Minute OrderCal. Super. - 6th Dist.December 4, 2020SUPERIOR COURT OF CALIFORNIA COUNTY OF SANTA CLARA MINUTE ORDER Line 4 Hearing Start Time: 1:30 PM Silvaco, Inc. v. Andersen, et al. 20CV374355 Hearing Type: Hearing: Demurrer Date of Hearing: 07/15/2021 Comments: Heard By: Kulkarni, Sunil R Location: Department 1 Courtroom Reporter: - No Court Reporter Courtroom Clerk: Ann Vizconde Court Interpreter: Court Investigator: Parties Present: Future Hearings: Erickson, Mark David Attorney Exhibits: - Demurrer by Kathy Pesic and Iliya Pesic to the Amended Cross-Complaint. Stipulation & Order re Demurrer Briefing Schedule entered 4/28/21: moving papers due 5/21/21; opposition due 6/18/21; reply due 7/1/21. No one called to contest the Tentative Ruling. Appearance by above listed Counsel for Plntff via CourtCall; he confirms he is not contesting the Tentative Ruling. THE COURT ADOPTS THE TENTATIVE RULING; see below: These cross-actions arise from Plaintiff Silvaco, Inc. s acquisition of Nangate, Inc. (Nangate) pursuant to a Stock Purchase Agreement (SPA). The SPA provides for ongoing earn-out payments to the defendants, and dispute have arisen about those payments and associated issues. Silvaco seeks declaratory relief, while Cross-Complainants former Nangate shareholders Ole Christian Andersen, Jens Michelsen, and JPTB Family Holding ApS (JPTB) seek damages and other relief. Before the Court is a demurrer by individual cross-defendants Kathy Pesic and lliya Pesic (the Pesics) to all of the clams asserted against them in the Amended Cross-Complaint (FAXC). (Code Civ. Proc., 430.10, subd. (e).) As discussed below, the Court SUSTAINS the Pesics demurrer with leave to amend. I. BACKGROUND Silvaco commenced this action by filing a complaint for declaratory relief on December 4, 2020. It named as defendants Mr. Christian Andersen, Mr. Michelsen, and JPTB, as well as Guileherme Simoes Schlinker, Printed: 7/15/2021 07/15/2021 Hearing: Demurrer - 20CV374355 Page 1 of 7 SUPERIOR COURT OF CALIFORNIA COUNTY OF SANTA CLARA MINUTE ORDER who is also a party to the SPA. A. Silvaco s Complaint for Declaratory Relief The Complaint alleges that on March 2, 2018, Silvaco entered into the SPA as part of its acquisition of the stock of Nangate and Nangate Denmark ApS (the Stock). (Complaint, 9.) The object of the SPA was to acquire all of the rights to Nangate s products, including tools and services for the creation, optimization, characterization, and validation of standard cell library IP. (|bid.) Pursuant to the SPA, Silvaco acquired the Stock in exchange for an initial cash payment and its agreement to make certain earn-out payments to the defendants based on a percentage of the revenue generated by the Nangate products for a period of 5 years following the sale. (ld., 10.) The earn-out compensation was to be paid quarterly based on the revenue from (i) the ongoing sale of products that were part of Nangate s business at the SPA closing and (ii) the sale of new products and services to the extent they included the Nangate Characterizer tool and a version of Silvaco s SmartSpice that can be executed only by using Nangate Characterizer. (|bid.) Various disputes have arisen between Silvaco and Defendants concerning the earn-out payments, including about the extent to which Defendants are entitled to compensation for new products of Silvaco s. (Complaint, 14.) According to Silvaco, Mr. Christian Andersen has contended that Defendants are entitled to earn-out payments on the entire Foundation IP of Silvaco, arguably including standard cells, l/O activities, and memory and presumably without regard to whether such Foundation IP incorporates any Nangate products. (lbid.) Silvaco seeks a declaration that (i) in order for a new Silvaco product with l/O to qualify for an earn-out payment under the SPA, the new product must include both the Nangate Characterizer tool and SmartSpice; (ii) new memory products do not qualify for earn-out payments under the SPA; and (iii) Defendants request for an audit of 2nd Quarter 2020 and for resolution of earn-out payment disputes for 4th Quarter 2019 and lst Quarter 2020 are untimely and shall not proceed. (ld., p. 5, 3.) B. Defendants Cross-Complaint Mr. Christian Andersen, Mr. Michelsen, and JPTB filed the FAXC on April 21, 2021. They allege that Nangate was a thriving smaller Electronic Design Automation (EDA) company in a market dominated by three major players. (FAXC, 1 2.) Silvaco is also an EDA company, and embarked on a plan to grow its business through serial acquisitions to compete with these larger competitors. (ld., 2.) To induce Nangate s shareholders to sell, Silvaco made a number of false representations and promises regarding its commitment and ability to invest in the business, hire additional engineers to execute plans for Nangate products under development and planned for development at the time of the acquisition, provide necessary resources and equipment to develop new products, and generally grow revenues to a level that would support meaningful earn-out payments to cover the cost of acquisition. (FAXC, 5.) Silvaco promised to make these meaningful earnout payments within 30 days of the end of each quarter, and that it had the financial means to do so. (lbid.) During negotiations and prior to closing, Silvaco and the Individual Defendants told Cross-Complainants that the earn out payments would be at least $13.5 million. (lbid.) Printed: 7/15/2021 07/15/2021 Hearing: Demurrer - 20CV374355 Page 2 of 7 SUPERIOR COURT OF CALIFORNIA COUNTY OF SANTA CLARA MINUTE ORDER But Silvaco was unable to make the very first earn-out payment under the SPA, so that Nangate s shareholders had to accept payment in four installments. (FAXC, 6.) And at all times after closing, Silvaco has continually failed to live up to its promises to promote, support, and grow Nangate s business, refusing to add the additional hires that were promised before closing, terminating Nangate s sales staff with no adequate replacement in place, and terminating or reassigning employees who held important responsibilities . (lbid.) This resulted in a significant decline in revenue that has left Cross-Complainants substantially undercompensated in relation to their expected earn-out payments contemplated under the SPA. (lbid.) Silvaco has refused to comply with the dispute and audit processes provided by the SPA for challenging the calculation of earn-out payments; has improperly excluded certain products and services from the revenue base for calculating such payments; and employed unsavory tactics in response to challenges to its calculations, including firing Mr. Michelsen in retaliation for his complaints. (ld., 7.) Based on these and more detailed subsequent allegations, Cross-Complainants bring suit against Silvaco, its Director and Co-Founder Ms. Pesic, and its Executive Chairman Mr. Pesic (who is Ms. Pesic s son). (FAXC, 13 14.) They assert claims for (1) breach of contract and (2) breach of the implied covenant of good faith and fair dealing (against Silvaco); (3) fraudulent inducement false promise, (4) fraud, (5) negligent misrepresentation, and (6) unfair competition (against all Cross-Defendants); and (7) declaratory judgment (against Silvaco). |I. LEGAL STANDARD A demurrer tests the legal sufficiency of the complaint. (Chen v. PayPal, Inc. (2021) 61 Cal.App.5th 559, 568.) Consequently, it reaches only to the contents of the pleading and such matters as may be considered under the doctrine ofjudicial notice. (Weil v. Barthel (1955) 45 Cal.2d 835, 837; see also Code Civ. Proc., 430.30, subd. (a).) It is not the ordinary function of a demurrer to test the truth of the plaintiff s allegations or the accuracy with which he describes the defendant s conduct. Thus, the facts alleged in the pleading are deemed to be true, however improbable they may be. (Align Technology, Inc. v. Tran (2009) 179 Cal.App.4th 949, 958, internal citations and quotations omitted.) In ruling on a demurrer, the allegations of the complaint must be liberally construed, with a view to substantial justice between the parties. (Glennen v. Allergan, Inc. (2016) 247 Cal.App.4th 1, 6.) Nevertheless, while [a] demurrer admits all facts properly pleaded, [it does] not [admit] contentions, deductions or conclusions of law or fact. (George v. Automobile Club of Southern California (2011) 201 Cal.App.4th 1112, 1120.) A demurrer will succeed where the allegations and matters subject to judicial notice clearly disclose a defense or bar to recovery. (Casterson v. Superior Court (2002) 101 Cal.App.4th 177,183J Ill. DISCUSSION The Pesics are named as Cross-Defendants to the fraud-based cross-claims (the third through fifth causes of action) and the cross-claim for unfair competition (the sixth cause of action). They contend that the fraud-based claims are not pled with the requisite particularity and do not allege reliance, the fraud-based claims are barred by the economic loss rule, and the unfair competition claim fails with the fraud-based claims and does not even mention them. Cross-Complainants dispute each of these points, and further Printed: 7/15/2021 07/15/2021 Hearing: Demurrer - 20CV374355 Page 3 of 7 SUPERIOR COURT OF CALIFORNIA COUNTY OF SANTA CLARA MINUTE ORDER urge that their claim for negligent misrepresentation need not be stated with the same particularity as a fraud claim. A. The Fraud-Based Cross-Claims Cross-Complainants claims for fraudulent inducement false promise, fraud, and negligent misrepresentation are generally subject to the same analysis. The elements of a claim for fraud are (1) a misrepresentation, (2) with knowledge of its falsity, (3) with the intent to induce another s reliance on the misrepresentation, (4) actual and justifiable reliance, and (5) resulting damage. (Daniels v. Select Portfolio Servicing, Inc. (2016) 246 Cal.App.4th 1150, 1166 (Daniels); see also Lazar v. Superior Court (1996) 12 Cal.4th 631, 638 (Lazar) [reciting the same elementsl.) Promissory fraud is a subspecies of the action for fraud and deceit. A promise to do something necessarily implies the intention to perform; hence, where a promise is made without such intention, there is an implied misrepresentation of fact that may be actionable fraud. (Lazar, supra ,12 Cal.4th at p. 638.) And [t]he elements of a claim for negligent misrepresentation are nearly identical to a claim for fraud. (Daniels, supra, 246 Cal.App.4th at p. 1166.) Only the second element is different, requiring the absence of reasonable grounds for believing the misrepresentation to be true instead of knowledge of its falsity. (|bid.) For policy reasons, fraud and negligent misrepresentationfl must be pleaded with particularity that is, the pleading must set forth how, when, where, to whom, and by what means the representations were made. (Foster v. Sexton (2021) 61 Cal.App.5th 998, 1028.) The specificity requirement serves two purposes: to apprise the defendant of the specific grounds for the charge and enable the court to determine whether there is any basis for the cause of action. (Orcilla v. Big Sur, Inc. (2016) 244 Cal.App.4th 982, 1008, quoting Chapman v. Skype Inc. (2013) 220 Cal.App.4th 217, 231.) 1. Cross-Complainants Allegations Concerning the Pesics Ms. Pesic is Silvaco s Co-Founder and currently sits on its Board. (FAXC, 13.) Cross-Complainants allege that she is the primary owner and shareholder of Silvaco, and regularly provides funds to the business ; she was a core decision maker in Silvaco s decision to acquire Nangate, and participated in the negotiations on behalf of Silvaco ; and her personal assurances that Silvaco could and would invest substantial resources in Nangate s business were key drivers in Nangate s acceptance of Silvaco s acquisition proposal. (lbid.) Mr. Pesic is the Executive Chairman of Silvaco s Board, but also participates in the day-to-day management of Silvaco, was a core decision maker in Silvaco s decision to acquire Nangate, and participated in nearly all of the meetings during the negotiation period. (Id. 14.) Cross-Complainants allege that misrepresentations were made by the Pesics during a key meeting that took place over two days in early November 2017: 0n November 1, 2017, Cross-Complainants met with the Individual Defendants, Mr. Dave Dutton and Mr. [Ron] Sorisho at Silvaco s office. During that meeting, the Individual Defendants personally endorsed and reiterated the numerous representations that had been made by the Silvaco management team, including Printed: 7/15/2021 07/15/2021 Hearing: Demurrer - 20CV374355 Page 4 of 7 SUPERIOR COURT OF CALIFORNIA COUNTY OF SANTA CLARA MINUTE ORDER but not limited to: (a) the commitments to invest in and grow the Nangate business once owned by Silvaco; (b) Silvaco s financial capacity to make the earn-out payments to the Cross-Complainants; and (c) Ms. Pesic s personal commitment as the primary and controlling shareholder of Silvaco to support the growth of Nangate and Silvaco through investments and acquisitions; and (d) Mr. Pesic s commitment as a member of the Board to support the growth of Nangate and Silvaco through investments and acquisitions. These statements by both of the Individual Defendants were significant to Cross-Complainants, who were made to believe that not only Silvaco management but its Board President and controlling shareholder were fully aligned and would live up to the numerous promises made to induce Cross-Complainants to agree to the sale structure proposed by Silvaco. (FAXC, 33; see also 77 [repeating alleged misrepresentations (a) (d).) Discussions continued to November 2, when the parties reached a verbal agreement on deal terms, and handshakes were exchanged between the Cross-Complainants and the Silvaco team including Ms. Pesic, Mr. Pesic and Mr. Dutton. (ld., 34.) Elsewhere in the FAXC, Cross-Complainants allege misrepresentations by other individuals, groups of individuals, or Silvaco, and generally attribute these statements to the Pesics, Silvaco, and sometimes others as a group. (FAXC, 75; see also id., 76, 83, 84, 91 94.) 2. Particularity Requirement As reflected in the discussion above, Cross-Complainants attempt to hold the Pesics responsible for endors[ing] and reiterate[ing] representations that had been made by other members of the Silvaco management team. (FAXC, 33.) Such general allegations do not state a claim for fraud. (See Lazar, supra, 12 Ca|.4th at p. 645 [general and conclusory allegations do not suffice ].) Without specifically alleging which of the Pesics made what representations, Cross-Complainants do not satisfy the particularity requirement. (See 5 Witkin Cal. Proc. (5th ed. 2020) Pleading 718 [ [t]he representation must be directly and specifically pleaded; without that pleading an essential element of the cause of action is lacking ], 719 [ [t]he typical misrepresentation of fact is usually pleaded verbatim ].) For example, in the analogous context where a plaintiff alleges fraud by a corporation, the plaintiff must allege the names of the persons who made the allegedly fraudulent representations, their authority to speak, to whom they spoke, what they said or wrote, and when it was said or written. (Ibid., quoting Tarmann v. State Farm Mut. Auto. Ins. Co. (1991) 2 Cal.App.4th 153, 157.) Similarly, Cross-Complainants cannot just generally allege that statements by others should be imputed to the Pesics based on their attendance at a meeting without providing more specifics. Notably, while the claims at issue are based on a theory of affirmative misrepresentation, the allegations are more suggestive of a theory of nondisclosure. But [i]f the duty to disclose arises from the making of representations that were misleading or false, then those allegations should be described. (Alfaro v. Community Housing Improvement System & Planning Assn., Inc. (2009) 171 Cal.App.4th 1356, 1384.) The only statements Cross-Complainants specifically attribute to the Pesics are Ms. Pesic s personal commitment as the primary and controlling shareholder of Silvaco to support the growth of Nangate and Silvaco through investments and acquisitions; and (d) Mr. Pesic s commitment as a member of the Board to support the growth of Nangate and Silvaco through investments and acquisitions. (FAXC, 33, 77.) These alleged promises are too vague to be enforced. (See Lim v. The.TV Corp. Internat. (2002) 99 Cal.App.4th Printed: 7/15/2021 07/15/2021 Hearing: Demurrer - 20CV374355 Page 5 of 7 SUPERIOR COURT OF CALIFORNIA COUNTY OF SANTA CLARA MINUTE ORDER 684, 694 [ the allegation that defendant represented the auction would be fair and open is too vague to form a basis for fraud in itself ]; Rochlis v. Walt Disney Co. (1993) 19 Cal.App.4th 201, 216 [alleged promises regarding appropriate financial rewards did not support a claim for fraud; [p]romises too vague to be enforced will not support a fraud claim any more than they will one in contract ], disapproved on another ground by Turner v. Anheuser-Busch, Inc. (1994) 7 Ca|.4th 1238, 1251.) Cross-Complainants accordingly fail to allege any specific, affirmative misrepresentation by either of the Pesics sufficient to state a claim for fraud. 3. Conclusion Because Cross-Complainants fail to plead their fraud-based claims with the requisite particularity, the Pesics s demurrer to those claims will be sustained with leave to amend. Accordingly, the Court does not need to address the Pesics s arguments concerning reliance ancl the economic loss rule. B. The Unfair Competition Cross-Claim The parties agree that the sixth cross-claim for unfair competition is derivative of the fraud-based cross- claims, and thus stands or falls with these other claims. (See Medical Marijuana, Inc. v. ProjectCBD.com (2020) 46 Cal.App.5th 869, 896 [citing Hawran v. Hixson (2012) 209 Cal.App.4th 256, 277 for the proposition that a derivative unfair competition claim stands or falls with the underlying claim]; Krantz v. BT Visual Images, LLC (2001) 89 Cal.App.4th 164, 178 [claims incidental to and dependent upon an antecedent substantive cause of action stand or fall with the antecedent claim].) Based on its ruling above, the Court will sustain the demurrer to the sixth cross-claim as well. IV. CONCLUSION The Pesics s demurrer is SUSTAINED WITH 30 DAYS LEAVE TO AMEND as to all of the cross-claims alleged against them. The Court will prepare the order. *** LAW AND MOTION HEARING PROCEDURES In light of the significant progress combatting the COVID-19 pandemic and favorable rates of vaccination in the State of California and Santa Clara County, the Court rescinded, effective June 21, 2021, all prior general orders restricting courthouse access. Remote appearances for complex civil matters are still permitted, but are no longer mandatory. (See General Order Rescinding Portion of May 6, 2020 General Order Concerning Printed: 7/15/2021 07/15/2021 Hearing: Demurrer - 20CV374355 Page 6 of 7 SUPERIOR COURT OF CALIFORNIA COUNTY OF SANTA CLARA MINUTE ORDER Complex Civil Actions, available at https://www.scscourt.org/genera|_info/news_media/newspdfs/ZOZ1/ Genera|OrderRescindingPortionof05062lGeneralOrderConcerningComplexCivilActions.pdf.) If a party gives notice that a tentative ruling will be contested, any party seeking to participate in the hearing remotely should contact CourtCaII. Public access to hearings is available on a listen-only line by calling 888-808-6929 (access code 2752612). State and local rules prohibit recording of court proceedings without a court order. These rules apply while in court and also while participating in a hearing remotely or listening in on a public access line. No court order has been issued which would allow recording of any portion ofthis motion calendar. The court does not provide court reporters for proceedings in the complex civil litigation departments. Any party wishing to retain a court reporter to report a hearing may do so in compliance with this Court s October 13, 2020 Policy Regarding Privately Retained Court Reporters. The court reporter may participate remotely and need not be present in the courtroom. Printed: 7/15/2021 07/15/2021 Hearing: Demurrer - 20CV374355 Page 7 of 7
