Order Submitted MatterCal. Super. - 6th Dist.January 27, 2021KOOONONUl-hwwu-t NNNNNNNNNHHHHHHHHHH OONONM-PWNHOKOOONONm-PWNHO SUPERIOR COURT OF CALIFORNIA COUNTY OF SANTA CLARA JASON FORRESTER, Case N0.: 21CV376632 Plaintiff ORDER CONCERNING ’ (1) DEFENDANTS AND CROSS- VS_ COMPLAINANT’S DEMURRER TO PLAINTIFF’S FIRST AMENDED COMPLAINT AND (2) CROSS- DEFENDANT JASON LIGHTSPEED VENTURE PARTNERS, et a1., FORRESTER’S DEMURRER TO CROSS-COMPLAINT Defendants. AND RELATED CROSS-ACTION. Plaintiff Jason Forrester brings this action derivatively 0n behalf 0f nominal defendant SnapRoute, Inc. and in his individual capacity. He alleges that Defendants Lightspeed Venture Partners, Norwest Venture Partners, Joe Sexton, John Vrionis, and Rama Sehkar engaged in a fraudulent scheme t0 remove him as founding CEO 0f SnapRoute, and otherwise harmed him and the company. In its Cross-Complaint, SnapRoute alleges that Mr. Forrester and a co- conspirator, Jon Billow, perpetuated various schemes t0 benefit themselves and Peak Hosting (another company controlled by Mr. Billow) at SnapRoute’s expense. ORDER ON SUBMITTED MATTERS Electronically Filed by Superior Court of CA, County of Santa Clara, on 1/26/2022 2:13 PM Reviewed By: R. Walker Case #21CV376632 Envelope: 8145116 KOOONONUl-hwwu-t NNNNNNNNNHHHHHHHHHH OONONM-PWNHOKOOONONm-PWNHO Before the Court is Defendants’ demurrer t0 each cause 0f action in the operative First Amended Complaint (“FAC”), as well as Mr. Forrester’s demurrer t0 each cause 0f action in the Cross-Complaint. The Court issued a tentative ruling 0n January 19, 2022 and held oral argument 0n January 20. It now issues its final order, which OVERRULES Defendants’ demurrer as t0 the fifth cause 0f action and SUSTAINS it without leave t0 amend as t0 the other claims. The Court OVERRULES Mr. Forrester’s demurrer t0 the Cross-Complaint. I. BACKGROUND A. Allegations 0f the FACI As alleged in the FAC, Mr. Forrester is the founder and former CEO 0f SnapRoute, a networking technology startup. (FAC, W 1-3.) Defendants Lightspeed Venture Partners (“Lightspeed” 0r “LSVP”) and Norwest Venture Partners (“Norwest” 0r “NVP”) are two venture capital firms that worked with SnapRoute. (Id,W 4-5.) Defendant Joe Sexton is an entrepreneur-in-residence and advisor t0 various venture capital firms. (Id., 1] 6.) Defendant John Vrionis is a former partner at Lightspeed who also serves 0n SnapRoute’s board, and was the first venture capitalist t0 formally invest in SnapRoute. (1d,, 1] 7.) Finally, Defendant Rama Sehkar is a junior partner at Norwest. (161., 1] 8.) In early 20 1 5, after working for IBM and then Apple for many years, Mr. Forrester started working 0n a networking startup company using technology he had independently developed/invented. (FAC, 1] 25.) He hired the law firm Fenwick & West in mid-April 2015 to help form the company, which was ultimately called SnapRoute. (Ibid) At the same time, Mr. Forrester was discussing potential investment in his startup with Lightspeed. (Ibid) An agreement was reached 0n terms for funding 0n May 19, 2015, and SnapRoute was incorporated in Delaware 0n May 20, 2015. (Ibid) (It was registered with the California Secretary 0f State 0n May 22, 2015.) (Ibid) Mr. Forrester was elected CEO, President, CFO, and Secretary 0f SnapRoute and was issued 15 million shares 0f common stock 0n a four-year monthly “double trigger” vesting schedule. (Id., 1] 27.) 1 The Court takes n0 position 0n whether these allegations are true. KOOONONUl-hwwu-t NNNNNNNNNHHHHHHHHHH OONONM-PWNHOKOOONONm-PWNHO For the next two years, Mr. Forrester worked tirelessly for SnapRoute in developing its technology, soliciting and obtaining millions of dollars in investment funds, and running the company administratively. (FAC, 1] 28.) But the board (at that time, Mr. Sehkar, Mr. Sexton, and Mr. Vrionis) used their positions t0 enrich themselves and the VC firms they worked for by repeatedly putting their own self-interest and the interests 0f other companies in Lightspeed’s portfolio-namely, Apprnamics and Arrcus-before the interests 0f SnapRoute. (161.,W 29- 32.) The board repeatedly overruled Mr. Forrester’s decisions about what markets t0 take the product t0, resulting in wasted investments and harm t0 the company’s reputation. (FAC, 1] 33.) It also forbade NEA, a prestigious, well-known venture capital firm, from investing in SnapRoute, with Mr. Vrionis stating that a junior partner from Norwest could be better controlled. (Id, 1] 34.) In addition, the board hired, against Mr. Forrester’s advice, an unqualified Vice President 0f Engineering with ties t0 the venture capitalists; the Vice-President ultimately was terminated for non-performance. (Id., 1] 35.) Moreover, the board wasted money by using a recruiting firm, unreasonably declined t0 continue work with Linkedln, and fired essential personnel who were believed t0 be “Forrester loyalists.” (161.,W 37-39.) Board members put personal dislikes and grudges against peer venture capitalists before SnapRoute’s best interests, angrily dismissing potential investors, insulting an early investor, and dismissing another potential adviser. (Id., W 41-43.) And the board did not disclose that Mr. Sexton, the “independent” board member, had a previous relationship with the other board members, making him effectively an agent 0f the venture capitalists. (Id., 1] 44.) The board engaged in a fraudulent scheme t0 remove Mr. Forrester from his position and unilaterally took his shares, which Mr. Forrester believes is a pattern their firms have engaged in with other founding teams. (FAC, 1] 40.) They brought in an interim CEO with an undisclosed prior relationship t0 the venture capitalists, who had a reputation for liquidating and n0 relevant industry experience. (161., 1] 46.) The board made false statements about Mr. Forrester t0 competitors, customers, and prospective investors, including about an “investigation” into Mr. Forrester that was based almost entirely 0n unsubstantiated hearsay and rumor. (Id. , 1] 47.) KOOONONUl-hwwu-t NNNNNNNNNHHHHHHHHHH OONONM-PWNHOKOOONONm-PWNHO Defendants arranged t0 prepare a “dossier” 0n Mr. Forrester t0 justify his firing and the return 0f his shares. (Id, 1] 85.) Following a purported investigation by Fenwick & West in 2017, the board informed Mr. Forrester that he was being terminated due t0 misconduct and embezzlement. (Id,W 93-95.) The company was sold t0 Infoblox for $1 million in November 2019, in what Mr. Forrester believes was a “backdoor deal” between Lightspeed and Cisco. (Id., 1] 96.) Moreover, Mr. Forrester’s eX-wife accused him 0f breach 0f fiduciary duty based 0n the supposed embezzlement, attempting t0 get more money than she is entitled t0 in their divorce. (Id., 1] 97.) Ultimately, the board directed SnapRoute not t0 pay numerous suppliers, terminated all customer contracts, “pivoted” the main product, and sold the company’s technology for $1 million without notifying Mr. Forrester, its largest common shareholder. (FAC, W 49-53.) B. Procedural Based 0n these allegations, Mr. Forrester asserts the following causes 0f action against Defendants: (1) a derivative claim for breach 0f fiduciary duty; (2) a derivative claim for abuse 0f control; (3) a derivative claim for waste; (4) a derivative claim for breach 0f the covenant 0f good faith and fair dealing arising from SnapRoute’s Series Seed Preferred Stock Purchase Agreement; (5) an individual claim for tortious interference with Mr. Forrester’s Restricted Stock Purchase Agreement; (6) an individual claim for fraud; and (7) an individual claim for equitable indemnity concerning Mr. Forrester’s liability in his divorce proceedings. In an August 10, 2021 order, the Court overruled Defendants’ demurrer t0 the fifth cause 0f action and sustained the demurrer with leave t0 amend as t0 all 0f Mr. Forrester’s other claims. As t0 the derivative claims, the Court found that Mr. Forrester had failed t0 allege demand refusal 0r demand futility under Delaware law. It also found that Mr. Forrester had failed t0 allege his fraud claim with specificity and t0 establish that Defendants owed any duty t0 Mr. Forrester’s eX-wife as would support a claim for equitable indemnity. Mr. Forrester filed the FAC 0n September 9. Meanwhile, 0n August 27, 2021, SnapRoute filed a Cross-Complaint against Mr. Forrester and Mr. Billow, the President of Peak KOOONONUl-hwwu-t NNNNNNNNNHHHHHHHHHH OONONM-PWNHOKOOONONm-PWNHO Hosting. As discussed further below, SnapRoute alleges that Mr. Forrester and Mr. Billow perpetuated various schemes t0 benefit themselves and Peak at SnapRoute’s expense. Defendants again demur t0 the FAC, and Mr. Forrester demurs t0 the Cross-Complaint. II. REQUESTS FOR JUDICIAL NOTICE Defendants request judicial notice 0f Plaintiff’s response t0 a January 19, 2021 email described in connection with Plaintiff’s demand refusal allegations (EX. 1 t0 their request), SnapRoute’s Restated Certificate 0f Incorporation (EX. 2), and the Restricted Stock Purchase Agreement between Plaintiff and SnapRoute (EX. 3). Defendants request is unopposed, and is GRANTED. (EVid. Code, § 452, subds. (c) & (h); Ingram v. Flippo (1999) 74 Cal.App.4th 1280, 1285, fn. 3 [taking judicial notice 0f documents that “form the basis 0f the allegations in the complaint”].) In support 0f his demurrer t0 the Cross-Complaint, Mr. Forrester seeks judicial notice 0f a judgment entered in favor 0f his eX-wife in family law proceedings in San Mateo County (Case N0. 17FAM01636). This request is also unopposed, and the Court GRANTS it as t0 the existence and contents 0f this filing only. (EVid. Code, § 452, subd. (d); Sosinsky v. Grant (1992) 6 Cal.App.4th 1548, 1564-1568 [court cannot take judicial notice 0f the truth 0f hearsay statements 0r facts set forth in otherwise judicially noticeable documents].) III. 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. [T]he 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.) IV. DEMURRER TO THE FAC Defendants demur t0 the derivative claims 0n the grounds that Plaintiff fails t0 allege demand refusal 0r demand futility as a threshold matter, and otherwise fails t0 state any derivative claim under Delaware law. They also demur t0 the direct claims for failure t0 state a cause 0f action. In opposition, Plaintiff contends that California law applies t0 his derivative claims per section 21 15 0f the Corporations Code (Section 21 15); he made a demand, but only t0 “try t0 d0 what is right,” and the Court should nevertheless find that this attempt was futile; and each 0f his claims states a cause 0f action 0r could be amended t0 d0 so. A. Derivative Claims 1 . Applicable Law The parties agree that, as alleged in the FAC, SnapRoute is incorporated in Delaware. This typically means that claims 0n behalf 0f the company are subj ect t0 Delaware law, as t0 both the standard 0f care governing fiduciary duties and the requirements for bringing a derivative suit like demand futility 0r refusal. (See Kamen v. Kemper Fin. Services (1991) 500 U.S. 90, 108-109 [scope 0f demand requirement is established by the law 0f the state 0f incorporation]; Villari v. Mozilo (2012) 208 Cal.App.4th 1470, 1479, fn. 9 [Delaware substantive law applied in a shareholder derivative case “pursuant t0 the internal affairs doctrine, codified at Corporations Code section 21 16, which provides that the law 0f the place 0f incorporation governs the liability 0f directors t0 the corporation and its shareholders”]; Vaughn v. LJ Internat., Inc. (2009) 174 Cal.App.4th 213, 223-224 [law 0f the state 0f incorporation normally governs both the standard 0f care and permission t0 sue provisions].) But Plaintiff contends that California law applies here per Section 21 15, which states that specific provisions 0f the Corporations Code apply t0 foreign corporations if certain KOOONONUl-hwwu-t NNNNNNNNNHHHHHHHHHH OONONM-PWNHOKOOONONm-PWNHO requirements are satisfied. As one court explained, “[W]hile section 21 15 is a mass 0f text, it has been conveniently distilled into this one sentence ...:” after a certain amount 0f time has passed, “ ‘California law governs certain internal affairs 0f a foreign corporation if more than half of the corporation’s voting stock is held by California residents, and the corporation conducts a 3”maj ority 0f its business in the state (as measured by assets, payroll, and sales). (Kruss v. Booth (2010) 185 Cal.App.4th 699, 715-716 (Kruss), quoting State Farm Mutual Automobile Ins. C0. v. Superior Court (2003) 114 Cal.App.4th 434, 448.) In the FAC, Plaintiff alleges that these latter two elements were satisfied “[d]uring the two years preceding the fire sale 0f the SnapRoute intellectual property in 2019.” (FAC, 1] 15.) But even accepting that this is true} subdivision (b) 0f Section 21 15 lists the substantive provisions 0f California law that apply t0 foreign corporations that satisfy these elements. Defendants correctly note that section 800 0f the Corporations Code, which addresses conditions precedent t0 a shareholder action like alleging demand refusal 0r demand futility, is not among the provisions listed. So Delaware law applies t0 that threshold analysis. Notably, Plaintiff does not dispute this conclusion 0r provide any contrary authority in his opposition, which urges only that California’s substantive law regarding the duty 0f care (section 309 0f the Corporations Code)3 applies in this case. 2 Defendants correctly point out that Section 21 15 begins t0 apply only “upon the first day 0f the first income year 0f the corporation (1) commencing 0n 0r after the 135th day 0f the income year immediately following the latest income year with respect t0 which the tests referred t0 in subdivision (a) have been met.” (Kruss, supra, 185 Cal.App.4th at p. 720, fn. 28.) Per the detailed example outlined in Kruss, where SnapRoute was incorporated in May 2015 (FAC, 1] 25), the analysis is as follows: “Take the first full year in which the business-voting stock standard for an out-of-state corporation is met-year 1” (here, 2016, since 2015 was a partial year); “then, in the next full year-year 2-count 135 days” (bringing the count here t0 May 2017); “and then finally, the very first day 0f the next full year, year 3, is the very first day which California internal affairs law applies t0 that out-of-state corporation”: here, 201 8. (Id. at pp. 720-722.) So Delaware law applies t0 a substantial part 0f the allegations here, including those leading up to Plaintiff” s termination in August 2017. 3 Plaintiff also refers t0 section 389 0f the Corporations Code, but since this section does not exist, the Court assumes this is meant t0 be another reference t0 section 309. KOOONONUl-hwwu-t NNNNNNNNNHHHHHHHHHH OONONM-PWNHOKOOONONm-PWNHO 2. Analysis Under Delaware law, “the business and affairs 0f a corporation, absent exceptional circumstances, are t0 be managed by its board 0f directors.” (In re Tyson Foods, Inc. (Del. Ch. 2007) 919 A.2d 563, 581 (Tyson F00ds).) That means derivative claims are “owned” by the corporation rather than individual shareholders, since such claims are being brought 0n behalf 0f the corporation and, if successful, will benefit the corporation. Therefore, the board generally should have the first chance t0 decide t0 file such derivative claims. Only after it refuses t0 file these claims (0r after it has been shown that the board cannot lawfully decide the question, and thus that a demand would be “futile”) can a shareholder try t0 pursue derivative claims. Rule 23.1 0f the Chancery Court Rules hence “requires that the complaint [in a derivative action] ‘allege with particularity the efforts, if any, made by the plaintiff t0 obtain the action the plaintiff desires from the directors and the reasons for the plaintiff’s failure t0 obtain the action 0r for not making the effort.’ ” (Tyson Foods, supra, 919 A.2d at p. 581 .) Where a plaintiff asserts that demand would be futile, he 0r she must support that claim with allegations that “comply with stringent requirements 0f factual particularity.” (Ibid) a. The original Complaint, the Court’s prior order, and Plaintiffs impermissible new approach Here, the original Complaint did not allege that demand 0n SnapRoute’s board would be futile, but that Plaintiff “presented” the Complaint t0 SnapRoute 0n November 10, 2020 and waited 21 days for a response before filing suit. The Court found these allegations did not necessarily show a “demand” under Delaware law, 0r that such a demand was improperly refused. (August 10, 2021 Order at p. 7.) It granted Plaintiff leave t0 amend the Complaint t0 plead facts establishing either demand refusal 0r demand futility. The Court instructed that “[i]t will be Plaintiffs choice what theory 0r theories t0 pursue if he amends his complaint. But if he chooses t0 allege demand futility, he should be prepared t0 explain why this is permissible under the governing state’s law considering his current demand refusal allegations, and t0 provide supporting authority.” (Id. at pp. 7-8.) KOOONONUl-hwwu-t NNNNNNNNNHHHHHHHHHH OONONM-PWNHOKOOONONm-PWNHO In the FAC, Plaintiff alleges both that he made an adequate demand 0n SnapRoute’s board and that such demand was futile. But Delaware authorities hold that “[i]f a stockholder elects t0 make a pre-suit demand, then the stockholder may not allege that demand would have been futile in a subsequent complaint concerning the subject matter 0f the demand. Rather, the stockholder is limited t0 making the more difficult claim that the board wrongfully refused the demand.” (Solak v. Welch (Ch. Oct. 30, 2019, N0. 2018-0810-KSJM) 2019 Del. Ch. LEXIS 1338 (Solak), at *1-2 [observing that “[m]aking a pre-suit demand, therefore, carries significant downsides affecting the Viability 0f a derivative claim”].)4 “By electing t0 make a demand, a shareholder plaintiff tacitly concedes the independence 0f a majority 0f the board t0 respond. Therefore, when a board refuses a demand, the only issues t0 be examined are the good faith and reasonableness 0f its investigation.” (Spiegel v. Buntrock (Del. 1990) 571 A.2d 767, 777 (Spiegel).) “Delaware law prohibits a stockholder from both making a demand and pleading demand futility t0, in essence, cover all the bases.” (Solak, supra, 2019 Del. Ch. LEXIS 1338, *1 1, internal citation and quotation marks omitted; see also Raj & Sonal Abhyanker Family Trust v. Blake (Ch. June 17, 2021, N0. 2020-0521- KSJM) 2021 Del. Ch. LEXIS 120, at *16 (Blake) [Spiegel bars a claim for demand futility following an actual demand upon the b0ard].) In other words, “[a] stockholder’s options” in pursing demand refusal 0r demand futility “are mutually exclusive.” (Solak, supra, 2019 Del. Ch. LEXIS 1338, at *8.) That means Delaware substantive law concerning demands overrides the general procedural presumption that alternative theories can be pled. So the Court must address whether Plaintiff made a demand t0 determine which analysis applies in this case: demand refusal 0r demand futility. As discussed in its prior order, Yaw v. Talley (Del. Ch. Mar. 2, 1994, Civil Action N0. 12882) 1994 Del. Ch. LEXIS 35 (Yaw) 4 “Unpublished opinions 0f Delaware courts may be cited in Delaware, although not as binding precedent.” (VICIRacing, LLC v. T-Mobz'le USA, Inc. (3d Cir. 2014) 763 F.3d 273, 287, fn. 9.) KOOONONUl-hwwu-t NNNNNNNNNHHHHHHHHHH OONONM-PWNHOKOOONONm-PWNHO establishes the relevant standard under Delaware law. (Dahle v. Pope (Ch. Jan. 3 1, 2020, N0. 2019-0136-SG) 2020 Del. Ch. LEXIS 41, at *11 (Dahle).) b. New demand allegations A pre-suit communication is a demand under Yaw if it provides “(i) the identity 0f the alleged wrongdoers, (ii) the wrongdoing they allegedly perpetrated and the resultant injury t0 the corporation, and (iii) the legal action the shareholder wants the board t0 take 0n the corporation’s behalf.” (Dahle, supra, 2020 Del. Ch. LEXIS 41, at *1 1; Blake, supra, 2021 Del. Ch. LEXIS 120, at *13.) Importantly, Yaw emphasized that “where the character 0f the shareholder communication is ambiguous 0r unclear[,] the party asserting that a demand was made ([i.e.], the defendants) should bear the burden 0f proof. . . .” (Yaw, supra, 1994 Del. Ch. LEXIS 35, at *23-24.) “Policy considerations require” this, “and that ambiguous communications be construed against a finding 0f a demand,” due t0 “the severe procedural consequences t0 a plaintiff found t0 have made a pre-suit demand, namely, being precluded from challenging the board’s independence and disinterestedness.” (Id. at *24.) But Yaw’s “plaintiff-friendly deference t0 ambiguous communications” is only invoked by “sincere stockholder attempts t0 review issues with a board,” not “communication[s] intended t0 spur the Board t0 the same action it would take in response t0 an explicit demand, although attempting t0 skirt through clever draftsmanship the tacit concession that results from making such a demand.” (Dahle, supra, 2020 Del. Ch. LEXIS 41, at *14-15.) This case is somewhat unusual in that Plaintiff seeks t0 allege demand futility but insists that he did make a demand 0n SnapRoute’s board as well. Plaintiff alleges that “[t]he original demand letter has been lost and not retained due t0 a secretarial error, but a copy 0f a letter that was substantially identical in substance (except for the addressee information) and that went t0 Defendants Lightspeed and Norwest later 0n is attached hereto as Exhibit A.” (FAC, 1] 22.) This letter attaches a draft copy 0f the original Complaint and states that “[t]he complaint is being sent t0 SnapRoute’s current Board 0f Directors pursuant t0 Corp. Code sec. 800 as well so that they will have an opportunity t0 accept 0r decline the pursuit offhese claims.” (Italics added.) It 10 KOOONONUl-hwwu-t NNNNNNNNNHHHHHHHHHH OONONM-PWNHOKOOONONm-PWNHO summarizes the allegations 0f the Complaint in detail and concludes, “we expect t0 file this complaint in the next 21 days after SnapRoute fails t0 respond.” Accepting that a version 0f this letter was sent t0 SnapRoute’s board “so that they will have an opportunity t0 accept 0r decline the pursuit 0f these claims,” the Court finds that a demand was made applying the Yaw standard. Indeed, Plaintiff specifically alleges that each element 0f this standard was satisfied. (FAC, 1] 22.) In any event, it is apparent that the letter Plaintiff sent was not a “sincere stockholder attempt[] t0 review issues with [the] board,” but a “communication intended t0 spur the Board t0 the same action it would take in response t0 an explicit demand. . ..” (Dahle, supra, 2020 Del. Ch. LEXIS 41, at *14-15; see also id. at *12-13 [demand made where complaint and demand letter were Virtually identical, and letter sought action in line with what could be accomplished through a derivative suit]; cf. Yaw, supra, 1994 Del. Ch. LEXIS 35, at *13-14 [letters did not constitute a pre-suit demand because they were written t0 the defendants as stockholders, not as directors, and did not demand corporate action, but requested that the defendants, as individuals, sell their shares].) c. Demand refusal allegations “By operation 0f the tacit-concession doctrine, a board’s decision t0 refuse a demand is subject t0 the business judgment rule. After making a pre-litigation demand, a stockholder plaintiffmay not pursue claims challenging the subj ect matter 0f the demand; the stockholder is limited t0 a claim that the board wrongfully refused the demand.” (Blake, supra, 2021 Del. Ch. LEXIS 120, at *12.) Here, Plaintiff acknowledges that he received a communication from SnapRoute’s counsel dated January 19, 2021, reflecting that SnapRoute had not received the initial demand letter and requesting that Plaintiff send SnapRoute’s counsel that communication and other relevant documents t0 aid Defendants’ “evaluat[ion].” (FAC, 1] 23, EX. C.) He alleges that “[his] counsel provided all the requested materials that he could provide with reasonable diligence” but proceeded t0 file suit 0n January 27, 2021, without waiting for a substantive response from SnapRoute. (FAC, 1] 23.) Plaintiff alleges that substantive response came later, “0n March 24, 2021, well after the complaint was submitted for filing, and after the complaint was actually 11 KOOONONUl-hwwu-t NNNNNNNNNHHHHHHHHHH OONONM-PWNHOKOOONONm-PWNHO [processed by the C0urt].” (Ibid) Mr. Forrester “interpreted the response (in which SnapRoute threatened t0 sue him) as a refusal 0f his demand and indicated t0 Defendants’ counsel that the case had already been submitted for filing.” (Ibid) These allegations d0 not explain “why the Board acted with gross negligence 0r bad faith in refusing the demand” (see Dahle, supra, 2020 Del. Ch. LEXIS 41, at * 14), but merely assert that the demand was refused after Plaintiff filed the Complaint without waiting for a response. But again, because Plaintiff made a pre-suit demand, he “is limited t0 claiming that the Board wrongfully refused [it].” (Blake, supra, 2021 Del. Ch. LEXIS 120, at *16.) The FAC does not d0 this. Instead, it “does precisely what Spiegel bars: it makes a claim for demand futility following [an] actual demand[] made upon the Board.” (Ibid.) As such, the derivative claims are appropriately dismissed. (Ibid) As stated by the Delaware Supreme Court, “once a demand has been made, absent a wrongful refusal, the stockholders’ ability t0 initiate a derivative suit is terminated.” (Spiegel, supra, 571 A.2d at p. 775.) In opposition t0 Defendants’ demurrer, Plaintiff essentially disagrees with the governing law. He emphasizes his allegations that he was not certain who the directors were at the time 0f his demand, and argues that the fact that he assertedly gave his “best effort t0 make demand should be considered a ground t0 sustain the FAC, not a reason t0 believe that demand would not have been futile”: Plaintiff urges that “a person can try t0 d0 what is right even suspecting that it is likely t0 be pointless.” But Mr. Forrester cites n0 authority supporting the argument that his asserted good faith, 0r his alleged lack 0f certainty about who was 0n the board, negate the application 0f the tacit-concession doctrine under Delaware law. And the Court’s prior order specifically instructed him that he would need t0 cite supporting authorities if he chose t0 change course in this way. In sum, Plaintiff does not attempt t0 allege that his demand was improperly refused. Because he made a demand, the tacit-concession doctrine applies, and he cannot now take the position that demand was futile. Plaintiff fails t0 allege demand refusal, which is the only way for him to bring derivative claims at this point. 12 KOOONONUl-hwwu-t NNNNNNNNNHHHHHHHHHH OONONM-PWNHOKOOONONm-PWNHO d. Conclusion Since Plaintiff made a demand and there is n0 indication he can allege it was wrongfully refused, the Court SUSTAINS the demurrer t0 the derivative claims WITHOUT LEAVE TO AMEND. Notably, Plaintiff does not seek leave t0 amend the FAC t0 allege his demand was improperly refused; rather he urges that the demand was “pointless” t0 begin with. But as discussed above, the tacit-concession doctrine bars Plaintiff from changing course in this way. The derivative claims accordingly fail. B. Individual Claims There appears t0 be n0 dispute that California law applies t0 Plaintiff’s individual claims, which are not based 0n his rights as a shareholder. Defendants contend that Plaintiff fails t0 state a cause 0f action as t0 any 0f these claims applying California law. 1. The Fifth Cause OfActionfor Tortious Interference The Court overruled Defendants’ demurrer t0 the fifth cause 0f action as alleged in the original Complaint, holding that “[i]t is clear enough from the Complaint as a whole that Plaintiff contends Defendants falsely accused him 0f misconduct related t0 his job, which disrupted his contractual relationship with his employer, SnapRoute, and damaged him as a result 0f his termination.” (August 10, 2021 Order at p. 9.) But Defendants urge that the FAC changes course and alleges that the tortious interference harmed Plaintiff not due t0 his termination, but because he was “forced t0 incur attorney fees in [his] pending divorce proceedings t0 clear his name,” so he could obtain the benefits 0f his Restricted Stock Purchase Agreement (RSPA). (FAC, 1] 85.) In fact, the FAC alleges Mr. Forrester’s divorce fees are merely one “example” 0f the harm caused by Defendants’ alleged interference. (FAC, 1] 85.) The FAC continues t0 allege that Defendants “arranged t0 prepare a dossier 0n [Plaintiff] in order t0 fabricate a basis 0n which t0 justify his firing, and therefore the return 0f his shares.” (Ibid) In opposition, Plaintiff emphasizes these allegations that Defendants’ conduct “interfered with Plaintiff’s contract and his expectation 0f additional shares” by using a “sham dossier t0 justify [his] firing.” 13 KOOONONUl-hwwu-t NNNNNNNNNHHHHHHHHHH OONONM-PWNHOKOOONONm-PWNHO The Court’s prior analysis still applies t0 this theory, so the Court OVERRULES the demurrer t0 the fifth cause 0f action without the need t0 address whether Mr. Forrester’s divorce fees are properly claimed as another item 0f damages. (See Daniels v. Select Portfolio Servicing, Inc. (2016) 246 Cal.App.4th 1150, 1167 [a demurrer is not properly sustained as t0 a portion 0f a cause 0f action].) 2. The Sixth Cause ofActionfor Fraud Mr. Forrester’s fraud claim is based 0n the theory that Defendants “tricked” him into stepping down as CEO in order t0 fire him. The Court found that, in the original Complaint, Plaintiff failed t0 specify how, where, t0 whom, and by what means the representations at issue were made-or even which Defendants made which specific representations. The Court also noted that Plaintiff did not explain how his decision t0 step down caused the board t0 be able t0 terminate him, since Mr. Forrester admitted that the other board members always held a maj ority 0f the seats (three 0f the five) even before he stepped down and thus could always terminate him. In the FAC, Plaintiff alleges that he needs discovery t0 plead his fraud claims more specifically, but describes his best memory 0fhow “[i]n July 2017, the other board members” asked him t0 step down as CEO, “claiming it would be best for the company t0 get someone who had more experience running a startup company.” (FAC, 1] 92.) After he stepped down, “Mr. Sehkar was begging [him] t0 g0 0n a medical leave.” (Ibid.) “Now the other investors 0n the board had the power t0 vote him out, due t0 the fact he was n0 longer the CEO and n0 longer held two 0f the board seats.” (Ibid) These new allegations are certainly specific enough for pleading purposes, but d0 not cure the causation issue previously identified by the Court. The FAC also alleges that Mr. Forrester was terminated for purported misconduct and embezzlement, but these accusations were false. (FAC, 1] 95.) “Mr. Vrionis informed [Plaintiff] that the board was going t0 sue him and start an investigation, but they would not d0 so if he returned his shares.” (Ibid) The FAC goes 0n t0 allege that the false accusations harmed Mr. Forrester in various other ways-but not that he relied 0n the accusations himself t0 return his shares 0r take any other detrimental action. And Defendants correctly urge that it would not be reasonable for Plaintiff t0 rely 0n false statements about his own actions, anyway. 14 KOOONONUl-hwwu-t NNNNNNNNNHHHHHHHHHH OONONM-PWNHOKOOONONm-PWNHO Mr. Forrester’s opposition does not engage with these fundamental problems, and there is n0 indication that he can amend his complaint t0 address them. He already has had one chance t0 fix these problems, but could not d0 so. The Court accordingly SUSTAINS Defendants’ demurrer t0 this claim WITHOUT LEAVE TO AMEND. 3. The Seventh Cause ofActionfor Equitable Indemnity Plaintiff’s seventh cause 0f action is based 0n the theory that Defendants’ conduct caused him to incur liability and attorney fees in his divorce proceedings. The Court previously found that there was n0 basis t0 find Defendants owed a duty t0 Plaintiffs eX-Wife, 0r that there was any other basis t0 require them t0 indemnify Plaintiff for divorce liability. (See BFGC Architects Planners, Inc. v. Forcum/Mackey Construction, Inc. (2004) 119 Cal.App.4th 848, 852 [equitable indemnity “applies only among defendants who are jointly and severally liable t0 the plaintiff” and is generally “based 0n a duty owed t0 the underlying plaintiff’].) Neither the FAC nor Plaintiff’s opposition offers any new theory 0r addresses this fundamental issue. So this time, the Court SUSTAINS Defendants’ demurrer t0 the seventh cause 0f action WITHOUT LEAVE TO AMEND. C. Conclusion The Court SUSTAINS WITHOUT LEAVE TO AMEND Defendants’ demurrer as t0 the first through fourth, sixth, and seventh causes 0f action. The Court OVERRULES the demurrer as t0 the fifth cause 0f action. IV. DEMURRER TO THE CROSS-COMPLAINT Mr. Forrester demurs t0 every cause 0f action in the Cross-Complaint 0n the grounds that each claim is time-barred and the first, second, and fourth causes 0f action otherwise fail t0 state a claim, while the first through third and seventh causes 0f action are uncertain. A. Uncertainty Uncertainty is a disfavored ground for demurrer, and a demurrer 0n this ground is typically sustained only where the pleading is so unintelligible that the moving party cannot reasonably respond. (See Khoury v. Maly ’s ofCalifornia, Inc. (1993) 14 Cal.App.4th 612, 616 [“A demurrer for uncertainty is strictly construed, even where a [pleading] is in some respects 15 KOOONONUl-hwwu-t NNNNNNNNNHHHHHHHHHH OONONM-PWNHOKOOONONm-PWNHO uncertain, because ambiguities can be clarified under modern discovery procedures.”].) Here, the cross-claims are alleged clearly enough t0 enable a response, notwithstanding the various points 0f clarification requested by Plaintiff. The Court hence OVERRULES the demurrer based 0n uncertainty. B. Statute 0f Limitations A demurrer will succeed where the allegations and matters subj ect t0 judicial notice clearly disclose a defense 0r bar t0 recovery. However, “[a] demurrer based 0n a statute 0f limitations will not lie where the action may be, but is not necessarily, barred.” (Lee v. Hartley (2015) 61 Cal.4th 1225, 1232, internal citation and quotation marks omitted.) The defect must clearly and affirmatively appear 0n the face 0f the complaint and matters subj ect t0 judicial notice. (Richtek USA, Inc. v. uPI Semiconductor Corp. (2015) 242 Cal.App.4th 651, 658.) Mr. Forrester argues that SnapRoute’s claims accrued n0 later than August 25, 2017, when he was terminated for asserted misconduct. He asserts that “SnapRoute actually knew 0f the accrual [0f the] alleged causes 0f action,” and “attempted t0 secure a tolling agreement in 2019 preserving the claims, but Mr. Forrester declined and SnapRoute did not pursue its claims.” These general arguments d0 not show that the Cross-Complaint is entirely time-barred: the fact that SnapRoute knew about some misconduct does not show it should have uncovered all 0f the asserted misconduct alleged in the Cross-Complaint, and any effort t0 secure a tolling agreement is not alleged in the Cross-Complaint 0r subject t0 judicial notice. In any event, under the California Judicial Council’s Emergency Rule 9(a), enacted in response t0 the COVID pandemic, “the statutes 0f limitations and repose for civil causes 0f action that exceed 180 days are tolled from April 6, 2020 until October 1, 2020.” The most natural reading 0f this language is that the time from April 6 through October 1, 2020 is not counted when calculating whether a limitations period has expired. Mr. Forrester’s contrary reading is untenable. In addition, “the filing 0f a complaint tolls the statute 0f limitations applicable t0 a cross- complaint so long as the cross-complaint is related t0 the original complaint and its causes 0f action were not barred when the original complaint was filed.” (California-American Water C0. 16 KOOONONUl-hwwu-t NNNNNNNNNHHHHHHHHHH OONONM-PWNHOKOOONONm-PWNHO v. Marina Coast Water Dist. (2016) 2 Cal.App.5th 748, 763.) The Court finds that the subject matter 0f the cross-complaint and the original complaint largely overlap, and thus the cross- complaint and the original complaint are “related.” And discussed below, the cross-complaint’s claims were not time-barred when the original complaint was filed. Therefore, the filing of Mr. Forrester’s own Complaint again tolled the statutes as 0f January 27, 2021, the date 0f filing 0f his Complaint. Applying these tolling periods, any claims with a 3- 0r 4-year statute that accrued in August 2017 are timely. While SnapRoute’s claims arise from misconduct dating back t0 May 2015, SnapRoute alleges delayed discovery by specifying that the misconduct at issue was brought t0 its attention in August 2017. (Cross-Complaint, 1] 34.) Mr. Forrester does not dispute this last point. The parties agree that the claims for breach 0f contract, breach 0f the implied covenant 0f good faith and fair dealing, and breach 0f fiduciary duty are subj ect t0 a four-year statute, while the claims for fraud and conversion are subject t0 a three-year statute. That leaves the unjust enrichment and conspiracy claims.5 Mr. Forrester acknowledges that portions 0f the unjust enrichment claim (if not the entire claim) are subj ect t0 a 3- 0r 4-year statute. He contends that the conspiracy claim is subj ect t0 a 2-year statute because it arises from tortious interference with contract. But the Cross-Complaint is clear that at least part 0f that claim is based in fraud. (Cross-Complaint, 1] 66 [describing “scheme t0 defraud the Company, including by manufacturing sham transactions” t0 artificially inflate the Company’s sales prior t0 a financing r0und].) In sum, at least a portion 0f every claim in the Cross-Complaint is subject t0 a 3- 0r 4- year statute. SnapRoute alleges that it discovered the misconduct at issue in August 2017. Applying the tolling principles discussed above, at least a portion 0f every claim in the Cross- Complaint is timely accepting August 2017 as the time 0f accrual. The Court therefore OVERRULES Mr. Forrester’s demurrer based 0n the statute 0f limitations. 5 SnapRoute also brings a claim for aiding and abetting breach 0f fiduciary duty against Mr. Billow, but Mr. Billow is not a party t0 Mr. Forrester’s demurrer. In any event, the demurrer concedes that this claim is subject t0 a 3- 0r 4-year statute. 17 KOOONONUl-hwwu-t NNNNNNNNNHHHHHHHHHH OONONM-PWNHOKOOONONm-PWNHO C. Failure t0 State a Claim The first cause 0f action for breach 0f contract alleges that Mr. Forrester breached Section 13 0f the Employee Invention Assignment and Confidentiality Agreement (Agreement) attached as Exhibit A t0 the Cross-Complaint, “by failing t0 perform his employment duties in good faith, including but not limited t0, actively engaging in, and encouraging and assisting others t0 engage in sham transactions, illicit payments and kickbacks, and misappropriating Company funds for his own benefit and t0 the detriment 0f the Company.” (FAC, fl42.) Mr. Forrester argues this claim does not state a cause 0f action because the Agreement does not relate t0 his duties as CEO, and instead relates t0 his obligations t0 assign inventions t0 SnapRoute. But the Agreement also contains the provision identified by SnapRoute, which states that Mr. Forrester shall “at all times devote [his] best efforts t0 the interests 0f the Company” and refrain from actions that would “conflict with the Company’s interests” 0r disrupt its operations 0r prospects. SnapRoute alleges a breach 0f this provision, and Mr. Forrester’s inapposite argument is not t0 the contrary. Mr. Forrester’s argument regarding the second cause 0f action for breach 0f the implied covenant 0f good faith and fair dealing is essentially the same, and fails for the same reasons. Finally, the fourth cause 0f action for fraud alleges that from October 2016 t0 August 2017, “Mr. Forrester and Mr. Billow made false representations t0 SnapRoute concerning SnapRoute’s licensing revenue, as identified with particularity above at paragraphs 12-28.” (Cross-Complaint, 1] 55.) “Specifically, Mr. Forrester represented that Alorica and Peak Hosting were SnapRoute’s biggest customers and generated licensing fees in excess 0f $400,000, even though the purported licensing fees were, in fact, sham transactions that were designed solely for the purpose 0f artificially inflating SnapRoute’s revenue and enriching Mr. Forrester and Mr. Billow t0 the detriment 0f the Company.” (Ibid) SnapRoute relied 0n these representations by “pay[ing] over $440,000 t0” another company controlled by Mr. Billow, Exigent, “for non- existent equipment and contractors Exigent” (rather than SnapRoute) “provided directly t0 Alorica.” (Id. , 1] 57.) 18 KOOONONUl-hwwu-t NNNNNNNNNHHHHHHHHHH OONONM-PWNHOKOOONONm-PWNHO Mr. Forrester contends that these allegations d0 not specifically identify who at SnapRoute “fell for [these misrepresentations]” and acted 0n them, and d0 not contain allegations describing in detail why SnapRoute’s reliance was reasonable. But Mr. Forrester cites n0 authority specifically requiring the first detail, and SnapRoute does allege details about the overall “circumstances” in which the misrepresentations were made (Beckwith v. Dahl (2012) 205 Cal.App.4th 1039, 1067) t0 show reliance was reasonable: namely, the misrepresentations were believable assertions made by SnapChat’s own CEO. Finally, Mr. Forrester asserts that SnapRoute “actually profited from [this] transaction,” but this supposed fact is not alleged in the Cross-Complaint 0r subj ect t0 judicial notice. Mr. Forrester’s arguments as t0 the fourth cause 0f action therefore fail. D. Conclusion For the reasons discussed above, the Court OVERRULES Mr. Forrester’s demurrer in its entirety. IT IS SO ORDERED. Date: The Honorable Sunil R. Kulkarni Judge 0f the Superior Court 19 January 26, 2022
