Order Submitted MatterCal. 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 SECOND AMENDED CROSS- OLE CHRISTIAN ANDERSEN, et al., COMPLAINT Defendants. AND RELATED CROSS-ACTION. Plaintiff Silvaco, Inc. acquired Nangate, Inc. 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 0fwhom 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 second amended cross-complaint (“SAXC”), Cross-Complainants seek damages and other relief against Silvaco and Kathy and Iliya Pesic (“the Pesics”), based 0n various contractual breach and business tort theories. The Court previously sustained the Pesics’s demurrer t0 the first amended cross- complaint. Now, they again demur t0 all 0f the claims asserted against them in the SAXC. ORDER ON SUBMITTED MATTER Electronically Filed by Superior Court of CA, County of Santa Clara, on 12/10/2021 11:25 AM Reviewed By: R. Walker Case #20CV374355 Envelope: 7838996 KOOONONUl-hwwu-t NNNNNNNNNHHHHHHHHHH OONONM-PWNHOKOOONONm-PWNHO (Code CiV. Proc., 430. 10, subd. (6).) Cross-Complainants oppose the demurrer. The Court issued a tentative ruling 0n November 30, 2021, held oral argument 0n December 2, and took the matter under submission. The Court now issues its final order, which SUSTAINS the demurrer, but with 30 days t0 amend. This will be Cross-Complainants’s last chance t0 plead Viable claims against the Pesics. Also at issue are three related motions t0 seal, which the Court GRANTS in large part. 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. (Complaint, 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 0f Nangate’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) 1 In a February 2021 stipulation, 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 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 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’s 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’s Cross-Complaint Mr. Christian Andersen, Mr. Michelsen, and JPTB filed the SAXC in mid-August 2021, after the Court sustained the Pesics’s demurrer t0 the FAXC. They allege that Nangate was a thriving smaller EDA company in a market dominated by three maj 0r players. (SAXC,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. (161., 1] 2.) T0 induce Nangate’s shareholders t0 sell, Silvaco supposedly 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.” (SAXC, 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.” (11nd,) KOOONONUl-hwwu-t NNNNNNNNNHHHHHHHHHH OONONM-PWNHOKOOONONm-PWNHO 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. (SAXC, 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 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 SAXC. (SAXC,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). On July 16, 2021, the Court issued an order sustaining the Pesics’s demurrer t0 the FAXC 0n the ground that Cross-Complainants failed t0 plead their fraud-based claims with the requisite particularity. Cross-Complainants subsequently filed the SAXC, including additional details t0 support their claims against the Pesics. The Pesics again demur. II. THE PESICS’S DEMURRER KOOONONUl-hwwu-t NNNNNNNNNHHHHHHHHHH OONONM-PWNHOKOOONONm-PWNHO 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 the fraud-based claims are not pled with the requisite particularity and d0 not allege justifiable reliance, while the unfair competition claim fails with the fraud- based claims. Cross-Complainants dispute each 0f these arguments. A. 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.” (Weil 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 quotation marks 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 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.) B. The Fraud-Based Cross-Claims The 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); accord Lazar v. Superior Court (1996) 12 Cal.4th 631, 638 (Lazar).) “ ‘Promissory KOOONONUl-hwwu-t NNNNNNNNNHHHHHHHHHH OONONM-PWNHOKOOONONm-PWNHO 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 means the representations were made.” (Foster v. Sexton (2021) 61 Cal.App.5th 998, 1028.) “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.) 1. The Claims Against MS. Pesic a. Allegations concerning Ms. Pesic Ms. Pesic is Silvaco’s Co-Founder and currently sits 0n its Board. (SAXC, 1] 13.) Cross- Complainants allege that she “is the primary owner and shareholder 0f Silvaco” and “regularly provided personal funds t0 Silvaco”; she “was a core decision maker in Silvaco’s decision t0 acquire Nangate, and participated in the negotiations 0n behalf 0f Silvaco”; and her “personal assurances that she supported, including through the investment 0f her personal funds, Silvaco’s plans t0 grow through acquisition and t0 invest substantial resources in Nangate’s business” were key drivers in Cross-Complainants’s acceptance 0f Silvaco’s acquisition proposal. (Ibid) Silvaco and Nangate engaged in several months 0f discussions beginning in May 2017, and Silvaco’s consultant Ron Sorisho told Mr. Christian Andersen that Silvaco would like t0 consider a term sheet in August 2017. (SAXC,W 23-27.) Mr. Sorisho said Silvaco would want t0 make part 0f the consideration offered contingent 0n financial results, and the parties subsequently began work 0n revenue models that they would ultimately rely 0n t0 calculate expected earn-out payments, while negotiating the terms 0f a potential deal. (161., W 27-32.) On KOOONONUl-hwwu-t NNNNNNNNNHHHHHHHHHH OONONM-PWNHOKOOONONm-PWNHO October 30, 2017, Mr. Christian Andersen “informed Mr. Sorisho that the current offer was not acceptable, and any further negotiations would have t0 be directly between the owners 0f Silvaco (namely, the [Pesics]) and the owners 0fNangate (namely, the Cross- Complainants).” (Id, 1] 32.) This meeting occurred over two days 0n November 1-2, 2017. (Ibid) “During that meeting, the [Pesics] personally endorsed and reiterated the numerous representations that had been made by the Silvaco management team ....” (161., 1] 33.) With regard t0 Ms. Pesic, the SAXC alleges that she “was introduced by Mr. Sorisho t0 Mr. Christian Andersen and Mr. Michelsen as Silvaco’s owner and someone who had set aside” a specified amount 0f personal funds each year “t0 support Silvaco’s growth and acquisition strategy.” (SAXC, 1] 34.) “Ms. Pesic verbally adopted and confirmed this information, and also reiterated other statements previously made by Silvaco, including that Silvaco was financially strong, had n0 debt, had doubled its revenues in the last 4 years, and was able t0 support Nangate’s growth.” (Ibid) “Ms. Pesic was present for most 0f the November 1, 2017 meeting” and did not object t0 the headcount and revenue growth proj ections that were presented 0r raise any concerns about the proposed earn-out payments being unrealistic. (Id, 1] 37.) Ms. Pesic specifically “confirmed t0 Mr. Christian Andersen and Mr. Michelsen that she was currently providing capital t0 Silvaco t0 support its business and investing” a specific amount each year. (Id., 1] 35.) She stated that Silvaco would not be able t0 pay more than the offered $2.7 million up-front due in part t0 this current set-aside (id, 1] 36) and she “was prepared” t0 continue this personal investment “t0 support Silvaco’s growth plans” (id, 1] 47). These representations were so important that Mr. Christian Andersen rejected a draft term sheet lacking language “regarding Silvaco’s obligation t0 invest and support the Nangate business” and only agreed t0 a revised term sheet, which “stated that ‘The Parties hereby agree that the Acquirer will provide adequate personnel and other budgetary resources t0 properly support the Earn-Out.’ ” (161., 1] 48.) Based 0n these allegations, the SAXC identifies three representations by Ms. Pesic t0 support its fraud claims: o “Silvaco was financially strong, had n0 debt, had doubled its revenues in the last 4 years, and was able t0 support Nangate’s growth”; KOOONONUl-hwwu-t NNNNNNNNNHHHHHHHHHH OONONM-PWNHOKOOONONm-PWNHO o “She was currently providing capital t0 Silvaco t0 support its business and investing” a specific amount annually “specifically t0 support Silvaco’s growth and acquisitions ...”; o “She personally supported and would continue t0 support Silvaco’s Vision 0f growth ..., as well as the plans t0 grow Nangate through the Silvaco acquisition, both in principle and backed by her own dollars.” (SAXC,w 53, 99, 110; see also id. 1] 126.) b. Analysis concerning Ms. Pesic The Court previously held that Ms. Pesic’s alleged representations that she “personally supported Silvaco’s Vision” are too vague and general t0 support a claim for fraud. (See 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’]; Rochlis 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 any more than they will one in contract”], disapproved 0n another ground by Turner v. Anheuser-Busch, Inc. (1994) 7 Cal.4th 1238, 125 1 .) That remains true. Ms. Pesic’s alleged statements that Silvaco was “financially strong” and “able t0 support Nangate’s growt ” are similarly too vague t0 state a claim. By contrast, the allegations that Ms. Pesic said Silvaco “had n0 debt” and “had doubled its revenues in the last 4 years” are specific. The problem here is that Cross-Complainants fail t0 allege with specificity their actual and justifiable reliance 0n such statements. In terms 0f timing, the SAXC alleges that term sheets were exchanged in November 2017 and the acquisition was closed in March 2018, and refers t0 the “due diligence process” as happening “during this period.” (SAXC, 1] 24.) While the Court understands that typically, due diligence in a merger/takeover is done by the acquirer 0f the acquires, in this case the acquires (Nangate) had an incentive t0 d0 due diligence 0f the acquirer (Silvaco), given the payout structure. Information learned from such due diligence by Nangate would have superseded, 0r least heavily informed, its reliance 0n Ms. Pesic’s statements. Yet we don’t know from the SAXC whether KOOONONUl-hwwu-t NNNNNNNNNHHHHHHHHHH OONONM-PWNHOKOOONONm-PWNHO such due diligence occurred. Moreover, it is unclear whether “due diligence,” as used in the SAXC, covers both financial and technical due diligence, 0r just the latter. (See SAXC, 1] 69.) Cross-Complainants suggest that they were not entitled t0 conduct financial due diligence 0f Silvaco before executing the SPA. But that allegation is not in the SAXC. Overall, given the somewhat-ambiguous allegation 0f “due diligence” in the SAXC, the lack 0f explanation in the SAXC as t0 why Cross-Complainants couldn’t have reviewed Silvaco’s finances before signing the SPA, the complicated nature 0f the transaction at issue, and the sophisticated parties involved, Cross-Complainants must allege more details t0 show actual and justifiable reliance. (See Wilhelm v. Pray, Price, Williams & Russell (1986) 186 Cal.App.3d 1324, 1332 (Wilhelm) [demurrer appropriately sustained where allegations preclude a showing ofjustifiable reliance as a matter 0f law; not reasonable for an individual represented by counsel t0 rely 0n an adversary’s representations “without an independent inquiry”]; Hoflman v. I62 North Wolfe LLC (2014) 228 Cal.App.4th 1178, 1194-1 197 (Hoflman) [reasonable reliance may be decided as a matter 0f law considering “a plaintiffs particular knowledge and experience”; unreasonable for experienced real estate agent t0 rely 0n vague reassurance about trespassing vehicles while “fail[ing] t0 make further inquiry 0r complaint”]; Food Mkt. Merck, Inc. v. Cal. Milk Processor Bd. (ED. Cal. May 30, 2018, N0. 2:15-CV-01083-TLN-CKD) 2018 U.S.Dist.LEXIS 91258, at *39 (Food Mkt.) [dismissing fraud claim where counterclaimant did not specifically explain “what was false” about alleged representation when made and where reliance was unreasonable in light of counterclaimant’s “legal right t0 examine [a corporation’s] books and records t0 verify” representations].) Those details could include, without limitation, allegations about Cross- Complainants’s supposed inability t0 conduct financial due diligence 0n Silvaco, 0r allegations explaining why such due diligence would not be commercially reasonable in this context. That leaves the alleged representations about Ms. Pesic’s personal financial support 0f Silvaco. Most 0f the SAXC’S allegations 0n this point refer t0 Ms. Pesic’s past 0r “current[]” support (at the time 0fnegotiations)-which Cross-Defendants d0 not specifically allege was misrepresented. Critically, the SAXC is vague about whether Ms. Pesic actually represented that her past and current support 0f Silvaco would continue in the future. (See SAXC,w 35, 47.) KOOONONUl-hwwu-t NNNNNNNNNHHHHHHHHHH OONONM-PWNHOKOOONONm-PWNHO The SAXC goes 0n t0 allege that Mr. Christian Andersen rejected a draft term sheet lacking language “regarding Silvaco’s obligation t0 invest and support the Nangate business” and only agreed t0 a revised term sheet, which “stated that ‘The Parties hereby agree that the Acquirer will provide adequate personnel and other budgetary resources t0 properly support the Earn-Out.’ ” (Id., 1] 48.) This is not a representation that Ms. Pesic would continue t0 invest personal funds. Moreover, it would not be reasonable for Cross-Complainants t0 rely 0n Ms. Pesic’s statements about her past investments as a promise that these same investments would continue in the future-particularly where the assurances Mr. Christian Andersen sought and obtained 0n this issue were that Silvaco would “provide adequate personnel and other budgetary resources.” If Cross-Complainants maintain that Ms. Pesic specifically promised t0 continue investing personal funds in Silvaco, they should have alleged it, and they should have been clear about the words that she used in making this representation-for example, whether she promised t0 continue investing a specific amount 0r whether the promise was unquantified. This theory does not state a claim as currently alleged. Finally, Cross-Complainants allege that “Ms. Pesic was present for most 0f the November 1, 2017 meeting” and did not obj ect t0 the headcount and revenue growth proj ections that were presented 0r raise any concerns about the proposed earnout payments being unrealistic. (Id., 1] 37.) But these allegations d0 not explain what specifically was presented in Ms. Pesic’s presence that was false. This theory also fails t0 state a claim. For all these reasons, Cross-Complainants currently fail t0 state any fraud-based claim against Ms. Pesic. 2. The Claims Against Mr. Pesic a. Allegations concerning Mr. Pesic Mr. Pesic is the Executive Chairman 0f Silvaco’s Board “and participates in the day-to- ,9 ‘6 day management 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.” (SAXC, 1] 14.) The misrepresentations attributed t0 Mr. Pesic are also alleged t0 have been made at the November 1, 2017 meeting described above. Cross-Complainants allege that Mr. Pesic “was the 10 KOOONONUl-hwwu-t NNNNNNNNNHHHHHHHHHH OONONM-PWNHOKOOONONm-PWNHO most active participant during this meeting” and “spoke roughly 60% 0f the time, mainly on the technological and business aspects 0f the proposed combination.” (Id, 1] 38.) “Mr. Pesic touted the business potential for Nangate’s characterization products under Silvaco, including the demand for such products by numerous existing customers 0f Silvaco’s,” a group which Mr. Pesic said included three specific large technology companies. (SAXC, 1] 39.) Mr. Pesic represented that Silvaco’s SmartSpice product “had broad market support from large companies such as [Company C],2 when, 0n information and belief, Mr. Pesic knew that Silvaco was losing [Company C] as a SmartSpice customer and that sales 0f SmartSpice were slowing generally.” (Ibid) In addition, “Mr. Pesic overstated SmartSpice’s performance capabilities and the ease by which it could be integrated with Nangate’s characterization products,” stating that Company C “was a large and strategic SmartSpice customer that had already completed such an integration with an internally developed characterization product and used it successfully in a TSMC 7nm project.” (Id, 1] 41 .) The representation that TSMC had certified SmartSpice down t0 7nm was, 0n information and belief, also false. (Ibid) Additionally, Mr. Pesic told Cross-Complainants that SmartSpice could be integrated with Library Characterizer easily through SmartSpice’ HSPICE-mode, a method that Nangate had already employed multiple times t0 integrate Library Characterizer with other companies’s simulation products. . .. Cross- Complainants understood this t0 mean that the integration 0f Silvaco’s products with Nangate’s would be relatively easy. But while previously-integrated simulators offered stable, accurate, and sufficiently-featured support for the HSPICE-mode, which enabled fast and easy integration with Library Characterizer, SmartSpice was later discovered t0 suffer from instability, lack 0f accuracy, key missing 0r non-functioning features in the HSPICE-mode, and severe performance issues 0f up t0 30X slower operation than HSPICE. Mr. Pesic, by Virtue 0f his deep knowledge 0f the technical aspects 0f Silvaco’s 2 The actual identity 0f Company C is confidential. It also is immaterial for purposes 0f this order. The Court therefore has substituted “Company C” for the actual company’s name throughout this order. 11 KOOONONUl-hwwu-t NNNNNNNNNHHHHHHHHHH OONONM-PWNHOKOOONONm-PWNHO products, either knew 0r should have known that these critical issues with SmartSpice were not solved 0r would only be solved with large delays. (SAXC, 1] 4 1 .) Mr. Pesic also made specific proposals about how t0 integrate Silvaco’s SmartSpice product with Nangate’s products, and the headcounts needed t0 perform such integrations. Yet Mr. Pesic was, 0r should have been, fully aware that the SmartSpice team was overloaded with multiple integration efforts from Silvaco’s prior acquisitions and existing needs, and thus unable t0 support the SmartSpice/Nangate integration that he was proposing and that was material t0 the earn-out structure that Silvaco was proposing. . .. (SAXC, 1] 42.) “Because the information he provided regarding SmartSpice was inaccurate, Mr. Pesic grossly understated the headcount and resources needed t0 integrate the companies’s products, the timeline for completing such integration (which impacted the timeline for recognizing revenue), and the performance capabilities 0f the combined product (which negatively impacted demand)” (Id., 1] 43.) “From Mr. Pesic’s representations, Cross- Complainants were made t0 believe that upon joining Silvaco, there would be immediate revenue from Silvaco’s existing customers who were looking for products such as Nangate’s. Cross- Complainants also expected, due t0 Mr. Pesic’s statements, t0 be able t0 quickly recognize additional revenue through a combined characterization product (Library Characterizer/SmartSpice bundle) that would be quickly developed and highly sought after by Silvaco’s existing SmartSpice customer-base.” (Id., 1] 47.) Based 0n these allegations, the SAXC identifies six representations by Mr. Pesic t0 support its fraud claims: o “SmartSpice had broad market support from large companies such as [Company C], when Mr. Pesic knew 0r should have known that Silvaco was losing [Company C] as a SmartSpice customer, and that sales 0f SmartSpice were slowing generally”; 12 KOOONONUl-hwwu-t NNNNNNNNNHHHHHHHHHH OONONM-PWNHOKOOONONm-PWNHO o Company C “was a large and strategic SmartSpice customer that had already completed an integration with an internally developed characterization product and used it successfully in a TSMC 7nm project”; o “TSMC had certified SmartSpice down t0 7mm”; o “SmartSpice could be integrated with Library Characterizer easily through SmartSpice’ [s] HSPICE-mode”; o “That Silvaco had the resources, and would devote the resources, necessary t0 integrate Nangate’s products with SmartSpice”; and o “He personally supported and would continue t0 support Silvaco’s Vision 0f growth. . ., as well as the plans t0 grow Nangate through the Silvaco acquisition.” (SAXCW 53, 100, 111; see also id. 1] 118.) b. Analysis concerning Mr. Pesic As already discussed, the sixth alleged misrepresentation concerning Mr. Pesic’s “personal[] support” 0f Silvaco and the acquisition is too vague t0 state a claim. So the Court will focus 0n Cross-Complainants’s remaining theories. With regard t0 the first three alleged misrepresentations, Cross-Complainants d0 not dispute that there is n0 allegation that Company C was not a Silvaco customer at the time 0f the representations. Cross-Complainants d0 allege, however, that Mr. Pesic knew 0r should have known that Silvaco “was losing” this customer and sales in general, but they d0 so 0n information and belief. Allegations upon information and belief must be supported by “a statement 0f the facts upon which the belief is founded,” which is lacking here. (Woodring v. Basso (1961) 195 Cal.App.2d 459, 464-465 [“allegations [0n information and belief] concerning [the knowledge element 0f] fraud through nondisclosure are clearly insufficient” without such a statement]; see also Cansino v. Bank OfAmerica (2014) 224 Cal.App.4th 1462, 1472 (Cansino) [“knowledge element 0f fraud” not satisfied by “conclusory statement that defendants ‘knew that the [r]epresentation[] [was] either false 0r at least highly speculative’ because the allegation does not identify how defendants knew that the 2005 appraisal misrepresented the market value 0f the 13 KOOONONUl-hwwu-t NNNNNNNNNHHHHHHHHHH OONONM-PWNHOKOOONONm-PWNHO property at the time the property was appraised”].) The allegation that TSMC had not certified SmartSpice down t0 7nm is also made 0n information and belief without the required explanation, and Cross-Complainants d0 not articulate what else was false about the asserted representation that Company C “was a large and strategic SmartSpice customer that had already completed an integration with an internally developed characterization product and used it successfully in a TSMC 7nm project.” Cross-Complainants argue that they did allege, without the “0n information and belief” caveat, these three supposed misrepresentations. (See SAXC,W 111a, 1110.) But that still leaves the “0n information and belief” allegations in other parts 0f the SAXC, which are improper. Cross-Complainants can seek t0 fix this problem in their next (and final) cross- complaint. Turning t0 the fourth alleged misrepresentation, Cross-Complainants allege that Mr. Pesic said SmartSpice could be “easily” integrated with Library Characterizer, and complain that the SmartSpice integration was ultimately not as fast as others Nangate had performed and did not result in “stable, accurate, and sufficiently-featured support for the HSPICE-mode” like these other integrations. (SAXC, 1] 41 .) But Cross-Complainants d0 not allege Mr. Pesic promised the SmartSpice integration would be as fast and successful as others Nangate had performed (0r that he knew anything about these other integrations), nor d0 they allege he made any specific representations regarding the timeframe 0r ultimate quality 0f the integration. In any event, “[t]he law is well established that actionable misrepresentations must pertain t0 past 0r existing material facts.” (Cansino, supra, 224 Cal.App.4th 1462, 1469, italics added.) “Statements 0r predictions regarding future events are deemed t0 be mere opinions which are not actionable.” (Id. at p. 1470, citations omitted.) T0 state a claim 0n this theory, Cross-Complainants would have t0 allege that Mr. Pesic misrepresented the facts concerning specific, known issues with HSPICE-mode. The SAXC fails t0 d0 so. And Cross-Complainants would also need t0 address why these issues would not have been revealed during due diligence. (See Wilhelm, supra, 186 Cal.App.3d at p. 1332; Hofi’man, supra, 228 Cal.App.4th at pp. 1194- 1197; Food Mkt., supra, 2018 U.S.Dist.LEXIS 91258, at *39 [all finding n0 reasonable reliance 14 KOOONONUl-hwwu-t NNNNNNNNNHHHHHHHHHH OONONM-PWNHOKOOONONm-PWNHO 0n the pleadings where sophisticated and/or represented parties failed t0 make an independent inquiry to confirm representations].) This is particularly true where the SAXC appears t0 admit that the fact that “SmartSpice’s HSPICE compatibility mode did not work as represented” was revealed “during the technical due diligence phase.” (SAXC, 1] 69 [alleging that this issue “was not fixed by [closing 0n] March 7, 2018, as promised”].) Finally the fifth alleged misrepresentation is that Mr. Pesic generally represented “[t]hat Silvaco had the resources, and would devote the resources, necessary t0 integrate Nangate’s products with SmartSpice” (SAXC, 1] 53) and “made specific proposals about how t0 integrate Silvaco’s SmartSpice product with Nangate’s products, and the headcounts needed t0 perform such integrations” (1d,? 42). But Cross-Complainants d0 not say what “specific proposals” were made by Mr. Pesic personally. They complain that because unspecified “information” Mr. Pesic provided was inaccurate, he “grossly understated the headcount and resources needed t0 integrate the companies’s products, the timeline for completing such integration ..., and the performance capabilities 0f the combined product ....” (161., 1] 43.) But again, Cross- Complainants d0 not allege that Mr. Pesic made any specific representations about these subjects. Notably, the SAXC claims that “[flrom Mr. Pesic’s representations, Cross- Complainants were made t0 believe that upon joining Silvaco, there would be immediate revenue from Silvaco’s existing customers” and they would “quickly recognize additional revenue through a combined characterization product that would be quickly developed and highly sought after by Silvaco’s existing SmartSpice customer-base.” (1d,, 1] 47, italics added.) But it does not allege that Mr. Pesic actually said these things. Again, t0 state a claim 0n this theory, Cross-Complainants should have alleged what specific facts Mr. Pesic misrepresented about existing, known issues with Silvaco’s capabilities, and why these issues would not have been revealed during due diligence. The SAXC accordingly currently fails t0 state a claim for fraud against Mr. Pesic, either. 3. Conclusion For all the reasons discussed above, the Court will again sustain the Pesics’s demurrer t0 the fraud-based claims. But at oral argument, Cross-Complainants’s counsel discussed with the 15 KOOONONUl-hwwu-t NNNNNNNNNHHHHHHHHHH OONONM-PWNHOKOOONONm-PWNHO Court various amendments that could be made t0 the SAXC. In the Court’s View, it is possible that some 0f these proposed amendments could save Cross-Complainants’s fraud cross-claims against the Pesics. Therefore, the Court will give one final chance for Cross-Complainants t0 amend their cross-complaint. Cross-Complainants must file a Third Amended Cross-Complaint within 30 days 0f the date 0f service 0f this order. C. The Unfair Competition Cross-Claim The parties d0 not appear t0 dispute 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 [citing Hawran v. Hixson (2012) 209 Cal.App.4th 256, 277 for the proposition that a derivative unfair competition claim stands 0r falls with the underlying claim]; Krantz v. BT Visual Images, LLC (2001) 89 Cal.App.4th 164, 178 [claims incidental t0 and dependent upon an antecedent substantive cause 0f action stand 0r fall with the antecedent claim].) Based 0n its ruling above, the Court will sustain the demurrer t0 the sixth cross-claim as well, without the need t0 address the Pesics’s argument about the asserted need t0 allege harm t0 competitors 0r members 0f the public.3 And because the Court is giving leave t0 amend the fraud cross-claims, the Court accordingly gives leave t0 amend this unfair competition cross- claim. D. Conclusion The Court SUSTAINS, WITH LEAVE TO AMEND, the Pesics’s demurrer. Cross- Complainants must file a Third Amended Cross-Complaint within 30 days 0f the date 0f service of this order. 3 The Court DENIES Cross-Complainants’ request for judicial notice 0f another action against Silvaco (made in a footnote t0 their opposition). This action is not addressed by the SAXC and is not relevant t0 the Court’s analysis here. 16 KOOONONUl-hwwu-t NNNNNNNNNHHHHHHHHHH OONONM-PWNHOKOOONONm-PWNHO III. MOTIONS TO SEAL In an application filed 0n August 30, 2021, Ms. Pesic and Silvaco move t0 file under seal all 0f the redacted portions 0f the SAXC lodged by Cross-Complainants.4 Cross-Complainants filed a statement 0f non-opposition t0 this motion. In two subsequent motions, Ms. Pesic and Silvaco move t0 seal portions 0f the Pesics’s demurrer, and 0f the opposition and reply briefs thereto, that reference the redacted portions SAXC. Cross-Complainants have not filed any opposition t0 these other motions. A. Legal Standard “The court may order that a record be filed under seal only if it expressly finds facts that establish: (1) There exists an overriding interest that overcomes the right 0f public access t0 the record; (2) The overriding interest supports sealing the record; (3) A substantial probability exists that the overriding interest will be prejudiced if the record is not sealed; (4) The proposed sealing is narrowly tailored; and (5) N0 less restrictive means exist t0 achieve the overriding interest.” (R. Ct., rule 2.550(d).) Pleadings, in particular, should be open t0 public inspection “as a general rule,” although they may be filed under seal in appropriate circumstances. (Mercury Interactive Corp. v. Klein (2007) 158 Cal.App.4th 60, 104, fn. 35.) “Courts have found that, under appropriate circumstances, various statutory privileges, trade secrets, and privacy interests, when properly asserted and not waived, may constitute overriding interests.” (In re Providian Credit Card Cases (2002) 96 Cal.App.4th 292, 298, fn. 3 (Providian).) In addition, confidential matters relating t0 the business operations 0f a party may be sealed where public revelation 0f the information would interfere with the party’s ability t0 effectively compete in the marketplace. (See Universal City Studios, Inc. v. Superior Court (2003) 110 Ca1.App.4th 1273, 1285-1286.) Where some material within a document warrants sealing, but other material does not, the document should be edited 0r redacted if possible, t0 accommodate both the moving party’s overriding interest and the strong presumption in favor 0f public access. (Cal. Rules 0f Court, 4 An errata filed 0n October 15 clarifies that Ms. Pesic and Silvaco seek t0 maintain all 0f the redacted portions 0f the SAXC under seal, a few 0f which were not addressed by their original moving papers. 17 KOOONONUl-hwwu-t NNNNNNNNNHHHHHHHHHH OONONM-PWNHOKOOONONm-PWNHO rule 2.550(d)(4), (5).) In such a case, the moving party should take a line-by-line approach t0 the information in the document, rather than framing the issue t0 the court 0n an all-or-nothing basis. (Providian, supra, 96 Cal.App.4th at p. 309.) B. Analysis Ms. Pesic and Silvaco submit that overriding interests in Silvaco’s confidential business plans and customer information, and in Ms. Pesic’s personal financial information, support sealing associated portions 0f the SAXC, and explain the harm that would result from publicizing this information. The Court agrees that these interests warrant sealing and the factors set forth by rule 2.550(d) are satisfied as t0 this information-as well as a fourth category 0f confidential communications and business information that the moving papers describe as “trade secrets.”5 However, the description concerning Mr. Pesic’s alleged misrepresentations that “TSMC had certified SmartSpice down t0 7mm,” need not remain under seal so long as the associated customer’s identity does. The analysis concerning Ms. Pesic and Silvaco’s subsequent (and sometimes duplicative) motions filed 0n September 17 and November 23 is the same. With regard t0 all three motions, the Court intends t0 GRANT the motions except as t0 the description concerning Mr. Pesic’s alleged misrepresentation that “TSMC had certified SmartSpice down t0 7mm.” Silvaco will be required t0 file updated public versions 0f the SAXC and demurrer briefing in conformity with the Court’s order. 5 The Court expresses n0 opinion about the accuracy 0f that characterization. 18 KOOONONUl-hwwu-t NNNNNNNNNHHHHHHHHHH OONONM-PWNHOKOOONONm-PWNHO Finally, the Court notes that Ms. Pesic and Silvaco have not moved t0 file under seal the unredacted versions 0f their various motions t0 seal. Moreover, the public versions 0f the August 30 and September 17 motions discuss information they seek t0 maintain under seal.6 The parties shall meet and confer about a stipulated order that would address these issues consistent with the Court’s ruling here. IT IS SO ORDERED. Date: The Honorable Sunil R. Kulkarni Judge 0f the Superior Court 6 The Court has removed these documents from the public file pending the submission 0f an appropriate stipulated order. 19 December 9, 2021