Judge: John C. Gastelum, Case: 1791ManagementLPvs.BRCInc., Date: 2023-03-27 Tentative Ruling

(1) Demurrer to Complaint (2) Joinder (3) Motion to Dismiss (4) CMC

Tentative Ruling: (2-3) Defendants Black Rifle Coffee Company LLC, BRC Inc., and Authentic Brands LLC (“Defendants”) move to dismiss the Complaint of Plaintiff 1791 Management LP (“Plaintiff”) on the ground that a mandatory forum selection clause contained in the contract underlying Plaintiff’s claims requires litigation in New York.  On August 24, 2022, Defendant Engaged Capital, LLC’s (“Engaged”) filed a Notice of Joinder in Motion to Dismiss. 

The forum selection clause at issue is mandatory and Plaintiff, as the party opposing the enforcement of the forum selection clause, has not met its burden of proof to show that enforcement would be unfair or unreasonable.  (See Korman v. Princess Cruise Lines, Ltd. (2019) 32 Cal.App.5th 215, 216; CQL Original Prod., Inc. v. Nat’l Hockey League Players’ Assn. (1995) 39 Cal.App.4th 1347, 1354.) 

Though the Warrant Agreement is between SilverBox Engaged Merger Corp I (“SilverBox”) and Continental Stock Transfer & Trust Company, Defendant BRC Inc. is alleged to have assumed SilverBox’s rights and obligations under the Warrant Agreement.  (Compl., ¶ 7.) 

Moreover, a forum selection clause may be enforced against a plaintiff who is not a party to the contract in question.  (Net2Phone, Inc. v. Superior Court (2003) 109 Cal.App.4th 583, 588.)  “The relevant inquiry . . . is whether (1) the third party is ‘closely related to the contractual relationship,’ and (2) the contractual forum state provides a ‘suitable alternative forum’ for the lawsuit.” (Id., at p. 587.)

Here, the mandatory forum selection clause is part of the Warrant Agreement, which is the basis for Plaintiff’s claims.  Under the first cause of action for Breach of Contract/Implied Covenant of Good Faith and Fair Dealing, Plaintiff alleges that Defendants breached the Warrant Agreement, thereby depriving it of receiving the full benefits thereof.  (Compl., ¶¶ 12, 14.)  Under the second cause of action, Plaintiff alleges Defendants breached the fiduciary duty owed to Plaintiff as holder of the Warrants by failing to abide by the terms of the Warrant Agreement.  (Compl., ¶¶ 18-19.)  Under the third cause of action, Plaintiff alleges that he justifiably relied on Defendants to abide with the terms and conditions of the Warrant Agreement and purchased Warrants which it otherwise would not have purchased as a result of Defendants’ acts, errors, and omissions.  (Compl., ¶¶ 24-25.)  Under the fourth cause of action, Plaintiff alleges that Defendants had no intention of abiding by the terms of the Warrant Agreement, Plaintiff justifiably relied on Defendants’ failures to inform it that they would not be abiding in good faith with the terms, and Plaintiff purchased Warrants which it otherwise would not have purchased as a result.  (Compl., ¶¶ 30-31.)  Last, under the fifth cause of action, Plaintiff alleges Defendants purposely engaged in a course of conduct to drive up the share price of the Company’s Class A common stock, which course of conduct included failing to abide by the terms of the Warrant Agreement and redeeming the Warrants in accordance with the Redemption Notice.  (Compl., ¶ 36.)

Plaintiff is asserting claims based on the rights and obligations of the Warrant Agreement and, if Plaintiff prevails, it will reap the benefits of the Warrant Agreement that it alleges it was deprived of by Defendants’ conduct.  It would be unreasonable to allow Plaintiff to use the Warrant Agreement as the basis for its claims against Defendants while at the same time avoiding the forum selection clause.

Engaged’s Joinder in the Motion to Dismiss is GRANTED.  Plaintiff cites to Village Nurseries, L.P. v. Greenbaum (2002) 101 Cal.App.4th 26, Decker v. U.D. Registry, Inc. (2003) 105 Cal.App.4th 1382, and Barak v. The Quisenberry Law Firm (2006) 135 Cal.App.4th 654, to argue that Engaged’s Joinder in the Motion to Dismiss is ineffective.

Here, the reasoning in Barak is most apt.  Because the Motion to dismiss is based on a mandatory forum selection clause, it is Plaintiff’s burden to show that enforcement of the forum selection clause would be unfair or unreasonable.  This is similar to a motion to strike, where the complaint itself shows that the allegations qualify for treatment under section 425.16, as was the case in Barak. 

Further, the Complaint does not allege any specific conduct against Engaged.  Rather, it refers to Defendants collectively.  Thus, the allegations against Engaged are the same as the allegations against the moving Defendants, i.e., that it breached the Warrant Agreement, breached the fiduciary duty owed to Plaintiff under the Warrant Agreement, etc.  Under these circumstances, the Court finds Engaged’s Joinder to be proper.

Plaintiff argues that even if the Court finds that some causes of action are governed by the forum selection clause, public policy precludes application of the clause to Plaintiff’s fifth cause of action under Corporations Code section 25400.

The Corporate Securities Law of 1968 was enacted to effectuate “California’s policy [] to protect the public from fraud and deception in securities transactions.”  (Hall v. Superior Court (1983) 150 Cal.App.3d 411, 417.)  “The cornerstone of the law is section 25701, which provides, ‘Any condition, stipulation or provision purporting to bind any person acquiring any security to waive compliance with any provision of this law . . . is void.’ ”  (Ibid.)  Thus, “the right of a buyer of securities in California to have California law and its concomitant nuances apply to any future dispute arising out of the transaction is a ‘provision’ within the meaning of section 25701 which cannot be waived or evaded by stipulation of the parties to a securities transaction.”  (Id., at p. 418.)  The court in Hall held that a choice of Nevada law provision violated section 25701 and the public policy of California, such that enforcement of the forum selection clause was unreasonable.  (Ibid.)

As discussed above, the party opposing enforcement of a forum selection clause ordinarily bears the burden of showing why it should not be enforced.  “That burden, however, is reversed when the claims at issue are based on unwaivable rights created by California statutes. In that situation, the party seeking to enforce the forum selection clause bears the burden to show litigating the claims in the contractually-designated forum ‘will not diminish in any way the substantive rights afforded . . . under California law.’ ”  (Verdugo v. Alliantgroup, L.P. (2015) 237 Cal.App.4th 141, 147.)  “By definition, this showing requires the defendant to compare the plaintiff's rights if the clause is not enforced and the plaintiff's rights if the clause is enforced.”  (Id., at p. 157.)

Here, Defendants have not made any showing that Plaintiff’s substantive rights under California’s securities laws, which are made unwaivable by section 25701, would not be diminished in any way in the New York forum.  In Reply, Defendants argue enforcement would not diminish Plaintiff’s rights because section 25400 has been interpreted as virtually identical to section 9, subdivisions (a) and (e) of the Securities Exchange Act of 1934 and nothing precludes Plaintiff from bringing a section 9 claim in a New York forum.  However, this is insufficient to demonstrate that a section 9 claim in a New York forum would not diminish Plaintiff’s rights.  Plaintiff’s fifth cause of action does not limit itself to relief under section 25400.  Rather, it cites to section 25400 et seq.  Section 25401 states: It is unlawful for any person to offer or sell a security in this state, or to buy or offer to buy a security in this state, by means of any written or oral communication that includes an untrue statement of a material fact or omits to state a material fact necessary to make the statements made, in the light of the circumstances under which the statements were made, not misleading.  Defendants have made no showing that there is any identical provision in the Securities Exchange Act of 1934.

Also in Reply, Defendants represent that they are amendable to entering a binding stipulation that a New York court could apply California law to Plaintiff’s alleged section 25400 violations. 

In light of the above, if the parties, including Engaged, enter into a binding stipulation that a New York court must apply California law to Plaintiff’s alleged section 25400 violations, the Court is inclined to GRANT the Motion in its entirely.

If no stipulation is entered, the Court will DENY the Motion as to the fifth cause of action and GRANT the Motion as to the first through fourth causes of action. 

Defendants to give notice.

(1) Defendant Engaged Capital, LLC (“Engaged”) demurs to the Complaint of Plaintiff 1791 Management LP (“Plaintiff”) on the ground that all five causes of action for failure to state sufficient facts.

As the Motion to Dismiss has been granted as to the first through fourth causes of action, the Demurrer is MOOT as to those causes of action.  The only remaining issue is the fifth cause of action for:

(1) Violation of California Corporations Code section 25400 et seq.

The Complaint alleges one or more of the Defendants entered certain agreements with the owners of BRCC-LLC and other corporate insiders and by reason of the agreements, those owners and insiders would acquire, pursuant to performance based vesting metrics, shares of stock in the Company after the closing of the BCA in the event that the share price of the Company's Class A common stock exceeded certain designated values.  (Compl., ¶ 35.)  It further alleges that Defendants, in concert and conspiracy with one or more of those owners and insiders, and in violation of California Corporations Code section  25400 et seq., purposely engaged in a course of conduct to drive up the share price of the Company’s Class A common stock so as to meet the designated values, which course of conduct included, without limitation, failing to abide by the terms and conditions of the Warrant Agreement as set forth above, issuing the Redemption Notice, and redeeming the Warrants in accordance with the Redemption Notice.  (Compl., ¶ 36.)

Plaintiff contends the facts are sufficient to state a cause of action pursuant to Corporations Code section 25401, which provides that it is unlawful for any person to offer to buy or sell or to buy or sell a security in this state by means of any written or oral communication that includes an untrue statement of a material fact or omits to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading.

The Complaint does not allege that any of the Defendants, including Engaged, used written or oral communications that included an untrue statement of material fact, or omitted to state any material fact, in an offer to buy or sell a security.  Further, the Complaint does not include any factual allegations against Engaged in particular and, instead, references Defendants as a whole.  The Court finds the Complaint fails to state a cause of action against Engaged for violation of California Corporations Code section 25400 et seq.

Thus, the Demurrer to the fifth cause of action is SUSTAINED with 20 days’ leave to amend.

Engaged to give notice.