Pinnacle Ventures LLC v. Bertelsmann Education Services

• Court: District Court, N.D. California
• Decided: March 6, 2020
• Docket: 5:18-cv-03412
• Status: Unknown

Opinion

1 2 UNITED STATES DISTRICT COURT 3 NORTHERN DISTRICT OF CALIFORNIA 4 SAN JOSE DIVISION 5 6 PINNACLE VENTURES LLC; PINNACLE Case No. 18-cv-03412-BLF VENTURES DEBT FUND III, L.P.; and 7 PINNACLE IV, L.P., ORDER DEFERRING RULING ON 8 Plaintiffs, PINNACLE’S ANTI-SLAPP MOTION; AND GRANTING PINNACLE’S 9 v. MOTION TO DISMISS WITH LEAVE TO AMEND 10 BERTELSMANN EDUCATION SERVICES LLC, [Re: ECF 87] 11 Defendant. [REDACTED PUBLIC VERSION] 12 ____________________________________ 13 AND RELATED COUNTERCLAIMS. 14 15 This action arises from competing assertions of wrongdoing by investors in third party 16 HotChalk, Inc. (“HotChalk”), a privately held corporation that provides education technology and 17 services. Pinnacle Ventures LLC, Pinnacle Ventures Debt Fund III, L.P., and Pinnacle IV, L.P. 18 (collectively, “Pinnacle”) provided debt financing to HotChalk in 2014 and 2015. Bertelsmann 19 Education Services LLC (“BES”) provided additional financing in 2015 and 2018. Pinnacle 20 claims that BES used fraudulent and unlawful means to lower the value of Pinnacle’s investment, 21 and BES claims that Pinnacle used extortionate threats to extract benefits from HotChalk to which 22 it was not entitled. The operative pleadings are Pinnacle’s first amended complaint (“FAC”) and 23 BES’s answer and counterclaims. 24 Before the Court are Pinnacle’s Special Motion to Strike BES’s counterclaims under 25 California Code of Civil Procedure § 425.16 (“anti-SLAPP motion”) and Pinnacle’s Motion to 26 Dismiss the counterclaims under Federal Rule of Civil Procedure 12(b)(6). For the reasons 27 discussed below, a ruling on the anti-SLAPP motion is DEFERRED and the motion to dismiss is 1 I. BACKGROUND 2 Pinnacle and HotChalk entered into loan agreements in 2014 and 2015 that extended debt 3 || financing of approximately SJ to HotChalk. FAC 4§ 23, 25, 27, ECF 59-4; Answer § 2, 4 || ECF 83-4. As part of the transactions, Pinnacle obtained warrants giving it the right to purchase 5 || HotChalk shares. FAC {ff 24, 26; Answer § 2. 6 In a 2015 transaction (“2015 Transaction”), BES made a substantial equity investment in 7 || HotChalk and purchased a large number of shares from existing HotChalk shareholders, after 8 || which BES owned approximately JJ of HotChalk’s shares. FAC § 29; Answer 9 3-6. Pinnacle 9 || wanted to participate in the 2015 Transaction, but BES’s offer to purchase applied only to shares 10 owned as of October 20, 2015. Pinnacle claims that it was not informed of the record date in time 11 to exercise its warrants. FAC {[§[ 34-36. BES claims that Pinnacle had time to exercise its 12 || warrants and participate in the 2015 Transaction. Answer {] 36. 5 13 In a 2018 transaction (“Series AA Financing”), BES made a further equity investment in 14 || HotChalk, after which BES owned more than of HotChalk’s shares. FAC ¥ 49; Answer 3 15 9, 49. In connection with the Series AA Financing, the shares of non-participating stockholders 16 and warrant holders were split on a J basis, meaning that one share of HotChalk became 3 17 || HJ of a share. FAC 950; Answer □□ 11,50. Pinnacle did not participate in the Series AA 18 Financing, and its warrants therefore were converted on a JJ basis, substantially diluting 19 Pinnacle’s stake in HotChalk. FAC 450; Answer 9 11, 50. 20 The parties take very different views of the events described above. Pinnacle claims that 21 “Pinnacle’s investment in HotChalk has been stolen and Pinnacle’s rights trampled by a 22 || controlling stockholder looking out only for its own interests.” FAC § 14. Pinnacle’s operative 23 FAC asserts claims against BES for: (1) fraud; (2) negligent misrepresentation; (3) intentional 24 || interference with prospective economic advantage; (4) negligent interference with prospective 25 economic advantage; (5) unfair business practices in violation of California Business & 26 Professions Code § 17200 et seq.; and (6) unjust enrichment. FAC, ECF 60. 27 BES claims that it has always supported HotChalk, and that Pinnacle “commenced a series 28 || of unwarranted and improper demands 3 eee 0

1 order to secure additional benefits for itself.” Counterclaims ¶ 99. Specifically, BES alleges that 2 when it met with Pinnacle in January 2018 to discuss HotChalk’s financial situation, “Pinnacle 3 responded by threatening to sue HotChalk’s board of directors for breach of fiduciary duty.” 4 Counterclaims ¶ 103. Pinnacle allegedly knew that the threat of litigation “would be devastating 5 to HotChalk’s ability to finalize its contract with ,” HotChalk’s biggest customer, “since 6 any such litigation would have to be disclosed.” Counterclaims ¶¶ 96, 104. Pinnacle allegedly 7 used the threat of litigation to demand benefits to which it was not entitled, including early 8 repayment of HotChalk’s entire loan amount. Counterclaims ¶¶ 103-05. BES claims that it was 9 forced to lend HotChalk nearly $ in additional financing to pay off Pinnacle. 10 Counterclaims ¶¶ 105, 108-09. BES filed an answer and counterclaims on September 19, 2019, 11 asserting claims against Pinnacle for: (1) unjust enrichment; (2) intentional interference with 12 prospective economic advantage; (3) negligent interference with prospective economic advantage; 13 and (4) unlawful and unfair business practices in violation of California Business & Professions 14 Code §§ 17200 et seq. 15 II. ANTI-SLAPP MOTION 16 A. Legal Standard 17 “Under California’s anti-SLAPP statute, a defendant may bring a special motion to strike a 18 cause of action arising from constitutionally protected speech or petitioning activity.” Barry v. 19 State Bar of California, 2 Cal. 5th 318, 320 (2017). “Unless the plaintiff establishes a probability 20 of prevailing on the claim, the court must grant the motion and ordinarily must also award the 21 defendant its attorney’s fees and costs.” Id. 22 “The analysis of an anti-SLAPP motion proceeds in two steps.” Barry, 2 Cal. 5th at 321. 23 “At the first step, the moving defendant bears the burden of identifying all allegations of protected 24 activity, and the claims for relief supported by them.” Baral v. Schnitt, 1 Cal. 5th 376, 396 (2016). 25 “When relief is sought based on allegations of both protected and unprotected activity, the 26 unprotected activity is disregarded at this stage.” Id. Only “[i]f the court determines that relief is 27 sought based on allegations arising from activity protected by the statute” is the second step 1 At step two, “the burden shifts to the plaintiff to demonstrate that each challenged claim 2 based on protected activity is legally sufficient and factually substantiated.” Baral, 1 Cal. 5th at 3 396. Where, as here, the anti-SLAPP motion challenges only the legal sufficiency of the claims, 4 the district court applies the Rule 12(b)(6) standard to consider whether a claim is stated. See 5 Planned Parenthood Fed’n of Am., Inc. v. Ctr. for Med. Progress, 890 F.3d 828, 834 (9th Cir. 6 2018), amended, 897 F.3d 1224 (9th Cir. 2018). If the challenged claims are not adequately stated 7 in the initial pleading, the district court may defer consideration of the anti-SLAPP motion 8 pending the filing of an amended pleading. See Verizon Delaware, Inc. v. Covad Commc’ns Co., 9 377 F.3d 1081, 1091-92 (9th Cir. 2004) (holding that district court did not err in deferring 10 consideration of Covad’s anti-SLAPP motion pending receipt of Verizon’s first amended 11 complaint, and affirming denial of anti-SLAPP motion to strike first amended complaint). 12 B. Discussion 13 Pinnacle has filed an anti-SLAPP motion directed to BES’s counterclaims. At the first step 14 of the analysis, the Court finds that Pinnacle has made a threshold showing that the counterclaims 15 are based in part on allegations of protected activity, specifically, Pinnacle’s alleged threat to sue 16 HotChalk’s board of directors. See Counterclaims ¶¶ 103, 104, 115, 120. Communications in 17 connection with anticipated litigation are protected activity under the anti-SLAPP statute. See 18 Neville v. Chudacoff, 160 Cal.App.4th 1255, 1263 (2008). “[M]any anti-SLAPP cases involving 19 prelitigation communications concern demand letters or other statements to adverse parties or 20 potential adverse parties.” Id. Moreover, the anti-SLAPP statute “has been held to protect 21 statements to persons who are not parties or potential parties to litigation, provided such 22 statements are made in connection with pending or anticipated litigation.” Id. (internal quotation 23 marks omitted). Informal “pre-litigation demands and threats to sue, even if made using rude 24 language, are protected activity within the meaning of the anti-SLAPP statute.” Fiji Water Co., 25 LLC v. Fiji Mineral Water USA, LLC, No. SACV 09-01148-CJC (MLGx), 2010 WL 11518555, at 26 *2 (C.D. Cal. Nov. 10, 2010). In Fiji Water, the protected activity requirement was met by verbal 27 threats to a distributor at a convention to the effect that the distributer would be “financially 1 BES relies on Park v. Bd. of Trustees of California State Univ. in arguing that the anti- 2 SLAPP motion should be denied because Pinnacle’s litigation threat is not itself the wrong 3 complained of, but merely evidence of Pinnacle’s efforts to exploit HotChalk’s precarious 4 financial position to extract benefits to which it was not entitled. In Park, the California Supreme 5 Court held that: “[A] claim is not subject to a motion to strike simply because it contests an action 6 or decision that was arrived at following speech or petitioning activity, or that was thereafter 7 communicated by means of speech or petitioning activity. Rather, a claim may be struck only if 8 the speech or petitioning activity itself is the wrong complained of, and not just evidence of 9 liability or a step leading to some different act for which liability is asserted.” Park v. Bd. of 10 Trustees of California State Univ., 2 Cal. 5th 1057, 1060 (2017). 11 BES’s reliance on Park is misplaced. The allegations regarding Pinnacle’s litigation threat 12 are not merely evidence of Pinnacle’s alleged wrongful conduct but rather are incorporated into 13 and central to each of BES’s counterclaims. The threat of litigation that would have to be 14 disclosed to is the means by which Pinnacle allegedly compelled BES to lend HotChalk 15 an additional $ to pay off Pinnacle’s loan. See Counterclaims ¶¶ 104, 108-09. BES’s 16 additional loan, and the use of those loan monies to pay off Pinnacle, form the basis for BES’s 17 first counterclaim for unjust enrichment. See Counterclaims ¶ 111 (“Because of Pinnacle’s 18 improper conduct, BES was forced to confer an undue benefit on Pinnacle (i.e., the early payment 19 of its loan, including pre-payment penalties).”). “Pinnacle’s improper threats against HotChalk’s 20 Board” are specifically alleged to be “independently wrongful, intentional acts” underpinning 21 BES’s second counterclaim for intentional interference with prospective economic advantage and 22 third counterclaim for negligent interference with prospective economic advantage. See 23 Counterclaims ¶¶ 115, 120. Pinnacle’s “unlawful and unfair business practices,” including the 24 threat of litigation, form the basis for BES’s fourth counterclaim under California Business and 25 Professions Code § 17200. See Counterclaims ¶¶ 104, 122-24. 26 At most, BES’s argument that its counterclaims are based on conduct other than Pinnacle’s 27 threat of litigation establishes that its counterclaims are “mixed.” When evaluating “mixed” 1 of the analysis with respect to allegations based on protected activity. See Baral, 1 Cal. 5th at 396. 2 At step two, the burden shifts to BES to demonstrate that each of its counterclaims based on 3 protected activity “is legally sufficient and factually substantiated.” Id. Pinnacle’s motion 4 challenges the legal sufficiency of BES’s counterclaims. Accordingly, the Court applies the Rule 5 12(b)(6) standard in its step two determination whether BES has demonstrated that its 6 counterclaims are legally sufficient. See Planned Parenthood, 890 F.3d at 833-34. 7 For the reasons discussed below in connection with Pinnacle’s motion to dismiss pursuant 8 to Rule 12(b)(6), BES has failed to state a claim upon which relief may be granted. Accordingly, 9 BES has not met its burden at step two of the anti-SLAPP analysis. Before making a final 10 determination on Pinnacle’s anti-SLAPP motion, however, the Court will grant BES leave to 11 amend its counterclaims to either eliminate its allegations of protected activity or allege claims 12 based on protected activity with more specificity. See Verizon, 377 F.3d at 1091. At the hearing, 13 Pinnacle’s counsel argued that the Court should not defer ruling on the anti-SLAPP motion, citing 14 Planned Parenthood and Todd v. Lovecruft, No. 19-CV-01751-DMR, 2020 WL 60199 (N.D. Cal. 15 Jan. 6, 2020), in support of its position that the Court should grant the anti-SLAPP motion and 16 then grant BES leave to amend if warranted. The Court has reviewed Planned Parenthood and 17 Todd. Neither decision calls into question the Court’s discretion to defer ruling on an anti-SLAPP 18 motion under Verizon, and the Court finds it appropriate to exercise its discretion in this case. 19 III. MOTION TO DISMISS 20 A. Legal Standard 21 “A motion to dismiss under Federal Rule of Civil Procedure 12(b)(6) for failure to state a 22 claim upon which relief can be granted tests the legal sufficiency of a claim.” Conservation Force 23 v. Salazar, 646 F.3d 1240, 1241-42 (9th Cir. 2011) (internal quotation marks and citation omitted). 24 While a complaint need not contain detailed factual allegations, it “must contain sufficient factual 25 matter, accepted as true, to ‘state a claim to relief that is plausible on its face.’” Ashcroft v. Iqbal, 26 556 U.S. 662, 678 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). 27 B. Discussion 1 to all of the counterclaims. However, as argued by Pinnacle, those allegations appear to fall 2 squarely within California’s Litigation Privilege, California Civil Code § 47(b). “The litigation 3 privilege grants absolute immunity from tort liability for communications made in relation to 4 judicial proceedings.” Mindys Cosmetics, Inc. v. Dakar, 611 F.3d 590, 599 (9th Cir. 2010) 5 (internal quotation marks and citation omitted). “[C]ommunications with ‘some relation’ to an 6 anticipated lawsuit” fall within the privilege. Rubin v. Green, 4 Cal. 4th 1187, 1194 (1993). As 7 presently framed, all of BES’s counterclaims are subject to dismissal as barred by § 47(b). 8 The counterclaims also are subject to dismissal for failure to plead the required elements. 9 i. First Counterclaim for Unjust Enrichment 10 “The elements of an unjust enrichment claim are the receipt of a benefit and the unjust 11 retention of the benefit at the expense of another.” Peterson v. Cellco P’ship, 164 Cal. App. 4th 12 1583, 1593 (2008) (internal quotation marks, citation, and alteration omitted). BES alleges that 13 Pinnacle received a benefit to which it was not entitled, namely, the early repayment of its loan, 14 including prepayment penalties. See Counterclaims ¶¶ 111-12. However, it is clear from the 15 pleading that HotChalk repaid Pinnacle’s loan. BES has not alleged facts showing that 16 HotChalk’s repayment of an existing debt was at the expense of BES. While BES chose to lend 17 HotChalk the funds that HotChalk subsequently used to pay off its loan to Pinnacle, BES is 18 entitled to repayment of its loan from HotChalk. BES has cited no cases, and the Court has 19 discovered none, that would entitle BES to pursue a claim of unjust enrichment on these facts. 20 Pinnacle’s motion to dismiss is GRANTED WITH LEAVE TO AMEND as to the first 21 counterclaim for unjust enrichment. 22 ii. Second Counterclaim for Intentional Interference with Prospective 23 Economic Advantage and Third Counterclaim for Negligent 24 Interference with Prospective Economic Advantage 25 “The elements of interference with prospective economic advantage (though differing on 26 the mental state required for intentional or negligent interference) are: (1) a relationship between 27 the plaintiff and some third party with the probability of future economic benefit to the plaintiff; 1 itself, by the defendant designed to disrupt the relationship; (4) actual disruption of the 2 relationship; and (5) economic harm to the plaintiff.” Kacher Firestopping, Inc. v. Local No. 5, 3 Int’l Ass’n of Heat & Frost Insulators & Asbestos Workers, No. SACV 08-00610-CJC(ANx), 4 2008 WL 11337452, at *4 (C.D. Cal. June 30, 2008) (internal quotation marks and citation 5 omitted). 6 BES identifies the following as independently wrongful acts: “Pinnacle’s unreasonable 7 refusal to consent to the increase in HotChalk’s bridge loans, Pinnacle’s improper threats against 8 HotChalk’s Board, and Pinnacle’s threats to scuttle HotChalk’s ability to close its agreement with 9 .” Counterclaims ¶¶ 115, 120. BES has not alleged any facts showing that Pinnacle 10 was legally obligated to consent to an increase in HotChalk’s bridge loans. Pinnacle’s threat of 11 suit against the HotChalk board is protected by California’s Litigation Privilege, as discussed 12 above, and Pinnacle’s threats to scuttle the deal are grounded in the threat of litigation. 13 Accordingly, BES’s allegations are inadequate to show an independently wrongful act on the part 14 of Pinnacle. Moreover, BES has not alleged facts showing a disruption in its relationship with 15 HotChalk. Based on the face of the counterclaims, it appears that BES controls HotChalk and 16 provides it with financial support. 17 Pinnacle’s motion to dismiss is GRANTED WITH LEAVE TO AMEND as to the second 18 counterclaim for intentional interference with prospective economic advantage and the third 19 counterclaim for negligent interference with prospective economic advantage. 20 iii. Fourth Counterclaim under Cal. Bus. & Prof. Code § 17200 21 California’s Unfair Competition Law (“UCL”) prohibits “any unlawful, unfair or 22 fraudulent business act or practice.” Cal. Bus. & Prof. Code § 17200. BES alleges that 23 “Pinnacle’s unlawful and unfair practices, including Pinnacle’s improper demands for additional 24 consideration, constitute a violation of California Business and Professions Code §§ 17200 et 25 seq.” Counterclaims ¶ 123. BES has not pled facts showing a violation of law by Pinnacle. With 26 respect to BES’s allegation that Pinnacle’s demands for additional consideration were “unfair” 27 within the meaning of the UCL, BES has not alleged facts showing why Pinnacle’s demand for 1 has standing to assert a UCL claim based on Pinnacle’s repayment demand. To establish standing 2 || under the UCL, a plaintiff must establish that it suffered direct injury and lost money or property 3 as a result of the alleged unfair competition. See Cal. Bus. & Prof. Code § 17204; Kwikset Corp. 4 || v. Superior Court, 51 Cal. 4th 310, 325 (2011). It appears on the face of the counterclaims that 5 HotChalk repaid a debt it owed to Pinnacle. While BES chose to lend HotChalk the funds that 6 || HotChalk subsequently used to pay off Pinnacle, BES is entitled to repayment of its loan to 7 HotChalk and therefore BES has not established that it lost any money or property. 8 Pinnacle’s motion to dismiss is GRANTED WITH LEAVE TO AMEND as to the fourth 9 counterclaim under California’s UCL. 10 IV. ORDER 11 (1) A ruling on Pinnacle’s anti-SLAPP motion is DEFERRED pending amendment of 12 || the counterclaims to provide BES with the opportunity to either eliminate its allegations of 5 13 protected activity or allege counterclaims based on protected activity with adequate specificity. 14 || The anti-SLAPP motion is TERMINATED WITHOUT PREJUDICE to renewal, if appropriate, 3 15 after the filing of BES’s amended counterclaims (if any). a 16 (2) Pinnacle’s motion to dismiss is GRANTED WITH LEAVE TO AMEND as to all 3 17 counterclaims; 18 (3) Any amended counterclaims shall be filed on or before March 3, 2020. Leave to 19 || amend is limited to the deficiencies identified in this order. BES may not add new counterclaims 20 || or parties without obtaining prior leave of the Court. 21 (4) This order terminates ECF 87. 22 23 || Dated: February 11, 2020 han hon Lh oman BETH LABSON FREEMAN 25 United States District Judge 26 27 28