Electro Scan, Inc., a Delaware corporation, et al. v. Crown Electrokinetics Corp., a Delaware corporation; et al.

• Court: District Court, E.D. California
• Decided: May 7, 2026
• Docket: 2:25-cv-02442
• Status: Unknown

Opinion

1 2 3 4 5 6 7 8 UNITED STATES DISTRICT COURT 9 EASTERN DISTRICT OF CALIFORNIA 10 11 ELECTRO SCAN, INC., a No. 2:25-cv-02442-JAM-CSK Delaware corporation, et al., 12 Plaintiffs, 13 ORDER GRANTING DEFENDANTS’ v. MOTIONS TO DISMISS WITH 14 PREJUDICE AS TO PLAINTIFFS’ CROWN ELECTROKINETICS CORP., FEDERAL CLAIMS 15 a Delaware corporation; et al., 16 Defendants. 17

18 19 This matter is before the Court on two motions to dismiss. 20 Defendants Crown Electrokinetics Corp. and Element 82, Inc. move 21 to dismiss all claims against them (ECF No. 8, “Crown Mot.”); 22 Defendant Croxall does the same (ECF No. 11, “Croxall Mot.”). 23 The motions are fully briefed.1 See ECF No. 18, Plaintiffs’ 24 Opposition to Crown Electrokinetics Corp. and Element 82, Inc.’s 25 Motion to Dismiss (“Crown Opp’n”); ECF No. 19, Defendants Crown 26 Electrokinetics Corp. and Element 82, Inc.’s Reply (“Crown 27 1 These motions were determined to be suitable for decision 28 without oral argument. See ECF No. 20; E.D. Cal. L.R. 230(g). 1 Reply”); ECF No. 14, Plaintiffs’ Opposition to Croxall’s Motion 2 to Dismiss (“Croxall Opp’n”); ECF No. 15, Defendant Croxall’s 3 Reply (“Croxall Reply”).2 For the reasons detailed below, 4 Defendants’ motions are granted as to all of Plaintiffs’ federal 5 claims. 6 I. FACTUAL ALLEGATIONS AND PROCEDURAL BACKGROUND 7 This case stems from Plaintiff Electro Scan, Inc., “an 8 industry leader in pipeline inspection and leak detection 9 technology,” and several individual employees (collectively 10 “Plaintiffs”) suing Crown Electrokinectics Corp. (“Crown”), “its 11 subsidiary Element 82, Inc. (‘Element 82’), and individual 12 executives Douglas Croxall and David Kinsella” for “fraudulently 13 induc[ing] Electro Scan into entering into an Exclusivity 14 Agreement . . . in connection with its proprietary ‘SWORDFISH’ 15 lead pipe detection technology.” ECF No. 1, Compl. ¶¶ 1-2. 16 Plaintiffs initiated this case in August 2025, asserting five 17 federal securities-related claims and 13 state law claims against 18 Defendants. 19 After Defendants Crown and Element 82’s filed their motion 20 to dismiss in response to Plaintiffs’ complaint, the hearing date 21 on the motion was rescheduled, and Plaintiffs were granted an 22 extension to respond based on representations by Plaintiffs’ 23 counsel. See ECF No. 16. On January 12, 2026, the Court reset a 24 briefing scheduling, ordering Plaintiffs to file an opposition to 25 Crown and Element 82’s motion to dismiss no later than January 26 26, 2026. Id. Plaintiffs’ counsel, however, did not file their 27 2Defendants’ unopposed request for judicial notice (ECF No. 8-2) 28 is granted. Fed. R. Evid. 201. 1 opposition to Crown and Element 82’s motion to dismiss until 2 January 30; the opposition included an accompanying declaration, 3 citing an “inadvertent[] calendar[ing]” error as the reason for 4 the late filing. See ECF No. 18-2. In Defendants Crown and 5 Element 82’s original reply brief – filed before the Court reset 6 the scheduling deadlines – there were emails and other documents 7 demonstrating Plaintiffs’ counsel had previously failed to 8 properly calendar and calculate the timing for her opposition. 9 See ECF No. 13-1 (miscalculating the 14-day response time 10 required under E.D. Cal. L.R. 230(c)). Instead of construing the 11 untimely opposition as a non-opposition, the Court has considered 12 the merits of Plaintiffs’ brief, but will impose sanctions in the 13 amount of $200 – or $50 per day the filing was late. See E.D. 14 Cal. L.R. 230(c). Plaintiffs’ counsel shall pay $200 to the 15 Clerk of the Court no later than May 27, 2026. 16 II. OPINION 17 A. Legal Standard 18 A Rule 12(b)(6) motion challenges the sufficiency of a 19 complaint for “failure to state a claim upon which relief can be 20 granted.” Fed. R. Civ. P. 12(b)(6). The motion may be granted 21 only if “the complaint lacks a cognizable legal theory or 22 sufficient facts to support a cognizable legal theory.” 23 Mendiondo v. Centinela Hosp. Med. Ctr., 521 F.3d 1097, 1104 (9th 24 Cir. 2008). The court assumes all factual allegations are true 25 and “construe[s] them in the light most favorable to the 26 nonmoving party.” Parks Sch. of Bus., Inc. v. Symington, 51 27 F.3d 1480, 1484 (9th Cir. 1995) (citing Everest & Jennings, Inc. 28 v. Am. Motorists Ins. Co., 23 F.3d 226, 228 (9th Cir. 1994)). 1 That said, if the complaint’s allegations do not “plausibly give 2 rise to an entitlement to relief,” the motion must be granted. 3 Ashcroft v. Iqbal, 556 U.S. 662, 679 (2009). 4 A complaint need contain only a “short and plain statement 5 of the claim showing that the pleader is entitled to relief,” 6 Fed. R. Civ. P. 8(a)(2), not “detailed factual allegations.” 7 Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007) (citations 8 omitted). However, this rule demands more than unadorned 9 accusations; “sufficient factual matter” must make the claim at 10 least plausible. Iqbal, 556 U.S. at 678. In the same vein, 11 conclusory or “formulaic recitation[s] of the elements” do not 12 alone suffice. Id. (internal quotations and citations removed). 13 “A claim has facial plausibility when the plaintiff pleads 14 factual content that allows the court to draw the reasonable 15 inference that the defendant is liable for the misconduct 16 alleged.” Id. 17 In granting a motion to dismiss, a court must also decide 18 whether to grant leave to amend. See Fed. R. Civ. P. 15. Leave 19 to amend should be given freely where there is no “undue delay, 20 bad faith or dilatory motive on the part of the movant, . . . 21 undue prejudice to the opposing party by virtue of allowance of 22 the amendment, [or] futility of amendment . . . .” Foman v. 23 Davis, 371 U.S. 178, 182 (1962); Eminence Cap., LLC v. Aspeon, 24 Inc., 316 F.3d 1048, 1052 (9th Cir. 2003). Dismissal without 25 leave to amend is proper only if “‘the complaint could not be 26 saved by any amendment.’” Intri-Plex Techs., Inc. v. Crest 27 Grp., Inc., 499 F.3d 1048, 1056 (9th Cir. 2007) (quoting In re 28 Daou Sys., Inc., 411 F.3d 1006, 1013 (9th Cir. 2005)). 1 B. Analysis 2 1. Federal Securities Claims 3 Defendants Crown and Element 82 move to dismiss the federal 4 counts naming them, Counts One, Three, and Four, arguing 5 Plaintiffs failed to satisfy the heightened pleading 6 requirements of Federal Rule of Civil Procedure 9(b) and the 7 Private Securities Litigation Reform Act (“PSLRA”), Plaintiffs 8 failed to identify a prospectus and therefore cannot state a 9 claim under section 12(a)(2) of the Securities Act, Plaintiffs 10 failed to plead an actionable misstatement or omission as to 11 Counts One and Four, and Count Three fails because there is no 12 private right of action under the identified statute. See Crown 13 Mot. Defendant Croxall moves to dismiss Counts One through 14 Five, making the same arguments as to Counts One, Three, and 15 Four, and averring Counts Two and Five fail because they derive 16 from Counts One and Four and do not include any facts or 17 information substantiating the requisite elements of the claims 18 asserted under the Securities Act. See Croxall Mot. 19 Plaintiffs’ oppositions generally assert their claims are 20 sufficiently pled and otherwise request dismissal without 21 prejudice. See Crown Opp’n and Croxall Opp’n. 22 A claim “grounded in fraud” is subject to Federal Rule of 23 Civil Procedure 9(b). Vess v. Ciba-Geigy Corp. USA, 317 F.3d 24 1097, 1103-04 (9th Cir. 2003). These include claims under the 25 Securities Act and the Exchange Act. Id. (citing and quoting 26 Ninth Circuit, First Circuit, Third Circuit, and Fifth Circuit 27 cases finding heightened pleading standards apply to various 28 claims under the 1933 Securities Act); In re Stac Electronics 1 Securities Litigation, 89 F.3d 1399, 1404 (9th Cir. 1996) (“It 2 is well established that claims brought under Rule 10b–5 and 3 Section 10(b) must meet the particularity requirements of 4 Fed.R.Civ.P. 9(b).”); see also Crown Mot. at 13; Croxall Mot. at 5 10. “Rule 9(b) demands that, when averments of fraud are made, 6 the circumstances constituting the alleged fraud ‘be “specific 7 enough to give defendants notice of the particular misconduct 8 . . . so that they can defend against the charge and not just 9 deny that they have done anything wrong.”’” Vess, 317 F.3d at 10 1106 (quoting Bly-Magee v. California, 236 F.3d 1014, 1019 (9th 11 Cir. 2001) and Neubronner v. Milken, 6 F.3d 666, 672 (9th Cir. 12 1993). Indeed, “[a]verments of fraud must be accompanied by 13 ‘the who, what, when, where, and how’ of the misconduct 14 charged.” Id. (quoting Cooper v. Pickett, 137 F.3d 616, 627 15 (9th Cir.1997)); see also In re GlenFed, Inc. Securities 16 Litigation, 42 F.3d 1541, 1548 (9th Cir. 1994) (“The plaintiff 17 must set forth what is false or misleading about a statement, 18 and why it is false. In other words, the plaintiff must set 19 forth an explanation as to why the statement or omission 20 complained of was false or misleading.”) (superseded by statute 21 on other grounds). 22 a. Count One 23 Plaintiffs’ first claim is under 15 U.S.C. § 77l(a)(2). 24 Compl. at 13-14. Aside from including verbatim language from 25 the statute, the only facts under this cause of action are in 26 paragraph 47, which reads: “Defendants and each of them 27 ‘offered’ and ‘sold’ securities within the meaning of the 28 Securities Act because they solicited Plaintiffs’ and others’ 1 investments in the Crown/Element 82 platform and actively and 2 knowingly participated in the offer and sale of securities to 3 Plaintiffs and others, and/or offered or sold securities they 4 held or controlled to Plaintiffs. The Securities are not subject 5 to any applicable exemption.” Compl. ¶ 47. 6 It is undisputed that Section 12(a)(2) of the Securities 7 Act creates liability for offers, sales, or communications 8 related to the sale of securities by means of prospectus. See 9 15 U.S.C. § 77l(a)(2); Crown Mot. at 13-14; Crown Opp’n at 3 10 (noting civil liability lies when offer or sale is by means of a 11 prospectus or via “oral communications related to a prospectus 12 . . . .”); Croxall Mot. at 10-11; Gustafson v. Alloyd Co., Inc., 13 513 U.S. 561, 567-68 (1995) (“[T]he phrase ‘oral communication’ 14 is restricted to oral communications that relate to a 15 prospectus.”). As the Supreme Court noted, “[t]hree sections of 16 the 1933 Act are critical in [interpreting the term prospectus]: 17 § 2(10), which defines a prospectus; § 10, which sets forth the 18 information that must be contained in a prospectus; and § 12, 19 which imposes liability based on misstatements in a prospectus.” 20 Gustafson, 513 U.S. at 568. And, critically, “[t]he primary 21 innovation of the 1933 Act was the creation of federal duties— 22 for the most part, registration and disclosure obligations—in 23 connection with public offerings.” Id. at 571 (citations 24 omitted). In Gustafson, the Supreme Court held, “[T]he term 25 ‘prospectus’ refers to a document soliciting the public to 26 acquire securities.” Id. at 574. 27 As correctly noted by Defendants, Plaintiffs’ complaint 28 fails to identify any prospectus or communication related to 1 one, which is fatal to Count One. Crown Mot. at 14; Croxall 2 Mot. at 11. Plaintiffs’ only response in their opposition is to 3 argue “[w]hether the communications at issue, whether oral, by 4 electronic mail or published press releases, functioned as 5 selling materials is a fact question.” See Crown Opp’n at 4. 6 Not only do Plaintiffs fail to identify facts in their complaint 7 supporting the existence of a prospectus, Plaintiffs fail to 8 explain why their complaint would be saved by amendment. See 9 id. The Court grants Defendants’ motions as to Count One and 10 finds dismissal with prejudice is appropriate, since it is clear 11 authorizing leave to amend would be futile. See Foman v. Davis, 12 371 U.S. 178, 182 (1962); Eminence Cap., LLC v. Aspeon, Inc., 13 316 F.3d 1048, 1052 (9th Cir. 2003); Intri-Plex Techs., Inc. v. 14 Crest Grp., Inc., 499 F.3d 1048, 1056 (9th Cir. 2007). 15 b. Count Three 16 It is undisputed that there is no private right of action 17 under 15 U.S.C. § 77q(a), the statute identified as the basis 18 for Count Three. See Crown Mot. at 16; Crown Opp’n at 4; 19 Croxall Mot. at 11. Nevertheless, Plaintiffs request leave to 20 amend, despite “acknowledge[ing] that Section 17(a) does not 21 support a standalone private damages claim . . . .” Crown Opp’n 22 at 4. Given that there is no legal basis for Plaintiffs’ claim, 23 Defendants’ motions are granted with prejudice. See In re 24 Washington Public Power Supply System Securities Litigation, 823 25 F.2d 1349, 1355, 1358 (9th Cir. 1987) (“There simply is no 26 indication, explicit or implicit, of legislative intent to 27 create a private right of action under section 17(a). . . . [N]o 28 private right of action lies under section 17(a) . . . .”). 1 c. Count Four 2 Defendants move to dismiss Count Four, arguing Plaintiffs’ 3 Section 10(b) of the Exchange Act and Rule 10b-5 claim fails to 4 identify any actional misstatement or omission, especially under 5 the PLRA and Rule 9(b)’s heightened pleading requirements. 6 Crown Mot. at 14-15; Croxall Mot. at 11-13. Plaintiffs aver 7 omissions and “half-truths” are the crux of this claim, arguing 8 their claims are sufficiently pled by citing a number of 9 paragraphs of their complaint and focusing on statements and the 10 alleged state of mind of defendant Croxall. See Crown Opp’n at 11 4-6; Croxall Opp’n at 4-5. 12 Tellingly, none of the paragraphs cited by Plaintiffs are 13 within Count Four of their complaint. Compare Crown Opp’n at 4- 14 6 and Croxall Opp’n at 4-5 with Compl. ¶¶ 60-65. Moreover, as 15 argued by Defendants, “Plaintiffs do not allege who made the 16 supposed statements, when or where they were made, or how they 17 were false when made,” as required by Rule 9(b). Crown Mot. at 18 14 (citing Cooper v. Pickett, 137 F.3d 616 (9th Cir. 1997)). 19 Nor do Plaintiffs identify any affirmative statements “and 20 specify why they are misleading by omission.” Id. The Ninth 21 Circuit has made abundantly clear Rule 9(b) demands a “plaintiff 22 [] set forth what is false or misleading about a statement, and 23 why it is false. In other words, the plaintiff must set forth an 24 explanation as to why the statement or omission complained of 25 was false or misleading.” In re GlenFed, Inc. Securities 26 Litigation, 42 F.3d 1541, 1548 (9th Cir. 1994) (superseded by 27 statute on other grounds); see also Vess, 317 F.3d at 1106; 28 Pickett, 137 F.3d at 627. Plaintiffs’ complaint is wholly 1 deficient under this standard; Plaintiffs have not included any 2 facts substantiating a requisite element of a claim under Rule 3 10(b). Accordingly, Defendants’ motions are granted as to Count 4 Four.3 5 Both Defendants note the background facts included in the 6 complaint that Plaintiffs claim relate to Count Four are just 7 conclusory allegations regarding meetings or involve conduct 8 that occurred after the exclusivity agreement was executed, 9 meaning they cannot support a claim under Section 10(b) and Rule 10 10b-5 as a matter of law. See Crown Reply at 3; Croxall Reply 11 at 3. Macquarie Infrastructure Corp. v. Moab Partners, L.P., 12 601 U.S. 257 (2024) and In re VeriFone Securities Litigation, 11 13 F.3d 865 (9th Cir. 1993) cited by Defendants, are instructive 14 here. The Supreme Court recently reiterated that “[p]ure 15 omissions are not actionable” under the Exchange Act and Rule 16 10b-5. Macquarie, 601 U.S. at 259. Instead:

17 The Rule prohibits omitting material facts necessary to make the “statements made . . . not misleading.” 18 Put differently, it requires disclosure of information necessary to ensure that statements already made are 19 clear and complete (i.e., that the dessert was, in fact, a whole cake). This Rule therefore covers half- 20 truths, not pure omissions. Logically and by its plain text, the Rule requires identifying affirmative 21 assertions (i.e., “statements made”) before determining if other facts are needed to make those 22 statements “not misleading.” 23 3 Plaintiffs include a line in their opposition to Crown’s Motion 24 to Dismiss for a “Request for Judicial Notice of Crown’s September 19, 2024 press release titled ‘Crown Element 82 25 Division Secures $10M Contract’ is hereby made.” Crown Opp’n at 6; ECF No. 18-1. Plaintiffs’ request is denied as moot. 26 Plaintiffs do not cite any portions of the complaint relating to 27 this information, and it does not alter what has been insufficiently pled in the complaint, nor the Court’s ruling on 28 Defendants’ motions as to Count Four. 1 Id. at 264. Nor does liability attach when a “prediction proves 2 to be wrong in hindsight [since it would] not render the 3 statement untrue when made.” VeriFone, 11 F.3d at 871. In 4 Verifone, the Ninth Circuit affirmed dismissal with prejudice of 5 a number of securities-related claims, including one under 6 section 10(b), for the failure to identify specific, misleading 7 statements and “actionable misstatement[s] of fact or omission,” 8 although it was a ruling on an amended complaint. 11 F.3d at 9 870-72. The Court finds that allowing Plaintiffs to amend this 10 claim would be futile. Plaintiffs have not provided any 11 additional facts or justification for authorizing leave to 12 amend; instead, their oppositions are replete with conclusory 13 assertions, none of which explain the lack of factual detail to 14 support allegations of fraud or material omissions in their 15 complaint. See Crown Opp’n at 6 (“At the Rule 12 state, such 16 allegations suffice, particularly where, as here, discovery is 17 likely to reveal the reckless of such statements made to induce 18 the Plaintiffs.”). Accordingly, Defendants’ motions as to Count 19 Four are granted with prejudice. 20 d. Counts Two and Five 21 Defendant Croxall moves to dismiss Counts Two and Five of 22 Plaintiffs’ complaint since they are derivative of Counts One 23 and Four, respectively. See Croxall Mot. at 13 (“Counts Two and 24 Five assert “control-person” liability against Croxall under 25 Section 15 of the Securities Act and Section 20(a) of the 26 Exchange Act. Both provisions require a viable primary 27 violation and actual control over the primary violator. [] 28 Because [] Plaintiffs have failed to state any primary violation 1 under either Section 12(a)(2) or Rule 10b-5, their derivative, 2 vicarious liability claims necessarily fail as a matter of law 3 and should be dismissed with prejudice.”). Plaintiffs do not 4 dispute this, instead arguing “a primary violation and control” 5 supporting these “[c]ontrol-person claims” have been 6 sufficiently pled. Croxall Opp’n at 5. The Court agrees with 7 Defendant Croxall, that because Plaintiffs’ underlying claims 8 have been dismissed with prejudice, Plaintiffs’ derivative 9 claims fail as a matter of law. Accord In re Rigel 10 Pharmaceuticals, Inc. Securities Litigation, 697 F.3d 869, 886 11 (9th Cir. 2012) (“Section 20(a) and section 15 both require 12 underlying primary violations of the securities laws. 15 U.S.C. 13 §§ 77o, 78t(a). Because Plaintiff here has failed to adequately 14 plead a violation of the federal securities laws, it follows 15 that Plaintiff also has failed to adequately plead violations of 16 section 20(a) and section 15.”). Accordingly, Counts Two and 17 Five are dismissed with prejudice. 18 2. Plaintiffs’ State Law Claims 19 Because the Court granted Defendants’ motions as to all of 20 Plaintiffs’ federal claims with prejudice, the Court declines to 21 exercise supplemental jurisdiction over Plaintiffs’ remaining 22 state-law claims. See Ove v. Gwinn, 264 F.3d 817, 826 (9th Cir. 23 2001) (“A court may decline to exercise supplemental jurisdiction 24 over related state-law claims once it has ‘dismissed all claims 25 over which it has original jurisdiction.’”) (quoting 28 U.S.C. 26 § 1367(c)(3)) (other citations omitted). Accordingly, the Court 27 dismisses Plaintiffs’ state law causes of action, claims Six 28 through Eighteen, without prejudice. ee REI OIE EEE IE RIE NEI NII ED ee

1 Given the Court’s rulings, it declines to reach any other 2 arguments presented by the parties. 3 Til. ORDER 4 For the reasons set forth above, the Court GRANTS 5 Defendants’ Motions to Dismiss, as follows: 6 1. Defendants Crown Electrokinetics Corp. and Element 82, 7 Inc.’s Motion to Dismiss (ECF No. 8) Plaintiffs’ First, Third, 8 and Fourth Causes of Action is granted, with prejudice; 9 2. Defendant Croxall’s Motion to Dismiss (ECF No. 11) 10 Plaintiffs’ First, Second, Third, Fourth, and Fifth Causes of 11 Action is granted, with prejudice; 12 3. Since all of Plaintiffs’ federal claims are dismissed, 13 | with prejudice, the Court declines to exercise supplemental 14 jurisdiction over Plaintiffs’ remaining state law claims; 15 accordingly, Plaintiffs’ Sixth through Eighteenth Causes of 16 | Action are dismissed, without prejudice. 17 Plaintiffs’ counsel is ordered to pay sanctions in the 18 amount of $200 to the Clerk of the Court no later than May 27, 19 | 2026. 20 The Clerk of Court is hereby DIRECTED to close this case. 21 IT IS SO ORDERED. 22 Dated: May 6, 2026 23 Se Z J (Paras HN A. MENDEZ. 24 SENIOR UNITED STATES DISTRICT JUDGE 25 26 27 28 13