction, the court also considered the federal rules governing when state law applies in federal court and followed Ninth Circuit precedent applying California’s anti-SLAPP statute in diversity cases.

Anti-SLAPP Analysis

California’s anti-SLAPP analysis has two steps. First, the party bringing the motion must show that the challenged claim arises from protected activity. Second, the opposing party must show a reasonable probability of success on the claim.

At Step One, the court found that Nor-Cal’s filing of this lawsuit was activity furthering its right to petition. The court concluded that this activity supplied an element of Paylocity’s counterclaim because Paylocity alleged that Nor-Cal breached the contract by filing the lawsuit and appeared to seek damages for expenses incurred defending it.

At Step Two, the court applied the standard for a motion to dismiss because Nor-Cal raised only legal, rather than factual, challenges. The court found that Paylocity had not shown a reasonable probability of success. Paylocity’s damages allegations were conclusory, and the court stated that litigation expenses and attorney fees generally do not qualify as breach-of-contract damages under California or Illinois law unless an agreement or statute specifically permits them.

The court also found two alleged breaches inadequately pleaded. Paylocity did not allege when Nor-Cal became or should reasonably have become aware of the events underlying its claims, so it did not sufficiently allege that Nor-Cal violated the contract’s two-year limitations provision. Paylocity also provided no details supporting its allegation that Nor-Cal failed to provide accurate inputs and data.

Disposition

The court stated that the anti-SLAPP analysis favored striking Paylocity’s counterclaim, but it did not rule on Nor-Cal’s motion at that time. Because the court could not conclude that amendment would be futile, it deferred ruling on the motion until Paylocity had an opportunity to file an amended counterclaim.

Paylocity was permitted to file an amended counterclaim by January 5, 2026. The amendment may not add new counterclaims or parties, or otherwise change the allegations, except to correct the identified deficiencies unless the court grants permission or the parties stipulate under Federal Rule of Civil Procedure 15. If Paylocity files an amendment, Nor-Cal may file a supplemental brief by January 12, 2026, and Paylocity may respond by January 19, 2026; each brief is limited to three pages.