Valjakka v. Netflix, Inc.

Opinion

1 2 3 4 UNITED STATES DISTRICT COURT 5 NORTHERN DISTRICT OF CALIFORNIA 6 7 LAURI VALJAKKA, Case No. 22-cv-01490-JST

8 Plaintiff, ORDER DENYING DEFENDANT’S 9 v. MOTION FOR AN ORDER TO SHOW CAUSE AND MOTION TO JOIN AIPI, 10 NETFLIX, INC., LLC 11 Defendant. Re: ECF Nos. 216, 217

12 13 Before the Court are Defendant Netflix, Inc.’s motion for an order to show cause and 14 motion to join non-party AiPi, LLC. ECF Nos. 216, 217. The Court will deny both motions. 15 I. BACKGROUND 16 This is a patent infringement case against Netflix brought by Plaintiff Lauri Valjakka. 17 ECF No. 74. Netflix has counterclaimed for a judgment that Netflix does not infringe the patents 18 at issue; that both patents are invalid for lack of inventive concept, obviousness, and other reasons; 19 that one of the patents at issue is unenforceable due to inequitable conduct; that Plaintiff’s claims 20 are barred by the doctrine of unclean hands; and for violation of the California Uniform Voidable 21 Transactions Act (“CUVTA”), Cal. Civ. Code §§ 3439 et. seq. ECF No. 192. With regard to the 22 CUVTA claim, Netflix alleges that Valjakka created an entity called CDN Licensing for the 23 purpose and with the effect of diverting settlement proceeds from other patent litigation to avoid 24 paying creditors, including Netflix. Id. ¶¶ 130–157. The CUVTA claim is at the heart of the 25 present motions. 26 After conducting discovery, Netflix moved for a preliminary injunction on its CUVTA 27 claim. ECF No. 127. The Court granted the motion and issued a preliminary injunction in 1 success on the merits of its CUVTA claims, and that Valjakka had transferred assets to CDN 2 Licensing with fraudulent intent and with no legitimate supervening purpose. ECF No. 204 at 6– 3 10. The Court’s preliminary injunction (“PI Order”) prevented Valjakka from “selling, using, 4 moving, concealing, transferring, or otherwise disposing of any Enforcement Assets1 in his 5 possession, custody, or control.” Id. at 12–13. Valjakka was also ordered to transmit a copy of 6 the PI Order to “his licensees, and to any entity that ha[d] an interest in Enforcement Assets 7 including, but not limited to, CDN and IPRA Tech.” Id. at 13. 8 By separate order, the Court also granted Netflix the ability to take CUVTA-related 9 discovery. ECF No. 183. In the course of that discovery, on October 3, 2023, Valjakka’s then 10 attorney, William Ramey, disclosed the involvement of litigation fund manager AiPi, LLC, to 11 Netflix via email. ECF No. 216-3 at 5. Netflix represents, and it is not disputed, that AiPi’s 12 involvement had not been disclosed before that time. ECF No. 217 at 3. 13 AiPi’s counsel submitted a declaration describing its role in the litigation. He stated that 14 AiPi “agreed to engage a law firm to file a Complaint and initiate the Valjakka litigation.” ECF 15 No. 233-1 ¶ 13. AiPi also “agreed to support the Valjakka litigation and manage third-party 16 funding.” Id. ¶ 14. He notes that AiPi “has assisted counsel in the production of Valjakka 17 documents . . . including the collection of documents from Valjakka, the marking of documents 18 and providing documents to counsel for Defendant.” Id. ¶ 26. He explains that AiPi managed the 19 settlement funds from prior defendants “totaling $1,285,500.” Id. ¶ 28. From this amount, he 20 states that AiPi paid $295,539 to Ramey LLP, $267,594.76 to experts, $393,911 to investors in the 21 litigation, and $258,500 to Valjakka. Id. ¶¶ 30–33. 22 Netflix now moves to join AiPi as a party based on its alleged control over the settlement 23 and licensing proceeds. ECF No. 217. Valjakka, now proceeding pro se, has filed a statement of 24 non-opposition to Netflix’s motion and a declaration in support of joinder. ECF Nos. 223, 223-1. 25 Netflix also moves for a finding of contempt. ECF No. 216. On October 12, 2023, Netflix 26

27 1 Enforcement Assets are all litigation and licensing proceeds, including from settlement and final 1 conducted Valjakka’s deposition. ECF No. 216-4. Based on Valjakka’s testimony, Netflix 2 concluded that Valjakka was not abiding by the terms of the injunction. ECF No. 216 at 5–6, 9– 3 10. Thereafter, Netflix wrote to AiPi and Mr. Ramey stating, “[i]t is our understanding that the 4 Court’s PI Order extends to stay any Enforcement Assets held by the Ramey Firm and AiPi.” 5 ECF No. 216-5 at 2. AiPi responded, “[c]onfirmed, only to the extent that any ‘licensing or 6 settlement assets’ that are ‘held’ by any other entities are in the ‘possession, custody or control’ of 7 Mr. Valjakka,” and that because it was not aware of any such assets, AiPi deemed the question 8 moot. Id. Based on this information, Netflix moved for an order to show cause as to why 9 Valjakka, “his agents, and his counsel, including the Ramey Firm and AiPi, should not be held in 10 civil contempt for failure to comply with the Court’s order granting a preliminary injunction.” 11 ECF No. 216 at 2. 12 II. LEGAL STANDARD 13 A. Order to Show Cause 14 “Civil contempt [ . . . ] consists of a party’s disobedience to a specific and definite court 15 order by failure to take all reasonable steps within the party’s power to comply.” Reno Air Racing 16 Ass’n., Inc. v. McCord, 452 F.3d 1126, 1130 (9th Cir. 2006) (citing In re Dual-Deck Video 17 Cassette Recorder Antitrust Litig., 10 F.3d 693, 695 (9th Cir. 1993)). “The party alleging civil 18 contempt must demonstrate that the alleged contemnor violated the court’s order by ‘clear and 19 convincing evidence,’ not merely a preponderance of the evidence.” In re Dual-Deck Video, 10 20 F.3d at 695. “‘Substantial compliance’ with the court order is a defense to civil contempt, and is 21 not vitiated by ‘a few technical violations.’” Id. “A court has wide latitude in determining 22 whether there has been contemptuous defiance of its order.” Gifford v. Heckler, 741 F.2d 263, 23 265–66 (9th Cir. 1984). 24 B. Joinder of Absent Party 25 The Court undertakes a three-step inquiry to determine whether joinder of an absent party 26 is required under Rule 19 of the Federal Rules of Civil Procedure: “(1) Is the absent party 27 necessary [] under Rule 19(a)[;] (2) If so, is it feasible to order that the absent party be joined[;] (3) 1 indispensable such that the action must be dismissed?” Salt River Project Agric. Imp. & Power 2 Dist. v. Lee, 672 F.3d 1176, 1179 (9th Cir. 2012) (citing E.E.O.C. v. Peabody W. Coal Co., 400 3 F.3d 774, 779–80 (9th Cir. 2005)). 4 III. DISCUSSION 5 A. Motion for an Order to Show Cause 6 Netflix alleges three violations of the PI Order: (1) Valjakka failed to send the PI Order to 7 all licensees as required; (2) Valjakka may have transferred Enforcement Assets; and (3) AiPi (as 8 Valjakka’s agent) may have aided and abetted the transfer of Enforcement Assets. ECF No. 216. 9 The Court considers whether Valjakka and AiPi’s alleged violations of the PI Order are an 10 appropriate basis for Netflix’s request for an order to show cause. 11 1. Alleged Failure to Send the PI Order to All Licensees 12 Netflix argues that Valjakka violated the PI Order when he did not send a copy of the 13 Court’s Order to either the settling defendant licensees or to CDN Licensing and IPRA Tech. ECF 14 No. 216 at 8–9. Valjakka responds that the PI Order was “given to all licensees who provided 15 Enforcement Assets . . . no later than November 6, 2023.” ECF No. 224-4; ECF No. 224 at 2. 16 “CDN Licensing and IPRA were made aware of the Court’s Preliminary Injunction Order on 17 September 22, 2023, and were provided a copy of the Court’s Preliminary Injunction Order no 18 later than November 2, 2023.” ECF No. 224 at 2; ECF No. 224-1 ¶ 4; ECF No. 224-2. 19 The party alleging civil contempt must prove by clear and convincing evidence that the 20 nonmoving party violated a court order and demonstrate that the noncompliance was more than 21 technical. In re Dual-Deck Video, 10 F.3d at 695. “Civil contempt sanctions . . . are employed for 22 two purposes: to coerce the defendant into compliance with the court’s order, and to compensate 23 the complainant for losses sustained.” Whittaker Corp. v. Execuair Corp., 953 F.2d 510, 517 (9th 24 Cir. 1992). Substantial compliance with the court’s order is a defense to civil contempt. In re 25 Dual-Deck Video, 10 F.3d at 695. 26 While Valjakka’s efforts to comply with the PI Order were somewhat belated and sluggish, 27 the Court finds that he has substantially complied with that order. Further, the issuance of an 1 (because he has already complied) nor of compensating Netflix for any losses sustained (because it 2 has not proven any). The Court declines to issue an order to show cause on this basis. 3 2. Valjakka’s Alleged Transfers Prohibited by PI Order 4 Netflix argues that Valjakka “testified that he never read the transcript of the preliminary 5 injunction hearing,” “that he did not believe the Court’s Order applied to the settlement and 6 licensing monies paid by the other defendants,” and that “in his view, the injunction ‘would cover 7 only the U.S. funds that [he] might . . . control, not the Finnish.’” ECF No. 216 at 5–6, 9–10. 8 Based on this deposition testimony, Netflix contends that “Valjakka himself is likely not 9 complying with the Court’s PI Order.” Id. at 9. Valjakka’s former counsel responds that “simply 10 because Mr. Valjakka’s description of . . . his understanding of the PI . . . differ[s] from the 11 information provided to him does not mean that . . . he is not following the PI.” ECF No. 216-3 at 12 4. 13 Netflix’s argument that Valjakka “likely” violated the PI Order is not supported by clear 14 and convincing evidence that he actually did so. Netflix’s request for an order to show cause on 15 this ground is denied. 16 3. AiPi’s Alleged Aiding and Abetting Transfers Prohibited by PI Order 17 Finally, Netflix argues that AiPi is also bound by the Court’s PI Order as Valjakka’s agent, 18 but AiPi “adamantly refuses to be bound by the Court’s PI Order.” ECF No. 216 at 3. Based on 19 this alleged refusal, Netflix argues that AiPi must be “flatly disregard[ing]” the Court’s order. Id. 20 at 11. 21 The Federal Rules of Civil Procedure “provide for the enforcement of judgments against 22 non-parties in limited circumstances.” Peterson v. Highland Music, Inc., 140 F.3d 1313, 1323 23 (9th Cir. 1998). Pursuant to Rule 65(d)(2), an injunction is binding upon “the parties” to the 24 action, their “officers, agents, servants, employees, and attorneys,” and upon those “persons in 25 active concert or participation with” them. Fed. R. Civ. P. 65(d)(2). Non-parties may be held in 26 contempt under two different tests. First, a non-party maybe held in contempt if it had notice of 27 the order and abets the party to the injunction in violating the court’s order. Peterson, 140 F.3d at 1 injunction, represented by it, or subject to its control. Class Plaintiffs v. City of Seattle, 955 F.2d 2 1268, 1280 (9th Cir. 1992) (citation omitted). Regardless of which theory is pursued, “[t]he 3 moving party has the burden of showing by clear and convincing evidence that the contemnors 4 violated a specific and definite order of the court.” FTC v. Affordable Media, LLC, 179 F.3d 5 1228, 1239 (9th Cir. 1999). 6 AiPi does not dispute that it is Valjakka’s agent. ECF No. 233-1 ¶ 24 (“AiPi is an agent of 7 Valjakka”); see also ECF No. 233 at 8 (“AiPi is a Valjakka agent and has fully complied with the 8 PI and has not disputed being bound to the full extent that AiPi is an agent of Valjakka.”). 9 Valjakka’s former counsel states that Enforcement Assets were transferred to CDN Licensing 10 prior to the issuance of the PI Order and have since been spent in the ordinary course of business. 11 ECF No. 224-1 ¶ 5. He also avers that there are no Enforcement Assets in any account of Ramey 12 LLP. Id. ¶ 10. Nor can it be disputed that Ramey, as Valjakka’s former attorney, is also bound by 13 the PI Order, given the explicit language of Rule 65. Fed. R. Civ. P. 65(d)(2)(B) (including 14 “attorneys” as persons bound). 15 Once again, however, Netflix has failed to meet its burden of demonstrating a violation by 16 AiPi or Ramey of the PI Order by clear and convincing evidence. Accordingly, Netflix’s request 17 for an order to show cause on this ground is denied. 18 B. Motion to Join AiPi 19 1. AiPi Is Not a Necessary Party 20 The Court first evaluates whether the absent party is necessary under Rule 19(a). A party 21 is necessary only if: (1) “in that party’s absence, the court cannot accord complete relief”; or (2) 22 the party claims “an interest relating to the subject of the action” and is situated such that 23 disposing of the action may “(a) impair or impede that party’s ability to protect the interest; or (b) 24 leave an existing party subject to substantial risk of incurring . . . inconsistent obligations.” Fed. 25 R. Civ. P. 19(a). “There is no precise formula for determining whether a particular non-party 26 should be joined under Rule 19(a). The determination is heavily influenced by the facts and 27 circumstances of the case.” E.E.O.C. v. Peabody W. Coal Co., 610 F.3d 1070, 1081 (9th Cir. 1 whether joinder is feasible. Alto v. Black, 738 F.3d 1111, 1126 (9th Cir. 2013). 2 Whether AiPi must be joined in this action centers on whether complete relief can be 3 provided in AiPi’s absence. Fed. R. Civ. P. 19(a); Salt River Project Agr. Imp. & Power Dist., 4 672 F.3d at 1179. Netflix argues that AiPi’s presence is necessary to provide complete relief 5 under three theories: first, because AiPi is strictly liable for damages as the initial transferee under 6 Netflix’s CUVTA claim; second, to ensure compliance with the Court’s PI Order; and third, to 7 ensure that AiPi is afforded due process for violating the Court’s PI Order. ECF No. 217 at 5–8. 8 Because the Court has already denied Netflix’s request for an order to show cause regarding 9 AiPi’s compliance with the PI Order, the Court considers only whether AiPi is a necessary party to 10 afford complete relief under the CUVTA. 11 Under the CUVTA, “a ‘fraudulent conveyance’ is a transfer by the debtor of property to a 12 third person undertaken with the intent to prevent a creditor from reaching that interest to satisfy 13 its claim.” Opperman v. Path, Inc., 87 F. Supp. 3d 1018, 1065 (N.D. Cal. 2014). California 14 courts have found that “[t]ransferees are necessary parties ‘in an action to declare a transfer void 15 as fraudulent.’” Diamond Heights Vill. Assn., Inc. v. Fin. Freedom Senior Funding Corp., 196 16 Cal. App. 4th 290, 304 (2011) (internal citations omitted). 17 According to Netflix, AiPi is the “initial transferee” because AiPi exercises “dominion” 18 over the settlement proceeds—that is, AiPi has the authority to distribute Enforcement Assets. 19 ECF No. 217 at 5–6. Netflix claims that the Court cannot provide complete relief in AiPi’s 20 absence because AiPi, as the initial transferee of Enforcement Assets, is strictly liable for damages 21 under the CUVTA. Id. (citing In re Matter of Walldesign, Inc., 872 F.3d 954, 962 (9th Cir. 22 2017)2). “[I]f Netflix proves that Valjakka fraudulently transferred Enforcement Assets, Netflix 23 may also recover against the ‘initial transferee,’ i.e., AiPi.” Id. AiPi responds that there is no 24

25 2 Walldesign relies upon the bankruptcy code. Courts in this circuit have found that the “California fraudulent conveyance law and the fraudulent transfer section of the Bankruptcy Code 26 are similar in form and substance, and [] may be analyzed contemporaneously.” In re United Energy Corp., 944 F.2d 589, 594 (9th Cir. 1991); In re 3DFX Interactive, Inc., 389 B.R. 842, 862 27 n.15 (Bankr. N.D. Cal. 2008) (comparing 11 U.S.C.A. § 548 and Cal. Civ. Code § 3439), aff’d, 1 allegation that AiPi ever participated in any fraudulent transfer. ECF No. 233 at 9–10. 2 The first step in the analysis is determining the two parties—transferor and transferee— 3 involved in an allegedly fraudulent transfer:

4 To the extent a transfer is avoidable in an action by a creditor . . . the creditor may recover judgment for the value of the asset 5 transferred . . . or the amount necessary to satisfy the creditor’s claim, whichever is less . . . against . . . [t]he first transferee of the 6 asset or the person for whose benefit the transfer was made . . . or an immediate or mediate transferee of the first transferee. 7 Cal. Civ. Code § 3439.08(b)(1). A transfer made fraudulent by the transferor’s intent may not be 8 voided against a person “who took in good faith and for a reasonably equivalent value.” Cal. Civ. 9 Code § 3439.08(a). 10 Netflix’s argument that AiPi is the initial transferee misapplies this first step. Netflix 11 alleges in its counterclaim that the transfer between Valjakka (the debtor) and CDN Licensing (a 12 third party) is fraudulent under the CUVTA. ECF No. 192 ¶¶ 130–157. In Netflix’s counterclaim, 13 there is no allegation of any transfer from Valjakka to AiPi after Valjakka became aware of 14 Netflix’s contingent claim for attorney’s fees. Nor is there any such allegation in Netflix’s motion 15 for joinder. Instead, Netflix argues that AiPi has received, and exercises “dominion” over, 16 Valjakka’s Enforcement Assets. ECF No. 217 at 3, 5–6. 17 These allegations are inadequate. “Dominion” is a “minimum requirement [for] status as a 18 ‘transferee,’” Walldesign, 872 F.3d at 962, but it is not sufficient by itself—there still must be an 19 actual transfer. Nor does Netflix allege when AiPi received any transfer. Because Netflix does 20 not allege any transfer from Valjakka to AiPi after Valjakka’s potential liability to Netflix became 21 known, Netflix has not stated any right to recover from AiPi as a transferee, initial or otherwise. 22 Therefore, AiPi is not a necessary party. Accordingly, the Court does not proceed to the second 23 inquiry––whether joinder is feasible.3 Alto, 738 F.3d at 1126. 24 Because AiPi is not a necessary party, Netflix’s motion for joinder is denied. 25 26 3 Were the Court to reach the question, it would find that it does not have jurisdiction over AiPi 27 because Netflix has not shown that AiPi did anything “causing harm that [it] knows is likely to be 1 CONCLUSION 2 For the foregoing reasons, the Court denies Netflix’s motions for an order to show cause 3 and to join AiPi. 4 IT IS SO ORDERED. 5 Dated: May 29, 2024 6 7 JON S. TI 8 nited States District Fudge 9 10 11 a 12

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