Thomas Atencio et al v. Tunecore, Inc. et al

BRIEF

C.D. Cal.December 5, 2018

20358 1 TUNECORE BRIEF RE WAIVER 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 1100 El Centro Street So. Pasadena, CA 91030 Phone (626) 243-1100 Fax (626) 243-1111 Ryan J. Kohler, Esq., (State Bar No. 240047) Jessica J. Mead, Esq., (State Bar No. 299050) COLLINS COLLINS MUIR + STEWART LLP 1100 El Centro Street South Pasadena, CA 91030 (626) 243-1100 – FAX (626) 243-1111 Email: rkohler@ccmslaw.com; jmead@ccmslaw.com Attorneys for Defendant, TUNECORE, INC. UNITED STATES DISTRICT COURT CENTRAL DISTRICT OF CALIFORNIA THOMAS ATENCIO, an adult individual, and GIAN CATERINE a/k/a JOHN CATE, an adult individual, Plaintiffs, vs. TUNECORE, INC., a corporation, Defendant. ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) CASE NO. 2:16-cv-01925-DMG-MRW [Assigned to the Hon. Dolly M. Gee, Courtroom 8C] TUNECORE’S BRIEF RE LEGAL BASIS FOR WAIVER AFFIRMATIVE DEFENSE Complaint Filed: 03/21/16 Amended Complaint Filed: 06/13/16 Trial Date: 12/04/2018 TO THE COURT, ALL PARTIES, AND TO THEIR ATTORNEYS OF RECORD: Defendant TuneCore, Inc. (“TuneCore”) hereby submits the following brief concerning New York law’s treatment of waiver in support of TuneCore’s waiver affirmative defense. Case 2:16-cv-01925-DMG-MRW Document 170 Filed 12/05/18 Page 1 of 10 Page ID #:7011 20358 2 TUNECORE BRIEF RE WAIVER 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 1100 El Centro Street So. Pasadena, CA 91030 Phone (626) 243-1100 Fax (626) 243-1111 I. TuneCore is Entitled to a Waiver Jury Instruction Because New York Law Does Not Require an Express Written Waiver New York law on waiver is clear—a party may assert waiver as an affirmative defense on a breach of contract claim even where there is no written signed contractual waiver. It has long been the law in New York that waiver “is the voluntary act of the party and does not require or depend upon a new contract, new consideration or an estoppel. Alsens American Portland Cement Works v. Degnon Contracting Co., 222 N.Y. 34 , 37 (1917)(emphasis added). “Contractual rights may be waived if they are knowingly, voluntarily and intentionally abandoned.” Fundamental Portfolio Advisors, Inc. v. Tocqueville Asset Mgmt., L.P., 7 N.Y.3d 96, 104 (2006). Waiver may be accomplished not only by an express agreement, but also by “such conduct or failure to act as to evince an intent not to claim the purported advantage.” Bono v. Cucinella, 298 A.D. 2d 483, 484 (N.Y. App. Div. 2002). The question of whether a waiver has occurred is generally left to the finder of fact. Id. TuneCore must be allowed to present its affirmative defense of waiver to the jury as an alternative to its defense that Caterine’s options expired. Even if Caterine’s options did not expire prior to being granted the 2012 stock option agreement, the jury must be allowed to consider whether Caterine waived any rights he had under the six stock option grants that he received between 2006 and 2009 when he indicated to TuneCore in e-mails in July 2012, November 2012, and June 2013 that the only options available to him were the options granted to him in his 2012 second chance stock option agreement. Shortly after TuneCore granted Caterine a new stock option agreement in 2012 to give him a second chance to invest in TuneCore, Caterine e-mailed Cogan and acknowledged that he had one year to exercise his options. Caterine again waived his rights to the earlier options in November 2012 when he did not dispute that they had expired in an e-mail exchange with TuneCore’s attorney Paul Sieben. Finally, Caterine waived his rights to exercise his earlier options in June 2013 in an e-mail exchange with Gill Cogan when Caterine Case 2:16-cv-01925-DMG-MRW Document 170 Filed 12/05/18 Page 2 of 10 Page ID #:7012 20358 3 TUNECORE BRIEF RE WAIVER 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 1100 El Centro Street So. Pasadena, CA 91030 Phone (626) 243-1100 Fax (626) 243-1111 agreed that his remaining options were the options granted to him in the 2012 stock option agreement. “[T]he roots of waiver lie firmly in equity, and are ‘designed to prevent the waiving party from lulling the other party into a belief that strict compliance with a contractual duty will not be required and then either suing for noncompliance or demanding compliance for the purpose of avoiding the transaction.’” Kamco v. On the Right Track, 149 A.D.3d 375, 381 (N.Y. App. Div. 2017) (quoting13 Richard A. Lord, Williston on Contracts § 39:15 at 621 [4th ed 2013]). Here, as explained below, Caterine lulled TuneCore into granting him the largest stock option he ever received 18 months after he resigned as CFO by having it reported to the TuneCore Board of Directors that Caterine neglected to exercise his prior stock options in a timely fashion and, thus, he should be given a second chance to invest in TuneCore. He lulled TuneCore into believing he would not assert his right to exercise his options under the 2006 through 2009 stock option agreements in his July 2012 e-mail to Cogan, November 2012 e-mail to Paul Sieben and June 2013 e-mail to Gill Cogan. If Caterine had instead claimed that the earlier options were valid because he was still providing services, TuneCore would have confirmed that his consulting relationship was terminated. A. The Evidence Establishes Caterine Knew that the Options Granted to him in the 2006-2009 Stock Option Agreements Had Expired When he Was Granted the 2012 Stock Option Agreement Between 2006 and 2009 TuneCore granted Caterine a substantial number of stock options. After accounting for a stock conversion that occurred in November 2006, the effective amount of the six grants that Caterine received while he was performing services for TuneCore: (1) 68,901 shares on January 26, 2006; (2) 22,967 shares on August 11, 2006; (3) 35,000 shares on April 25, 2007; (4) 38,000 shares on October 17, 2007; (5) 35,000 shares on June 16, 2008; and (6) 130,000 shares on November 10, 2009. Those options contained vesting provisions that Case 2:16-cv-01925-DMG-MRW Document 170 Filed 12/05/18 Page 3 of 10 Page ID #:7013 20358 4 TUNECORE BRIEF RE WAIVER 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 1100 El Centro Street So. Pasadena, CA 91030 Phone (626) 243-1100 Fax (626) 243-1111 required Caterine to remain in continuous service with TuneCore as an officer, director, consultant or employee. In early January 2011, Caterine resigned as Chief Financial Officer. At that time, Caterine had vested in 205,784 shares of the total 319,868 shares underlying these six stock option grants. Under the terms of the six stock option agreements, Caterine had either 30 or 90 days after his continuous association with TuneCore terminated. By 2012, all of Caterine’s options had expired because he had ceased performing services for TuneCore and had failed to exercise any of his options. TuneCore’s then-CEO, Jeff Price, spoke with Caterine about the fact that his options had been cancelled. Price then caused the Company’s then Chief Operating Officer (and current CEO), Scott Ackerman, to request that the Board allow Caterine a second chance to invest in TuneCore even though he was no longer performing services in light of his prior service to the Company and the fact that he neglected to exercise his options before they expired. TuneCore’s Board of Directors reluctantly agreed to grant Caterine a new stock option that gave Caterine the opportunity to exercise the same number of shares that were vested as of the date of his resignation in January 2011 and allowed him an approximately one year deadline to exercise of August 4, 2013. Caterine now claims that the option grant he received in 2012 was not a second chance to invest in TuneCore in recognition of the fact that his prior options were expired because he had neglected to exercise them in a timely fashion, but rather were in addition to the prior stock options that he claims always remained valid. That is not how the request was presented to the Board, and it certainly was not TuneCore’s intent in granting the options. There are numerous facts demonstrating that the 2012 options were given to Caterine because his prior options had expired. First, the number of options granted to Caterine in 2012 is the exact amount of the shares that Caterine had vested under his prior six agreements at the time of his resignation in January 2011. If TuneCore Case 2:16-cv-01925-DMG-MRW Document 170 Filed 12/05/18 Page 4 of 10 Page ID #:7014 20358 5 TUNECORE BRIEF RE WAIVER 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 1100 El Centro Street So. Pasadena, CA 91030 Phone (626) 243-1100 Fax (626) 243-1111 wanted to provide additional compensation, it would be incredibly random to provide an amount that was exactly equal to the number of shares that had vested as of the date of his resignation in January 2011. Second, the number of options granted to Caterine in 2012 vastly exceeded any of the six prior grants. There is no explanation as to why TuneCore would suddenly grant such a large amount other than trying to allow Caterine the exact same opportunity to invest in TuneCore as when he had neglected to do so in early 2011 after he resigned. Third, Caterine’s services to TuneCore had ceased by 2012. It makes no sense to argue, as Caterine does, that 18 months after he resigned TuneCore would grant him a stock option that had 50% more shares than any option he had ever received while he was actually working as the company’s CFO. Fourth, the 2012 option grant was deemed immediately vested and had an express one-year exercise period, which was unlike the prior option grants that required Caterine to continue performing services on a monthly basis over a four year period to vest in the options and had an exercise deadline triggered by the termination of Caterine’s service relationship with TuneCore. These significant changes in the vesting requirement and the exercise deadline demonstrate that the 2012 grant was materially different than the prior ones—it was intended to allow Caterine a second chance to invest in TuneCore after the prior option grants expired. Caterine brushes aside all of these indicia that the 2012 grant was intended to give him a second chance after his prior options expired, denying any knowledge that Price had requested a new option grant on his behalf or that the Board had granted them expressly for that reason. /// /// /// /// Case 2:16-cv-01925-DMG-MRW Document 170 Filed 12/05/18 Page 5 of 10 Page ID #:7015 20358 6 TUNECORE BRIEF RE WAIVER 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 1100 El Centro Street So. Pasadena, CA 91030 Phone (626) 243-1100 Fax (626) 243-1111 B. Alternatively, the Evidence Showed Caterine Waived his Rights Under the Earlier Stock Option Agreement Based on His Conduct in E-mails in July 2012, November 2012, and June 2013 Even if Caterine could explain away all of the other support for the conclusion that the 2012 options were a second chance grant, however, his own conduct compels the conclusion that he waived any right to enforce the prior options. It is that “affirmative conduct” and “failure to act so as to evince an intent not to claim a purported advantage” that constitutes waiver under New York law. Fundamental Portfolio Advisors, Inc., 7 N.Y.3d at 104. Specifically, by failing to timely assert any rights under the 2006 through 2009 stock option agreements in three different e-mail exchanges in 2012 and 2013, Caterine evidenced his intent not to claim any options other than those granted to him in the 2012 stock option agreement. Therefore, in the event that the jury finds that, despite the above evidence, Caterine’s 2006-2009 options somehow had not expired when he was given the 2012 Stock Option Agreement, TuneCore should be allowed to present waiver as an affirmative defense. In Jumax Associates v. 350 Cabrini Owners Corp., 46 A.D.3d 407 (N.Y. App. Div. 1st Dep’t 2007), the court held that the plaintiff waived his right to payment under a prior contract in circumstances strikingly similar to those here. The plaintiff in that case was a member of the Board of a building association who asserted a right, based on a 1986 agreement, to proceeds from leasing the building’s roof. In 1995, the association entered into a license agreement to place antennas on the roof—but the plaintiff made no mention of his alleged rights under the 1986 agreement. In 2002, the plaintiff commenced an action demanding proceeds based on the conduct that occurred in 1995. The Appellate Division in Jumax Associates held that “defendant is entitled to summary judgment dismissing the complaint . . . based on its affirmative defenses of waiver and estoppel.” Id. at 408. Specifically, because the plaintiff had remained silent about his asserted rights under the 1986 agreement when the 1995 agreement Case 2:16-cv-01925-DMG-MRW Document 170 Filed 12/05/18 Page 6 of 10 Page ID #:7016 20358 7 TUNECORE BRIEF RE WAIVER 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 1100 El Centro Street So. Pasadena, CA 91030 Phone (626) 243-1100 Fax (626) 243-1111 was negotiated, and did not assert any right to payment until 2002, the court concluded that he had waived his rights under the earlier agreement: “As it appears that the offering plan and its amendments were always in plaintiff’s possession and thus readily available for plaintiff’s consultation and review, we find, as a matter of law, that plaintiff’s failure to assert its right to the proceeds of the license agreement evinced a knowing intent not to claim such right.” Id. “Enforcement of the right to the proceeds of the license agreement at this juncture would also work an injustice on defendant, which, justifiably relying on plaintiff's forbearance, has been acting on the reasonable belief that such enforcement would not be sought.” Id. at 409. Similarly here, Caterine knowingly waived any claim based upon his 2006 through 2009 stock option grants when, in 2012, Caterine accepted a new stock option knowing that TuneCore had offered it as a second chance to invest in TuneCore after his prior options had expired—without asserting that he had any lingering rights under the older agreements. Like in Jumax Associates, Caterine’s earlier stock agreements were always in his possession, and he could have asserted that he had continued rights to them when he was offered the second chance option grant in 2012. Also like in Jumax Associates, it would work an injustice on TuneCore to permit Caterine to remain silent, obtain a second chance option grant, and then later assert that the earlier options somehow still remained in effect. Three critical pieces of evidence further compel the conclusion that Caterine knew that TuneCore’s motivation in granting the replacement options was its understanding that the prior options had expired, and yet Caterine said nothing to dispute that understanding until long after the options granted to him under the 2012 stock option agreement had expired. It is that conduct, in leading TuneCore to believe that he agreed the prior options had expired, that compels a finding of waiver here. /// /// Case 2:16-cv-01925-DMG-MRW Document 170 Filed 12/05/18 Page 7 of 10 Page ID #:7017 20358 8 TUNECORE BRIEF RE WAIVER 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 1100 El Centro Street So. Pasadena, CA 91030 Phone (626) 243-1100 Fax (626) 243-1111 First, after TuneCore granted Caterine the 2012 stock option agreement and after Price was terminated, Caterine e-mailed Cogan in late July 2012 about the 2012 stock option agreement. In that e-mail, Caterine evidenced his intention that he would not exercise his earlier options when he stated, “This ‘new’ option agreement has a one year exercise date, which the original agreement did not have. I agreed to this new term with Jeff as CEO of the company, as I knew he would honor our original understanding and extend the exercise date if necessary . . . I hope I can count on you to carry out the understanding between Jeff & me.” Row Decl., Exh. 25, Dkt. No. 86-4, p. 162 of 183. Second, on November 17, 2012, Caterine exchanged emails with TuneCore’s outside counsel, in which he asserted there was a discrepancy between the number of options he was originally granted and the new options issued in July 2012. Row Decl., Exh. 26, Dkt. No. 86-4, p. 164-65 of 183. In fact, Caterine was wrong about there being a discrepancy. The replacement options were for the exact number of Caterine’s previously-vested options. Regardless, the fact that Caterine asserted there was a discrepancy again made clear that he understood the new option was given to him as a second chance to invest in TuneCore after his prior options expired. This demonstrates that Caterine understood he did not receive an independent grant that would somehow give him twice the number of vested options he received while actually serving as CFO. Moreover, TuneCore’s counsel responded by explaining that Caterine’s prior options had expired without exercise by Caterine, and that the Board granted him additional options in an amount it determined to be appropriate in its discretion. Notably, Caterine did not respond by disputing that his prior options had expired or that he remained a consultant who was eligible to continue vesting and exercising the options under the six option grants issued to him between 2006 and 2009. Instead he again expressed his intention not to assert rights on the earlier option agreements by responding, “Thanks Paul. Appreciate the info. Have a great Thanksgiving.” Row Decl., Exh. 26, Dkt. No. 86-4, p. 164 of 183. Case 2:16-cv-01925-DMG-MRW Document 170 Filed 12/05/18 Page 8 of 10 Page ID #:7018 20358 9 TUNECORE BRIEF RE WAIVER 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 1100 El Centro Street So. Pasadena, CA 91030 Phone (626) 243-1100 Fax (626) 243-1111 Third, in June 2013, while Caterine and Atencio were seeking to find an investor to purchase TuneCore shares directly from Price and other disgruntled minority shareholders who were upset that Price was terminated as CEO, Caterine asked Gill Cogan for an extension of time in which to exercise his options, mistakenly believing that they were about to expire “in a matter of days”. Cogan responded that Caterine was granted an option on June 21, 2012 to purchase 205,784 shares, that Caterine exercised 100 of those shares, and that his option to purchase the remaining 205,684 shares is not until August 4, 2013 rather than a matter of days. Cogan also wrote, “If your understanding of the facts differs from the above, pls let me know.” Cogan Decl. Exh. 14, Dkt. No. 86-3 at p. 24 of 24. Once again, Caterine did not assert that he had any right to the options granted to him in the earlier stock option agreements. Instead, he replied “Thank you. I re- checked the options and agreed the dates.” Cogan Decl. Exh. 14, Dkt. No. 86-3 at p. 23 of 24. Put simply, when TuneCore repeatedly advised Caterine that it was granting him a second chance option grant in 2012 because his prior options had expired, and Caterine gave no indication that he believed his prior options still existed, Caterine waived any rights he might have had to the prior options. New York law does not permit Caterine to acquiesce in TuneCore’s understanding, and induce it to believe he would not assert a claim to the options granted in the earlier stock option agreements, and only later assert (long after the options under the 2012 grant had expired) that TuneCore’s understanding was incorrect. Indeed, had Caterine claimed that he was still providing consulting services to TuneCore and, thus, eligible to continue vesting and to exercise his prior option grants, TuneCore would have confirmed that Caterine’s consulting relationship had been terminated at any of these three points in time (i.e. June 2012, November 2012 or June 2013). Caterine would then have been required to exercise his prior options within 30 to 90 days thereafter if he wanted to preserve his claim that his prior Case 2:16-cv-01925-DMG-MRW Document 170 Filed 12/05/18 Page 9 of 10 Page ID #:7019 20358 10 TUNECORE BRIEF RE WAIVER 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 1100 El Centro Street So. Pasadena, CA 91030 Phone (626) 243-1100 Fax (626) 243-1111 options had not somehow expired and he had remained an active consultant through such date. Given that Caterine did not exercise his option to purchase the 205,684 shares underlying the 2012 option agreement before the August 2013 deadline because he could not find a buyer for those shares, it is highly unlikely he would have purchased any of the shares underlying any of the prior option grants. Accordingly, similar to the plaintiff in Jumax, because Caterine remained silent about his asserted rights in July 2012, November 2012 and June 2013 when presented with TuneCore’s statements that his prior options expired, and did not assert any right to payment until after TuneCore was acquired in 2015, New York law compels the conclusion that Caterine waived any rights he had under the earlier agreements. DATED: December 5, 2018 COLLINS COLLINS MUIR + STEWART LLP By: ______________________________________ RYAN J. KOHLER Attorneys for Defendant, TUNECORE, INC. Case 2:16-cv-01925-DMG-MRW Document 170 Filed 12/05/18 Page 10 of 10 Page ID #:7020