Talece Inc. v. Zhang

Opinion

1 2 3 UNITED STATES DISTRICT COURT 4 NORTHERN DISTRICT OF CALIFORNIA 5 SAN JOSE DIVISION 6 TALECE INC., 7 Case No. 20-cv-03579-BLF 8 Plaintiff, v. ORDER DENYING DEFENDANT’S 9 MOTION TO DISMISS PLAINTIFF’S FIRST AMENDED COMPLAINT AND 10 ZHENG ZHANG DEFENDANT’S MOTION FOR A Defendant. MORE DEFINITE STATEMENT 11 [Re: ECF 38] 12

13 14 Defendant Zheng Zhang (“Defendant”) brings a Motion to Dismiss Plaintiff Talece Inc.’s 15 (“Plaintiff”) First Amended Complaint (“FAC”), ECF 36. Defendant moves to dismiss the FAC 16 for failure to state a claim upon which relief can be granted, pursuant to Federal Rule of Civil 17 Procedure 12(b)(6). See Mot. to Dismiss (“Mot.”) 7, ECF 38. In the alternative, Defendant moves 18 for a more definite statement. Id. Pursuant to Civil Local Rule 7-1(b), the Court finds that 19 Defendant’s Motion is appropriate for determination without oral argument. Having considered 20 the briefing of the parties, the Court DENIES Defendant’s Motion to Dismiss and Defendant’s 21 Motion for a More Definite Statement. 22 I. BACKGROUND 23 A. Factual History 24 Plaintiff is a Delaware corporation with its principal place of business in Santa Clara, 25 California. FAC ¶ 2. Defendant is the former Chief Executive Officer (CEO) and former Chief 26 Financial Officer (CFO) of Plaintiff. Id. ¶ 3. Plaintiff describes itself as an “online construction and 27 material distribution company,” which uses “software to locate resources and products to streamline 1 Plaintiff brings four causes of action against Defendant: breach of fiduciary duty, unjust 2 enrichment, conversion, and accounting. Id. ¶¶ 23–43. Plaintiff alleges that from February 4, 2019, 3 to February 14, 2020, while Defendant was serving as CEO and CFO for Plaintiff, Defendant 4 refused to provide requested information regarding Plaintiff’s financial state, submitted incorrect 5 financial reports, transferred money from Plaintiff’s business accounts into Defendant’s personal 6 accounts, and stole Plaintiff’s intellectual property for use in Defendant’s new company. Id. ¶¶ 8, 7 9, 15, 20. 8 Defendant seeks to dismiss Plaintiff’s FAC under 12(b)(6), specifically on the bases that it 9 fails to meet the heightened pleading standard for shareholder derivative actions under Rule 10 23.1(b); Plaintiff’s claims are either conclusory legal statements or implausible factual allegations 11 that are insufficient to meet the 12(b)(6) pleading standards; Plaintiff’s intellectual property theft 12 allegations fail to meet the heightened pleading requirements for allegations based on fraud under 13 Rule 9(b); and Plaintiff’s accounting cause of action is unwarranted. Mot. 10, 12, 14, 16, 17. In the 14 alternative, Defendant requests a more definite statement. Id. 6. Plaintiff opposes on the grounds 15 that this action is properly brought by Plaintiff Talece as a corporation and not by one of its 16 shareholders, its FAC has alleged facts sufficient to support its fraud-based claims under 9(b), and 17 Plaintiff’s claim for accounting is appropriate given that Defendant refuses to provide Plaintiff 18 with the requested financial records. Opp’n. 3–11. Plaintiff also argues that Defendant’s Motion 19 for a More Definite Statement is not appropriate, as Defendant is seeking additional extrinsic 20 evidence not required for Defendant to properly answer the FAC. Id. 10-11. 21 B. Procedural History 22 Plaintiff filed its initial complaint in the above-captioned action in Santa Clara County 23 Superior Court on May 18, 2020. See Compl., ECF 1-1. Ten days later, on May 28, 2020, 24 Defendant removed the case to this Court. See Notice of Removal, ECF 1. Plaintiff filed a motion 25 to remand the case on July 13, 2020. See Mot. to Remand, ECF 17. Plaintiff’s motion to remand 26 was denied on September 8, 2020. See Order Den. Mot. to Remand, ECF 23. 27 On June 10, 2020, Defendant filed his motion to dismiss Plaintiff’s original complaint. See 1 22, 2020, on the basis that Plaintiff had not sufficiently pled causes of action for fraud under 9(b). 2 See Order Granting Mot. to Dismiss, ECF 35. Plaintiff filed its FAC on November 20, 2020. See 3 FAC. On December 3, 2020, Defendant filed his motion to dismiss Plaintiff’s FAC. See Mot. 4 Plaintiff filed its opposition on December 17, 2020. See Opp’n to Mot. to Dismiss (“Opp’n.”), 5 ECF 40. Defendant replied on December 24, 2020. See Reply to Opp’n (“Reply”), ECF 41. 6 II. LEGAL STANDARD 7 A. Federal Rule of Civil Procedure 12(b)(6) 8 “A motion to dismiss under Federal Rule of Civil Procedure 12(b)(6) for failure to state a 9 claim upon which relief can be granted ‘tests the legal sufficiency of a claim.’” Conservation 10 Force v. Salazar, 646 F.3d 1240, 1241-42 (9th Cir. 2011) (quoting Navarro v. Block, 250 F.3d 11 729, 732 (9th Cir. 2001)). Under Rule 8(a)(2) of the Federal Rules of Civil Procedure, a complaint 12 must include “a short and plain statement of the claim showing that the pleader is entitled to 13 relief.” Fed. R. Civ. P. 8(a)(2). In interpreting Rule 8(a)(2)’s “short and plain statement” 14 requirement, the Supreme Court has held that a plaintiff must plead “enough facts to state a claim 15 to relief that is plausible on its face,” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007), which 16 requires that “the plaintiff plead[] factual content that allows the court to draw the reasonable 17 inference that the defendant is liable for the misconduct alleged.” Ashcroft v. Iqbal, 556 U.S. 662, 18 678 (2009). This standard does not ask the Plaintiff to plead facts that suggest he will probably 19 prevail, but rather “it asks for more than a sheer possibility that a defendant has acted unlawfully.” 20 Id. (internal quotation marks omitted). The Court must “accept factual allegations in the complaint 21 as true and construe the pleadings in the light most favorable to the nonmoving party.” Manzarek 22 v. St. Paul Fire & Marine Ins. Co., 519 F.3d 1025, 1031 (9th Cir. 2008). The Court is not, 23 however, forced to “assume the truth of legal conclusions merely because they are cast in the form 24 of factual allegations.” Fayer v. Vaughn, 649 F.3d 1061, 1064 (9th Cir. 2011) (internal citation 25 omitted). 26 B. Federal Rule of Civil Procedure 9(b) 27 When a party pleads a cause of action for fraud or mistake, it is subject to the heightened 1 particularity the circumstances constituting fraud or mistake.” Fed. R. Civ. P. 9(b). “Malice, intent, 2 knowledge, and other conditions of a person’s mind may be alleged generally.” Id. Rule 9(b) 3 demands that the circumstances constituting any alleged fraud be plead “specific[ally] enough to 4 give defendants notice of the particular misconduct . . . so that they can defend against the charge 5 and not just deny that they have done anything wrong.” Kearns v. Ford Motor Co., 567 F.3d 1120, 6 1124 (9th Cir. 2009) (internal citation omitted). Claims of fraud must be accompanied by the 7 “who, what, when, where, and how” of the misconduct alleged. Cooper v. Pickett, 137 F.3d 616, 8 627 (9th Cir. 1997), superseded by statute on other grounds (internal citation omitted). 9 If a “claim is said to be ‘grounded in fraud’ or to ‘sound to fraud,’ [then] the pleading of 10 that claim as a whole must satisfy that particularity requirement of Rule 9(b).” Vess v. Ciba-Geigy 11 Corp. USA, 317 F.3d 1097, 1103–04 (9th Cir. 2003). For example, a claim may be “grounded in 12 fraud” if the “plaintiff [] allege[s] a unified course of fraudulent conduct and rel[ies] entirely on 13 that course of conduct as the basis of a claim.” Id. at 1103. 14 The applicability of Rule 9(b) hinges not on the elements of the claim but rather on the 15 nature of the allegations themselves: “Rule 9(b) applies to ‘averments of fraud’ in all civil cases in 16 federal district court . . . in cases in which fraud is not an essential element of the claim, Rule 9(b) 17 applies, but only to particular averments of fraud.” Vess, 317 F.3d at 1103; see also Kearns, 567 18 F.3d at 1124 (“Where fraud is not an essential element of a claim, only those allegations of a 19 complaint which aver fraud are subject to Rule 9(b)’s heightened pleading standard.”). Fraud can 20 thus be averred “by specifically alleging fraud, or by alleging facts that necessarily constitute 21 fraud (even if the word ‘fraud’ is not used).” Vess, 317 F.3d at 1105 (citations omitted). 22 C. Federal Rule of Civil Procedure 12(e) 23 Under Federal Rule of Civil Procedure 12(e), “[a] party may move for a more definite 24 statement of a pleading to which a responsive pleading is allowed but which is so vague or 25 ambiguous that the party cannot reasonably prepare a response.” Fed. R. Civ. P. 12(e). “However, 26 motions for a more definite statement are disfavored, and ordinarily restricted to situations where a 27 pleading suffers from unintelligibility rather than want of detail.” I.R. ex rel. Nava v. City of 1 (internal quotation marks and citations omitted). A Rule 12(e) motion must be denied “if the 2 complaint is specific enough to notify defendant of the substance of the claim being asserted,” or 3 “if the detail sought by a motion for a more definite statement is obtainable through the discovery 4 process.” Id. 5 III. DISCUSSION 6 A. Documents Attached to Defendant’s Motion 7 As a preliminary matter, Defendant’s Motion to Dismiss includes references to various 8 attachments and declarations. See e.g., Mot. 10-11. District courts generally may not consider 9 material outside the pleadings when assessing the sufficiency of a complaint under Rule 12(b)(6). 10 Lee v. City of Los Angeles, 250 F.3d 668, 688 (9th Cir. 2001). When “matters outside the pleading 11 are presented to and not excluded by the court,” the motion to dismiss converts into a motion for 12 summary judgment under Rule 56, where both parties must have the opportunity “to present all 13 the material that is pertinent to the motion.” Fed. R. Civ. P. 12(d). There are two exceptions to this 14 rule: the incorporation-by-reference doctrine, and judicial notice under Federal Rule of Evidence 15 201. Khoja v. Orexigen Therapeutics, Inc., 899 F.3d 988, 998 (9th Cir. 2018). Neither applies 16 here. Plaintiff has not extensively referred to any attachment or document in its FAC that 17 Defendant references in his Motion such that it could properly be incorporated-by-reference. See 18 id. at 1002; see also FAC. Nor has Defendant asked this Court to take judicial notice of these 19 documents. Therefore, this Court will not consider these attachments and declarations when 20 evaluating the Motion to Dismiss and Motion for a More Definite Statement. 21 B. Shareholder Derivative Suit 22 Defendant contends that Plaintiff brings a de facto shareholder derivative suit in this 23 present action, through shareholder Mr. Ming Zhang. Mot. 11-12. Accordingly, Defendant argues 24 that Plaintiff is subject to the heightened pleading requirement for a shareholder derivative suit 25 under 23.1(b), which it allegedly fails to meet. Id. Plaintiff responds that this action is neither a 26 derivative nor direct shareholder suit since it is brought by Talece Inc. as a corporation rather than 27 by an individual shareholder. Opp’n. 3. The Court agrees with Plaintiff. 1 the decision to initiate litigation—should be made by the board of directors or the majority of 2 shareholders.” Kamen v. Kemper Fin. Servs., Inc., 500 U.S. 90, 101 (1991) (citation and 3 quotations omitted). As such, a “derivative form of action permits an individual shareholder to 4 bring suit to enforce a corporate cause of action against officers, directors, and third parties” only 5 when the board of directors refuses to bring the suit on behalf of the corporation. Kamen, 500 U.S. 6 at 95. Indeed, to bring a derivative suit a shareholder must prove “that the corporation itself had 7 refused to proceed after suitable demand, unless excused by extraordinary conditions.” Ross v. 8 Bernhard, 396 U.S. 531, 534 (1970). 9 In his Motion, Defendant does not address that this action is brought by Plaintiff Talece in 10 its capacity as a corporation, rather than by an individual shareholder. See generally, Mot. 11 Defendant appears to argue that Plaintiff Talece has become defunct, on the basis that all 12 shareholders other than Mr. Ming Zhang have resigned, and therefore Talece can no longer 13 function as a corporation. Mot. 10-11. As discussed, the Court will not consider Defendant’s 14 extrinsic evidence in support of this argument, and Defendant does not cite to any part of 15 Plaintiff’s FAC indicating that Plaintiff is no longer functioning as a corporation. See generally 16 Mot. The FAC further fails to provide any indication that Mr. Ming Zhang is attempting to bring 17 this lawsuit himself on behalf of Talece, Inc. The named party in the litigation is Talece, Inc., and 18 the FAC does not even hint at an attempt to allege that there was a denial from Plaintiff Talece’s 19 board of directors to bring this action, as would be required under Rule 23.1 to bring a shareholder 20 derivative suit. See generally FAC. As such, Defendant has not provided the Court with any 21 properly considered evidence or plausible allegations that this action is brought on behalf of a 22 shareholder rather than by Plaintiff Talece as a corporation, and Plaintiff is not subject to the 23 heightened pleading requirement under 23.1(b). 24 C. Failure to State a Claim Under 12(b)(6) 25 Defendant argues that Plaintiff’s FAC should be dismissed under Rule 12(b)(6) because its 26 claims are “conclusory allegations of law” and “implausible factual allegations.” Mot. 14. Plaintiff 27 counters that it has alleged facts sufficient to establish causes of action for each of its claims. 1 Defendant’s arguments that the FAC is based on allegations that are implausible and non- 2 commonsensical are improper under the standard for dismissal under Rule 12(b)(6), where 3 “dismissal is proper if it appears beyond doubt that the non-movant can prove no set of facts to 4 support its claims.” Adams v. Johnson, 355 F.3d 1179, 1183 (9th Cir. 2004). Because Plaintiff has 5 not alleged any claims which apparently cannot be proven by a given set of facts, the Court does 6 not agree with Defendant’s characterization of Plaintiff’s claims as implausible or non- 7 commonsensical. 8 Defendant argues that Plaintiff’s FAC is “fraught with conclusory statements,” citing as an 9 example Plaintiff’s allegation that funds were transferred from Plaintiff’s accounts into an account 10 of an unknown third party that likely belongs to Defendant. Mot. 13. Defendant argues that 11 Plaintiff unreasonably inferred that this transfer was made to an account that was linked with him 12 simply because “[Plaintiff] does not recognize it.” Id. Defendant misrepresents Plaintiff’s 13 argument. Earlier in its FAC, Plaintiff alleges that at the time of the transfer, “Defendant was the 14 only person within Talece to have access to the company’s updated financial records and history,” 15 the transfers were not listed in financial reports, Plaintiff’s secretary Ms. Lani Su was not sure 16 who the transfer went to, and upon request Defendant refused to provide any financial records 17 indicating where the transferred money was sent. FAC ¶ 15. The Court finds that these allegations 18 are sufficient at this stage to support the inference that the bank account to which the funds were 19 transferred belongs to Defendant. 20 The Court also disagrees with Defendant’s contention that it is implausible that Defendant 21 could have transferred the funds without Mr. Ming Zhang’s knowledge, if Mr. Ming Zhang was 22 also acting as CFO. Mot. 15. It does not follow, as Defendant contends, that simply because Mr. 23 Ming Zhang also believed himself to be acting in the capacity of CFO for Plaintiff while the 24 alleged fraudulent transfers occurred that Mr. Ming Zhang had access to all of Plaintiff’s financial 25 documentation, or that Defendant had released the documents such that Mr. Ming Zhang was even 26 able to review them if he wished. In fact, Plaintiff’s FAC alleges that Defendant operated with 27 “great secrecy” and “outright refused to provide the requested information.” FAC ¶ 8. Accepting 1 unreasonable to conclude that even if Mr. Ming Zhang was acting as CFO, Defendant precluded 2 Mr. Ming Zhang from accessing records evidencing Defendant’s alleged fraudulent transfers of 3 funds. 4 Finally, Defendant’s contention that it is implausible to deduce that Defendant stole 5 Plaintiff’s intellectual property without providing an image of Plaintiff’s website is also incorrect. 6 See Mot. 14. In considering a motion to dismiss, the Court must “accept factual allegations in the 7 complaint as true and construe the pleadings in the light most favorable to the nonmoving party.” 8 Manzarek, 519 F.3d at 1031. Plaintiff has alleged that its website contained intellectual property, 9 including “website coding, software technology, [and] formats.” FAC ¶ 20. Plaintiff has further 10 alleged that Defendant stole the intellectual property when he formed a new company which had a 11 website with identical features and services to Plaintiff’s website. Id. ¶ 18. If accepted as true, 12 these allegations are sufficient to deduce that Defendant did steal Plaintiff’s intellectual property, 13 absent an image of Plaintiff’s website confirming as much. See Hill Phoenix, Inc. v. Classic 14 Refrigeration SoCal, Inc., No. SACV190695DOCJDEX, 2019 WL 7172977, at *6 (C.D. Cal. 15 Sept. 6, 2019) (noting that allegations regarding theft of trade secrets, when construed most 16 favorably to plaintiff, are sufficient to infer that plaintiff owned the trade secret). 17 D. Failure to Meet Heightened Pleading Standard Under 9(b) 18 Defendant additionally argues that Plaintiff’s claims for intellectual property theft are 19 claims of “theft by false pretenses,” which like fraud claims are subject to the heightened pleading 20 standard under Rule 9(b). Mot. 16. Defendant contends that the FAC does not meet the heightened 21 pleading standard because it does not provide printouts or other evidence of the alleged replicated 22 website, and, as such, Plaintiff’s intellectual property theft allegations based on the website should 23 be dismissed. Mot. 17. Plaintiff responds that it has alleged sufficient facts to support its claims for 24 intellectual property theft, and it is not necessary for Plaintiff to submit extrinsic evidence of the 25 similarity of the websites at this stage in the litigation. Opp’n. 9-11. 26 Although the Court agrees that Plaintiff’s claims relying on intellectual property theft are 27 subject to the heightened pleading standards for fraud under 9(b), see Order Granting Defendant’s 1 now attempts to characterize these claims as “theft by false pretenses” under Cal. Penal Code § 2 496. Regardless, the Court finds that Plaintiff adequately alleges the “who, what, when, where, 3 and how” of the intellectual property theft as required under 9(b). Cooper v. Pickett, 137 F.3d 616, 4 627 (9th Cir. 1997). 5 In its FAC, Plaintiff provides that on February 4, 2020, it discovered that Tech Prefab, Inc. 6 (“Tech Prefab”), a company of which Defendant is co-founder, had a website that was a “near 7 exact replica of Talece’s in both aesthetic, content, customer services, and user interface.” FAC ¶ 8 18. The FAC further alleges that Tech Prefab’s website even contained a graphic bearing Talece’s 9 name and logo. Id. Based on the similarity, Plaintiff concludes that it has reason to believe that 10 Defendant took its intellectual property, such as “website coding, software technology, [and] 11 formats” with him to his new company, Tech Prefab. Id. at ¶ 20. The Court finds that Plaintiff has 12 adequately alleged which of its intellectual property was stolen, approximately when it was taken, 13 by whom, and where it went such that Plaintiff’s allegations meet the 9(b) pleading requirements. 14 E. Accounting 15 Finally, Defendant argues that Plaintiff’s claim based on accounting should be dismissed, 16 because the requested accounting is not so complicated as to warrant an accounting action. Mot. 17 18. Plaintiff responds that the action is appropriate because the requested information is in the sole 18 possession of Defendant, who refuses to provide it to Plaintiff. Opp’n. 11. The Court finds that the 19 accounting claim is appropriate because of Plaintiff’s fiduciary relationship with Defendant. 20 A claim for accounting “may be brought to require a defendant to account to a plaintiff for 21 money or property: (1) where a fiduciary relationship exists between the parties, or (2) where, 22 though no fiduciary relationship exists, the accounts are so complicated that an ordinary legal 23 action demanding a fixed sum is impracticable.” Lee v. U.S. Bank, No. C 10-1434 RS, 2010 WL 24 2635777, at *12 (N.D. Cal. June 30, 2010) (citing Civic W. Corp. v. Zila Indus., Inc., 66 Cal. App. 25 3d 1 (1977)). Proof that the accounts are complicated is not necessary when there is an existence 26 of a fiduciary relationship. See Cruz v. United States, 219 F. Supp. 2d 1027, 1040 n. 8 (N.D. Cal. 27 2002) (noting that “the existence of a fiduciary relationship between plaintiffs and Wells Fargo 1 action and accounts are so complicated that a normal action for a fixed sum is not practical.”). The 2 Court finds that Plaintiff has sufficiently established a fiduciary relationship between itself and 3 Defendant, as Defendant was the former CEO and CFO for Plaintiff. FAC ¶ 3. See Gantler v. 4 Stephens, 965 A.2d 695, 708 (Del. 2009) (holding that an officer of a Delaware corporation owes 5 fiduciary duties of care and loyalty to the corporation). As such, Plaintiff is entitled to bring an 6 accounting claim against Defendant without alleging complicated accounts. 7 F. Motion for a More Definite Statement 8 Defendant requests in the alternative that Plaintiff provide a more definite statement (1) 9 explaining the wrongfulness of Defendant’s use of $57,341.00 for Plaintiff’s internal operations, 10 and (2) to “specifically allege what intellectual properties are at issue and provide print-outs or 11 comparisons of the “near exact replica” websites and logos.” Mot. 8, 17. 12 Defendant argues that without a more definite statement regarding the FAC’s allegation 13 that Defendant mishandled the $57,341.00 obtained from one of Plaintiff’s customers, Defendant 14 is “unable to comprehend how this fully agreed-to reimbursement transaction constitutes a 15 wrongdoing.” Mot. 8. The Court disagrees. The FAC alleges that Defendant sent a bill of 16 $57,341.00 to Jianyi, a company with whom Plaintiff does business, on the pretense that the fee 17 was reimbursement for services that Plaintiff would perform for the customer. FAC ¶¶ 10-11. The 18 FAC further alleges that from the financial report, it became evident that Defendant did not use the 19 funds for internal operations specific to Jianyi as Defendant claimed he would, but rather 20 Defendant used the funds for other undisclosed internal matters. Id. These allegations are 21 sufficient to allow Defendant to comprehend how this reimbursement constitutes a wrongdoing— 22 Defendant has allegedly used funds designated for internal matters related to a specific client for 23 other, undisclosed internal matters not related to that client. 24 Defendant also requests that Plaintiff provide a more definite statement regarding 25 Defendant’s alleged intellectual property theft, requiring Defendant to “specifically allege what 26 intellectual properties are at issue and provide print-outs or comparisons of the ‘near exact replica’ 27 websites and logos.” Mot. 17. The Court disagrees that a more definite statement regarding the 1 theft concerned Defendant’s taking of Plaintiff's “website coding, software technology, formats, 2 || and other resources.” FAC § 20. Plaintiff further notes that this allegation is based off of a 3 || comparison between its own website and Tech Prefab’s website, which is a near exact replica of 4 Plaintiffs in “aesthetic, content, customer services, and user interface.” FAC 4 18. These 5 allegations make clear which intellectual properties are at issue. Seeking evidence that could be 6 || obtained during discovery, such as print-outs or comparisons of the two websites, is not a proper 7 request for a 12(e) motion. .R. ex rel. Nava, 2012 WL 3879974 at *1 8 IV. CONCLUSION 9 For the foregoing reasons, Defendant’s Motion to Dismiss and Motion for a More Definite 10 || Statement are DENIED. 11 IT IS SO ORDERED. 12

|) Dated: May 4, 2021 kom Lh "YI én)

14 □ BETH LABSON FREEMAN 15 United States District Judge 16

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