Judge: Gail Killefer, Case: 23STCV14660, Date: 2024-12-02 Tentative Ruling
Case Number: 23STCV14660 Hearing Date: December 2, 2024 Dept: 37
HEARING DATE: Monday, December 2, 2024
CASE NUMBER: 23STCV14660
CASE NAME: Patrick Muh-En Lu
v. Lootably, Inc.
MOVING PARTY: Plaintiff/Cross-Defendant Patrick Muh-En Lu
OPPOSING PARTY: Defendant/Cross-Complainant Lootably, Inc.
TRIAL DATE: Not Set
PROOF OF SERVICE: OK
PROCEEDING: Demurrer with Motion to
Strike Second Amended Cross-Complaint
OPPOSITION: 15 November 2024
REPLY: 20
November 2024
TENTATIVE: Cross-Defendant
Lu’s demurrer to the SACC is overruled and motion to strike is denied. Cross-Defendant
must file an Answer by December 13, 2024.
An OSC Re: Answer is set for December 24, 2024, at 8:30 a.m. and a Case
Management Conference is also set for that date and time. Moving party to give notice.
Background
on June 23, 2023, Patrick Muh-En Lu (“Plaintiff”) filed a Complaint
against Lootably, Inc. (“Defendant” or “Lootably”) and Does 1 to 10. Plaintiff
seeks declaratory relief regarding whether his shares in Defendant have vested
making him a 25% owner.
On August 18, 2023,
Defendant filed a Cross-Complaint against Plaintiff and Roes 1 to 50. The
Cross-Complaint alleges six causes of action: (1) Recission of Employment
Agreement, (2) Recission of Stock Restriction Agreement, (3) Intentional
Misrepresentation, (4) Negligent Misrepresentation, (5) Breach of Fiduciary
Duty, and (6) Breach of Contract.
On September 18,
2023, the Plaintiff/Cross-Defendant Lootably filed a demurrer to the
Cross-Complaint. Defendant/Cross-Complainant opposes the demurrer. On February
24, 2024, the court sustained the demurrer to the Cross-Complaint with leave to
amend and found that Delaware law applied to the Employment Agreement, the
Stock Restriction Agreement, as well as any other dispute arising from said
agreements. (Order of 02/09/2024.)
On February 23,
2024, Defendant/Cross-Complainant Lootably filed the First Amended
Cross-Complaint (“FACC”) alleging the same six causes of action. On May 22,
2024, Plaintiff/Cross-Defendant Lu’s demurrer to the FACC was sustained with
leave to amend as to the first, second, third, and fourth causes of action and
overruled as to the fifth cause of action for breach of fiduciary duty.
On June 21, 2024,
Cross-Complainant Lootably filed the operative Second Amended Cross-Complaint
(“SACC”) alleging three causes of action for (1) breach of fiduciary duty, (2)
breach of employment agreement, and (3) breach of contract – proprietary information
agreement. Plaintiff/Cross-Defendant Lu now demurs to the first and third
causes of action in the SACC. The matter is now before the court.
LEGAL STANDARDS
A. Demurrer
A demurrer is an
objection to a pleading, the grounds for which are apparent from either the
face of the complaint or a matter of which the court may take judicial notice.
(CCP, § 430.30, subd. (a); see also Blank v. Kirwan (1985) 39 Cal.3d
311, 318.)¿“To survive a demurrer, the complaint need only allege facts
sufficient to state a cause of action; each evidentiary fact that might
eventually form part of the plaintiff’s proof need not be alleged.”¿(C.A. v.
William S. Hart Union High School Dist. (2012) 53 Cal.4th
861, 872.)¿For the purpose of testing the sufficiency of the cause of action, the
demurrer admits the truth of all material facts properly pleaded.¿ (Aubry v.
Tri-City Hospital Dist. (1992) 2 Cal.4th 962, 966-967.)¿A demurrer “does
not admit contentions, deductions or conclusions of fact or law.”¿(Daar v.
Yellow Cab Co. (1967) 67 Cal.2d 695, 713.)¿¿
B. Motion to Strike
¿Any party, within the time allowed to respond to a pleading
may serve and file a notice of motion to strike the whole or any part thereof.
(CCP, § 435(b)(1); CRC, rule 3.1322(b).) The court may, upon a motion or at any
time in its discretion and upon terms it deems proper: (1) strike out any
irrelevant, false, or improper matter inserted in any pleading; or (2) strike
out all or any part of any pleading not drawn or filed in conformity with the
laws of California, a court rule, or an order of the court. (CCP, § 436(a)-(b);
Stafford v. Shultz (1954) 42 Cal.2d 767, 782 [“Matter in a pleading
which is not essential to the claim is surplusage; probative facts are
surplusage and may be stricken out or disregarded”].)¿¿¿¿
C. Leave to Amend
“Where the defect raised by a motion to strike or by demurrer
is reasonably capable of cure, leave to amend is routinely and liberally
granted to give the plaintiff a chance to cure the defect in question.” (CLD
Construction, Inc. v. City of San Ramon (2004) 120 Cal.App.4th 1141, 1146.)
The burden is on the complainant to show the Court that a pleading can be
amended successfully. (Goodman v. Kennedy (1976) 18 Cal.3d 335, 348.)¿¿¿
Request
for Judicial Notice
The Court may
take judicial notice of records of any court of record of the United States.
(Evid. Code, § 452(d)(2).) However, the court may only judicially notice the
existence of the record, not that its contents are the truth. (Sosinsky v.
Grant (1992) 6 Cal.App.4th 1548, 1565.)
Cross-Defendant Lu requests that the court take judicial
notice “of all record of this Court in
this Case No. 23STCV14660.”
The court denies Cross-Defendant Lu’s request for judicial
notice on the basis that the request is overbroad, and Cross-Defendant Lu fails
to show that every record in Case No. 23STCV14660 is relevant to this Motion.
“Although a court may judicially notice a variety of matters (Evid. Code, §¿450
et seq.), only relevant material may be noticed.” (American Cemwood Corp. v.
American Home Assurance Co. (2001) 87 Cal.App.4th 431, 441, fn. 7.) In addition, Evid. Code § 453 requires
Cross-Defendant Lu to furnish “the court with sufficient information to enable
it to take judicial notice of the matter.” Here, the request for judicial
notice contains no attachments that would permit the court to determine that
all records in Case No. 23STCV14660 are the proper subject for judicial notice.
Accordingly, the request for judicial notice is denied.
I. Discussion
Cross-Defendant Lu argues that
the court sustained the prior demurrer and only gave Lootably leave to amend
the first, second, third, and fourth causes of action. Instead of complying
with the May 22, 2024 Order, Cross-Complainant Lootably amended the fifth cause
of action breach of fiduciary duty, despite the demurrer being overruled as to
that cause of action and added a new cause of action for breach of contract-
Proprietary Information Agreement. “The plaintiff may not amend the complaint
to add a new cause of action without having obtained permission to do so,
unless the new cause of action is within the scope of the order granting leave
to amend.” (Harris v. Wachovia Mortgage, FSB (2010) 185 Cal.App.4th
1018, 1023.)
A. First
Cause of Action – Breach of Fiduciary Duty
In its May 22, 2024 Order, the
court overruled the demurrer to the fifth cause of action for breach of
fiduciary duty. Cross-Defendant Lootably asserts that Lu improperly amended the
breach of fiduciary claim in the SACC by adding the allegation that “Lu also
breached his fiduciary duties to
LOOTABLY by, among other things, seeking to develop Playfull outside of
LOOTABLY.” (SACC, ¶ 26.) The court finds that the above allegations relate to
previous allegations asserting that since Lu was the Director, President, and Chief Operating
Officer of Lootably, Inc., Lu owed a duty of care and a fiduciary duty that
“precluded Lu from using company money for purpose of self-entertainment and
self-promotion wholly unrelated to LOOTABLY’s business interests”, including
not developing Playfull.com outside of Lootably. (See FACC, ¶¶ 52, 53; SACC, ¶¶
18, 25, 26.) In other words, the new allegation does not give rise to a new
claim for breach of fiduciary because the Cross-Complainant is not alleging a
new cause of action by adding a factual allegation that arises out of
the same operative facts giving rise to the original claim for breach of
fiduciary duty.
The court finds the new
allegation is within the scope of the order granting leave to amend because it clarifies
facts relating to the breach of fiduciary claim and does not add a new cause of
action. In addition, the court fails to find the allegation asserting that Lu
sought to develop Playfull.com outside of Lootably to be an allegation
contradicted by the prior pleadings, such that it is a sham allegation. The
fact that the CEO of Lootably, Ethan Geczi knew that Lu was not going to sell
Payfull.com does not necessarily mean that Lu did not violate the Employment
Agreement and his fiduciary duties by seeking to develop Playfull outside of
Lootably. Whether Lu was free to develop Playfull.com outside of Lootably given
his status as the Director, President, and Chief
Operating Officer of Lootably is a disputed question of fact not subject to
adjudication on demurrer. (See Fremont Indemnity Co. v. Fremont General Corp. (2007)
148 Cal.App.4th 97, 113-114.) Moreover, a demurrer must dispose of an
entire cause of action to be sustained. (Id., at p. 119.) Therefore, the proper
manner to challenge the new allegation that Lu sought to develop Playfull.com
outside of Lootably is by a motion to strike, not by demurrer.
Accordingly, the demurrer to the first cause of action for
breach of fiduciary duty is overruled.
B. Third
Cause of Action – Breach of Contract – Proprietary Information
The Defendant similarly demurs
to the third cause of action on the basis that it is a new cause of action that
falls outside the court’s May 22, 2024 Order granting leave to amend the first,
second, third and fourth cause of action for (1)
Recission of Employment Agreement, (2) Recission of Stock Restriction
Agreement, (3) Intentional Misrepresentation, and (4) Negligent
Misrepresentation.
In opposition,
Cross-Complainant Lootably asserts that the third cause of action bolsters an
existing cause of action. The third cause of action alleges for the first time
that Lu and Lootably entered into a Proprietary Information Agreement (“PIA”)
in connection with Lu’s employment with Lootably and breached the PIA by
seeking to develop Playfull.com outside of Lootably. (SACC, ¶¶ 17, 37, Ex. C.)
“The granting of leave to amend after a demurrer is sustained on one ground
does not give the plaintiff a license to add any possible cause of action that
might not be subject to dismissal on that ground.” (Zakk v. Diesel
(2019) 33 Cal.App.5th 431, 456.) “Otherwise, there would be virtually no
limitation on amendments following the sustaining of a demurrer.” (Id.)
Cross-Defendant Lu
failed to demur to the sixth cause of action in the FACC alleging breach of the
Employment Agreement. The Employment Agreement references the PIA and states in
the relevant part as follows:
3. Employment
Policies; Proprietary Information. You will be subject to all applicable employment and other
policies of the Company . . . Concurrently with your execution of this Offer
Letter and without limiting the generality of the foregoing, you acknowledge
and confirm your continuing obligations under the Proprietary Information and
Inventions Assignment Agreement, dated as of April 21, 2023, between you and
the Company (attached hereto as Exhibit A, the “Proprietary Information
Agreement”). In the event that the terms and conditions set forth in this Offer
Letter conflict with the terms and conditions set forth in the Proprietary
Information Agreement, the terms and conditions most favorable to the Company
shall govern and control.
(FACC, Ex. A, ¶ 3; see also SACC Ex. A, ¶ 3; Ex. C.)
As the Employment
Agreement explicitly references the PIA and requires Cross-Defendant Lu to
comply with the PIA, the court is not persuaded that alleging breach of the PIA
gives rise to a new cause of action that falls outside the scope of the order
granting leave to amend as Defendant did not demurrer to the claim for breach
of the Employment Agreement. In other words, compliance with PIA is a
contractual obligation that arises out of both the Employment Agreement and the
PIA. The court finds that the claim alleging breach of the PIA does not fall
outside the scope of the order granting leave to amend because it arises out of
the claim alleging breach of the Employment Agreement, a claim left
unchallenged by the Cross-Defendant Lu in its prior demurrer.
Secondly, contrary
to the Cross-Defendant Lu’s assertion, CCP § 426.30 does not bar
Cross-Complainant Lootably from alleging a new cause of action in this action.
Section 426.30 applies only to bar the allegations of claims in a new action
when that claim could have been raised in a Cross-Complaint in a prior action.
Section 326,30 provides “if a party against whom a complaint has been filed and
served fails to allege in a cross-complaint any related cause of action which
(at the time of serving his answer to the complaint) he has against the
plaintiff, such party may not thereafter in any other action assert
against the plaintiff the related cause of action not pleaded.” (Id.
[italics added]; see Align Technology, Inc. v. Tran (2009) 179
Cal.App.4th 949, 962 [new claims barred under the compulsory cross-complaint
statue because they were logically related to the prior action and were not
asserted in the prior action].)
Third,
Cross-Defendant Lu argues that under Delaware law, Lootably cannot plead
interpretation an interrelation of a contract that is inconsistent with the
unambiguous language of a written contract. (Phunware, Inc. v. Excelmind
Group Limited (D. Del. 2015) 117 F.Supp.3d 613, 625 [“The court may grant a
motion to dismiss when unambiguous language of a contract contradicts
plaintiffs' allegations in a complaint.”].)
The court does not
find that the third cause of action raises allegations contradicted by the PIA.
As pointed out and alleged in the SACC:
Exhibit “C” to the PIA afforded Lu with the
opportunity to disclose any prior proprietary information, prior creations,
technology, software, programs, and prior commitments he wanted to be excluded
from the PIA’s reach. Under the PIA, Lus waives all rights to Playfull, and any
other program or intellectual property he may claim is his. Lu was aware of the
consequences of not listing any prior proprietary information, prior creations,
technology, software, programs, and prior commitments on Exhibit "C"
to the PIA.
(SACC, ¶ 35.)
As the above
allegations are taken as true and are not contradicted by the PIA, Lu appears
to have waived the rights to Playfull.com such that if Lu did develop Playfull outside
of Lootably, he did so in breach of the PIA and the Employment Agreement.
Furthermore, whether Lu waived the rights to Playfull.com by not including it
in attachment Exhibit C of the PIA and whether Lu did in fact develop
Playfull.com outside of Lootably are all disputed issues of fact not subject to
demurrer.
For the reasons set
forth above, the demurrer to the third cause of action is overruled.
Motion to Strike
Cross-Defendant Lu seeks to
strike the following allegations:
“In passing on the correctness
of a ruling on a motion to strike, judges read allegations of a pleading
subject to a motion to strike as a whole, all parts in their context, and
assume their truth.” (Clauson v. Superior Court (1998) 67 Cal.App.4th
1253, 1255.) Having read the moving papers, the court fails to see why
Paragraphs 11, 12, 15, 17, 20, 21, 22, 26, and 34 to 40 should be stricken.
Cross-Defendant Lu fails to show that such allegations are irrelevant, false,
or improper.
Therefore, the motion to strike
is denied.
Conclusion
Cross-Defendant Lu’s demurrer to the SACC is
overruled and motion to strike is denied. Cross-
Defendant
must file an Answer by December 13, 2024.
An OSC Re: Answer is set for
December
24, 2024, at 8:30 a.m. and a Case Management Conference is also set for that
date and
time. Moving party to give notice.
[1]
Pursuant to CCP §§ 430.41 and 435.5(a), the meet and confer requirement has
been met. (Smith Decl., ¶ 2.)