OrderCal. Super. - 6th Dist.December 4, 2020KOOONONUl-hwwu-t NNNNNNNNNHHHHHHHHHH OONONM-PWNHOKOOONONm-PWNHO SUPERIOR COURT OF CALIFORNIA COUNTY OF SANTA CLARA SILVACO, INC., Case N0.: 20CV374355 Plaintiff, ORDER CONCERNING CROSS- DEFENDANTS KATHY PESIC AND VS. ILIYA PESIC’S DEMURRER TO THE AMENDED CROSS-COMPLAINT OLE CHRISTIAN ANDERSEN, et al., Defendants. AND RELATED CROSS-ACTION. Plaintiff Silvaco, Inc. acquired Nangate, Inc. (Nangate) under a Stock Purchase Agreement (“SPA”). The SPA provides for ongoing earn-out payments t0 Defendants/Cross- Complainants Ole Christian Andersen, Jens Michelsen, and JPTB Family Holding ApS (“JPTB”), all ofwhom are former Nangate shareholders. Disputes have arisen about those payments and associated issues. In its complaint, Silvaco seeks declaratory relief concerning these payments, while in the amended cross-complaint (“FAXC”), Cross-Complainants seek damages and other relief against Silvaco, Kathy Pesic, and Iliya Pesic, based 0n various contractual breach and business tort theories. Electronically Filed by Superior Court of CA, County of Santa Clara, on 7/16/2021 2:02 PM Reviewed By: R. Walker Case #20CV374355 Envelope: 6866061 KOOONONUl-hwwu-t NNNNNNNNNHHHHHHHHHH OONONM-PWNHOKOOONONm-PWNHO Before the Court is a demurrer by the Pesics t0 all 0f the claims asserted against them in the FAXC. (Code CiV. Proc., 430.10, subd. (6).) Cross-Complainants oppose the demurrer. The Court provided a tentative ruling 0n July 14, 2021, and n0 party contested the tentative ruling. The Court now issues its final order, which SUSTAINS the Pesics’ demurrer with 30 days’ leave t0 amend. I. BACKGROUND A. Silvaco’s Complaint Silvaco commenced this action by filing a complaint for declaratory relief (“Complaint”) in early December 2020. The Complaint names as Defendants Mr. Christian Andersen, Mr. Michelsen, and JPTB, as well as Guileherme Simoes Schlinker, who is also a party t0 the SPA.1 Silvaco develops and markets electronic design automation (“EDA”) software and semiconductor design intellectual property, among other things. The Complaint alleges that 0n March 2, 2018, Silvaco entered into the SPA as part 0f its acquisition 0f the stock 0fNangate and Nangate Denmark ApS (“the Stock”). (Complaint, 1] 9.) The purpose 0f the SPA was t0 acquire all 0f the rights t0 Nangate’s products, including tools and services for the creation, optimization, characterization, and validation 0f standard cell library IP. (Ibid) Under the SPA, Silvaco acquired the Stock in exchange for an initial cash payment and its agreement t0 make certain earn-out payments t0 Defendants based 0n a percentage 0f the revenue generated by the Nangate products for a period 0f 5 years following the sale. (Id, 1] 10.) The earn-out compensation was t0 be paid quarterly based 0n the revenue from: (i) the ongoing sale 0f products that were part 0fNangate’s business at the SPA closing and (ii) the sale 0fnew products and services t0 the extent they included the “Nangate Characterizer” tool and a version 0f Silvaco’s “SmartSpice” that can be executed only by using Nangate Characterizer. (Ibid.) Various disputes have arisen between Silvaco and Defendants concerning the earn-out payments, including about the extent t0 which Defendants are entitled t0 compensation for new products 0f Silvaco. (Complaint, 1] 14.) According t0 Silvaco, Mr. Christian Andersen has 1 In a stipulation filed 0n February 4, 2021, Mr. Schlinker agreed t0 be bound by any orders 0r judgment that the Court may enter 0n the Complaint, and Silvaco agreed that he need not appear 0r participate in the case going forward. KOOONONUl-hwwu-t NNNNNNNNNHHHHHHHHHH OONONM-PWNHOKOOONONm-PWNHO contended that Defendants are entitled t0 earn-out payments 0n the entire “Foundation 1P” 0f Silvaco, “arguably including standard cells, I/O activities, and memory and presumably without regard t0 whether such Foundation IP incorporates any Nangate products.” (Ibid) Silvaco seeks a declaration that “(i) in order for a new Silvaco product with I/O t0 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 d0 not qualify for earn-out payments under the SPA; and (iii) Defendants’ request for an audit 0f 2nd Quarter 2020 and for resolution 0f earn-out payment disputes for 4th Quarter 2019 and 1“ Quarter 2020 are untimely and shall not proceed.” (Id., p. 5, ‘H 3-) B. Defendants’ Cross-Complaint Mr. Christian Andersen, Mr. Michelsen, and JPTB filed the FAXC in mid-April 2021. They allege that Nangate was a thriving smaller EDA company in a market dominated by three major players. (FAXC,w 1-2.) Silvaco is also an EDA company, and embarked 0n a plan t0 grow its business through serial acquisitions t0 compete with these larger competitors. (Id., 1] 2.) T0 induce Nangate’s shareholders t0 sell, Silvaco made a number 0f false representations and promises regarding its “commitment and ability t0 invest in the business, hire additional engineers t0 execute plans for Nangate products under development and planned for development at the time 0f the acquisition, provide necessary resources and equipment t0 develop new products, and generally grow revenues t0 a level that would support meaningful earn-out payments t0 cover the cost 0f acquisition.” (FAXC, 1] 5.) Silvaco “promised t0 make these meaningful earnout payments within 30 days 0f the end 0f each quarter, and that it had the financial means t0 d0 so.” (Ibid) “During negotiations and prior t0 closing, Silvaco and the Individual Defendants told Cross-Complainants that the earn out payments would be at least $13.5 million.” (Ibid) But Silvaco was unable t0 make the very first earn-out payment under the SPA, so that Nangate’s shareholders had t0 accept payment in four installments. (FAXC, 1] 6.) “And at all times after closing, Silvaco has continually failed t0 live up t0 its promises t0 promote, support, and grow Nangate’s business, refusing t0 add the additional hires that were promised before KOOONONUl-hwwu-t NNNNNNNNNHHHHHHHHHH OONONM-PWNHOKOOONONm-PWNHO closing, terminating Nangate’s sales staff with n0 adequate replacement in place, and terminating 0r reassigning employees who held important responsibilities. . . .” (Ibid) This resulted in a significant decline in revenue that has left Cross-Complainants substantially undercompensated in relation t0 their expected earn-out payments contemplated under the SPA. (Ibid) Silvaco has refused t0 comply with the dispute and audit processes provided by the SPA for challenging the calculation 0f earn-out payments; has improperly excluded certain products and services from the revenue base for calculating such payments; and employed unsavory tactics in response t0 challenges t0 its calculations, including firing Mr. Michelsen in retaliation for his complaints. (Id, 1] 7.) Based 0n these and more detailed subsequent allegations, Cross-Complainants have sued Silvaco, its Director and Co-Founder Ms. Pesic, and its Executive Chairman Mr. Pesic (who is Ms. Pesic’s son) in the FAXC. (FAXC,w 13-14.) Cross-Complainants assert claims for: (1) breach 0f contract (against Silvaco); (2) breach 0f the implied covenant 0f good faith and fair dealing (against Silvaco); (3) fraudulent inducement - false promise (against all Cross- Defendants); (4) fraud (against all Cross-Defendants); (5) negligent misrepresentation (against all Cross-Defendants); (6) unfair competition (against all Cross-Defendants); and (7) declaratory judgment (against Silvaco). II. LEGAL STANDARD A demurrer tests the legal sufficiency 0f the complaint. (Chen v. PayPal, Inc. (2021) 61 Cal.App.5th 559, 568.) Consequently, it “reaches only t0 the contents 0f the pleading and such matters as may be considered under the doctrine ofjudicial notice.” (Wei! v. Barthel (1955) 45 Cal.2d 835, 837; see also Code CiV. Proc., § 430.30, subd. (a).) “It is not the ordinary function 0f a demurrer t0 test the truth 0f the plaintiff” s allegations 0r the accuracy with which he describes the defendant’s conduct. Thus, the facts alleged in the pleading are deemed t0 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 0f the complaint must be liberally construed, with a View t0 substantial justice between the parties. (Glennen v. Allergan, Inc. (2016) 247 KOOONONUl-hwwu-t NNNNNNNNNHHHHHHHHHH OONONM-PWNHOKOOONONm-PWNHO Cal.App.4th 1, 6.) Nevertheless, while “[a] demurrer admits all facts properly pleaded, [it does] not [admit] contentions, deductions 0r conclusions 0f law 0r fact.” (George v. Automobile Club ofSouthern California (201 1) 201 Cal.App.4th 1112, 1120.) A demurrer will succeed where the allegations and matters subject t0 judicial notice clearly disclose a defense 0r bar t0 recovery. (Casterson v. Superior Court (2002) 101 Cal.App.4th 177, 183.) III. DISCUSSION The Pesics are named as Cross-Defendants t0 the fraud-based cross-claims (the third through fifth causes 0f action) and the cross-claim for unfair competition (the sixth cause 0f action). They contend that: (a) the fraud-based claims are not pled with the requisite particularity and d0 not allege reliance; (b) the fraud-based claims are barred by the economic loss rule; (c) and the unfair competition claim fails with the fraud-based claims and does not even mention them. Cross-Complainants dispute each 0f these points. A. Fraud-Based Cross-Claims Cross-Complainants’ claims for fraudulent inducement - false promise, fraud, and negligent misrepresentation - are generally subj ect t0 the same analysis. The elements 0f a claim for fraud are: “(1) a misrepresentation, (2) with knowledge 0f its falsity, (3) with the intent t0 induce another’s reliance 0n 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 elements].) “ ‘Promissory fraud’ is a subspecies 0f the action for fraud and deceit. A promise t0 d0 something necessarily implies the intention t0 perform; hence, where a promise is made without such intention, there is an implied misrepresentation 0f fact that may be actionable fraud.” (Lazar, supra, 12 Cal.4th at p. 638.) And “[t]he elements 0f a claim for negligent misrepresentation are nearly identical” t0 a claim for fraud. (Daniels, supra, 246 Cal.App.4th at p. 1166.) “Only the second element is different, requiring the absence 0f reasonable grounds for believing the misrepresentation t0 be true instead 0f knowledge 0f its falsity.” (Ibid.) “For policy reasons, ... fraud and negligent misrepresentationfl must be pleaded with particularity-that is, the pleading must set forth how, when, where, t0 whom, and by what KOOONONUl-hwwu-t NNNNNNNNNHHHHHHHHHH OONONM-PWNHOKOOONONm-PWNHO means the representations were made.” (Foster v. Sexton (2021) 61 Cal.App.5th 998, 1028.)2 “The specificity requirement serves two purposes: t0 apprise the defendant 0f the specific grounds for the charge and enable the court t0 determine whether there is any basis for the cause 0f action. ” (Orcilla v. Big Sur, Inc. (2016) 244 Cal.App.4th 982, 1008, quoting Chapman v. Skype Inc. (2013) 220 Ca1.App.4th 217, 23 1 .) 1. Cross-Complainants ’ Allegations Concerning the Pesics Ms. Pesic is Silvaco’s Co-Founder and currently sits 0n its Board. (FAXC, 1] 13.) Cross- Complainants allege that she: (a) “is the primary owner and shareholder 0f Silvaco, and regularly provides funds t0 the business”; (b) “was a core decision maker in Silvaco’s decision t0 acquire Nangate, and participated in the negotiations 0n behalf 0f Silvaco”; and (c) gave “personal assurances that Silvaco could and would invest substantial resources in Nangate’s business were key drivers in Nangate’s acceptance 0f Silvaco’s acquisition proposal.” (Ibid) Mr. Pesic is the Executive Chairman 0f Silvaco’s Board, “but also participates in the day-to-day ,9 ‘6management 0f Silvaco, was a core decision maker in Silvaco’s decision t0 acquire Nangate, and participated in nearly all 0f the meetings during the negotiation period.” (Id. 1] 14.) Cross-Complainants allege that the Pescis made significant misrepresentations during a meeting that took place over two days in early November 2017: On November 1, 2017, Cross-Complainants met with the Individual Defendants, Mr. Dave Dutton and Mr. [Ron] Sorisho3 at Silvaco’s office. During that meeting, 2 The Court rejects Cross-Complainants’ argument that a claim for negligent misrepresentation is not subject t0 this heightened pleading requirement. (See SI 59 LLC v. Variel Warner Ventures, LLC (2018) 29 Cal.App.5th 146, 155 [negligent misrepresentation must be pleaded with particularity]; Daniels, supra, 246 Cal.App.4th at p. 1166 [“[c]auses 0f action for intentional and negligent misrepresentation sound in fraud and, therefore, each element must be pleaded with specificity”].) Barman v. Brown (2021) 59 Cal.App.5th 1048 (Barman) is not t0 the contrary: the “additional allegations” supporting the fraud claim in that case, which were unnecessary t0 the claim for negligent misrepresentation, related t0 the different intent required for each claim, not the level 0f factual detail required t0 state a claim. (See id. at pp. 1065-1066.) 3 Cross-Complainants allege that Mr. Sorisho was “a consultant hired t0 assist Silvaco in its business development and M&A strategy execution. Although Mr. Sorisho was the central 6 KOOONONUl-hwwu-t NNNNNNNNNHHHHHHHHHH OONONM-PWNHOKOOONONm-PWNHO the Individual Defendants personally endorsed and reiterated the numerous representations that had been made by the Silvaco management team, including but not limited t0: (a) the commitments t0 invest in and grow the Nangate business once owned by Silvaco; (b) Silvaco’s financial capacity t0 make the earn-out payments t0 the Cross-Complainants; and (c) Ms. Pesic’s personal commitment as the primary and controlling shareholder 0f Silvaco t0 support the growth 0f Nangate and Silvaco through investments and acquisitions; and (d) Mr. Pesic’s commitment as a member 0f the Board t0 support the growth 0f Nangate and Silvaco through investments and acquisitions. These statements by both 0f the Individual Defendants were significant t0 Cross-Complainants, who were made t0 believe that not only Silvaco management but its Board President and controlling shareholder were fully aligned and would live up t0 the numerous promises made t0 induce Cross-Complainants t0 agree t0 the sale structure proposed by Silvaco. (FAXC, 1] 33; see also 1] 77 [repeating alleged misrepresentations (a)-(d)].) Discussions continued t0 November 2, when “the parties reached a verbal agreement 0n deal terms, and handshakes were exchanged between the Cross-Complainants and the Silvaco team including Ms. Pesic, Mr. Pesic and Mr. Dutton.” (Id., 1] 34.) Elsewhere in the FAXC, Cross-Complainants allege misrepresentations by other individuals, groups 0f individuals, 0r “Silvaco,” and generally attribute these statements t0 the Pesics, Silvaco, and sometimes others as a group. (FAXC, 1] 75; see also id., W 76, 83, 84, 91- 94.) 2. Particularity Requirement As reflected in the discussion above, Cross-Complainants attempt t0 hold the Pesics responsible for “endors[ing] and reiterate[ing] representations that had been made by” other members 0f “the Silvaco management team.” (FAXC, 1] 33.) Such general allegations d0 not coordinator and manager 0f the M&A process 0n behalf 0f Silvaco, 0n information and belief, all decisions were made primarily by Mr. and Ms. Pesic and the CEO Dave Dutton.” (FAXC, 1] 25.) 7 KOOONONUl-hwwu-t NNNNNNNNNHHHHHHHHHH OONONM-PWNHOKOOONONm-PWNHO state a claim for fraud. (See Lazar, supra, 12 Cal.4th at p. 645 [“general and conclusory allegations d0 not suffice”].) Cross-Complainants also need t0 specifically allege which 0f the Pesics made what representations, which they did not d0 in the FAXC. (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 0f the cause 0f action is lacking”], § 719 [“[t]he typical misrepresentation 0f 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 0f the persons who made the allegedly fraudulent representations, their authority t0 speak, t0 whom they spoke, what they said 0r wrote, and when it was said 0r written.’ ” (Ibid, quoting Tarmann v. State Farm Mut. Auto. Ins. C0. (1991) 2 Cal.App.4th 153, 157.) Similarly, Cross-Complainants cannot just generally allege that statements by others should be imputed t0 the Pesics based solely 0n their attendance at a meeting. Notably, while the claims at issue are based 0n a theory 0f affirmative misrepresentation, the allegations are more suggestive 0f a theory 0f nondisclosure. But “[i]f the duty t0 disclose arises from the making 0f representations that were misleading 0r 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 t0 the Pesics are “Ms. Pesic’s personal commitment as the primary and controlling shareholder 0f Silvaco t0 support the growth 0fNangate and Silvaco through investments and acquisitions; and (d) Mr. Pesic’s commitment as a member 0f the Board t0 support the growth 0fNangate and Silvaco through investments and acquisitions.” (FAXC,W 33, 77.) These alleged promises are too vague t0 be enforced. Caselaw is in agreement. (See, e.g., Lim v. The.TV Corp. Internat. (2002) 99 Cal.App.4th 684, 694 [“the allegation that defendant represented the auction would be ‘fair and open’ is too vague t0 form a basis for fraud in itself’]; Rocklis v. Walt Disney C0. (1993) 19 Cal.App.4th 201, 216 [alleged promises regarding “appropriate” financial rewards did not support a claim for fraud; “[p]r0mises too vague t0 be enforced will not support a fraud claim KOOONONUl-hwwu-t NNNNNNNNNHHHHHHHHHH OONONM-PWNHOKOOONONm-PWNHO any more than they will one in contract”], disapproved 0n another ground by Turner v. Anheuser-Busch, Inc. (1994) 7 Cal.4th 1238, 1251.) Cross-Complainants accordingly fail t0 allege any specific, affirmative misrepresentation by either 0f the Pesics sufficient t0 state a claim for fraud. 3. Conclusion Because Cross-Complainants fail t0 plead their fraud-based claims with the requisite particularity, the Pesics’s demurrer t0 those claims will be sustained with leave t0 amend. Accordingly, the Court does not need t0 address the Pesics’s arguments concerning reliance and the economic loss rule. B. The Unfair Competition Cross-Claim The parties agree that the sixth cross-claim for unfair competition is derivative 0f the fraud-based cross-claims, and thus stands 0r falls with these other claims. (See Medical Marijuana, Inc. v. ProjectCBD.com (2020) 46 Cal.App.5th 869, 896.) Based 0n its ruling above, the Court will sustain the demurrer t0 the sixth cross-claim as well. IV. CONCLUSION The Court SUSTAINS Pesics’s demurrer WITH 30 DAYS’ LEAVE TO AMEND for all cross-claims alleged against them. IT IS SO ORDERED. Date: The Honorable Sunil R. Kulkarni Judge 0f the Superior Court July 16, 2021
