Wilhoite v. Hou

Opinion

a FILED | JUN 05 2024 | 5 CLERK, U.S, DISTRICT COURT é SOUTHERN DISTRICT OF CALIFORNIA 7 8 UNITED STATES DISTRICT COURT 9 SOUTHERN DISTRICT OF CALIFORNIA 10 11 |) NORMAN WILHOITE and JUDITH Case No.: 3:23-cv-02333-BEN-MSB 2 WILHOITE, derivatively on behalf of TuSimple Holdings, Inc., ORDER: 13 Plaintiffs, 14 (1) STAYING CASE PENDING V. RESOLUTION OF APPEALS; AND 15 AOL TOU: MO CHEN, CHENG LU, | (5) py-TENDING TEMPORARY 16 || GUOWEI “CHARLES” CHAO, and RESTRAINING ORDER 7 HYDRON, INC., 12 Defendants. 19 20 -and- 21 79 TUSIMPLE HOLDINGS, INC., 73 Nominal Defendant. 74 I. BACKGROUND 5 A. Factual Background. The facts of this particular case have been outlined 6 extensively in the parties’ briefing and summarized in previous Orders. This Order 47 || assumes familiarity with the factual background of this case. 28

B. Procedural Background. This case involves a lengthy procedural history. 2 ||Below is a summary of filings and arguments pertinent to the issue of this Court’s 3 ||jurisdiction pending TuSimple’s appeals to the Ninth Circuit. 4 1. Original TRO. Plaintiffs filed a Motion for Temporary Restraining Order 5 ||(@TRO”) on January 5, 2024. ECF No. 8. TuSimple opposed Plaintiffs’ TRO motion 6 ||raising two arguments relevant here: Plaintiffs were not likely to succeed on the merits 7 || because: (1) Plaintiffs brought suit in contravention of a valid forum selection clause; and 8 ||(2) Plaintiffs had not demonstrated “demand futility[,]” a preliminary requirement to 9 || proceed with a derivative lawsuit under Delaware law. ECF No. 28.! 10 After briefing and a hearing, the Court issued the original TRO on January 23, 11 ||2024. ECF No. 36 (“TRO”). The TRO did not address the merits of TuSimple’s forum 12 ||selection clause argument, indicating it did not “directly relate to the merits of 13 ||[Plaintiffs’] DTSA claim” and that “the Court may address TuSimple’s [FSC] arguments 14 |/in considering the briefing already underway related to TuSimple’s motion to dismiss.” 15 at 5-6. The TRO’s duration was set for forty-five (45) days and was set to expire 16 || March 8, 2024. Jd. at 8. 17 The TRO also ordered Defendant TuSimple to produce, within fourteen (14) days, 18 ||“documents sufficient to show the location of TuSimple’s trade secrets” and “documents 19 || sufficient to identify any proprietary information and/or intellectual property belonging tc 20 TuSimple that has been disclosed or transferred to Hydron.” Jd. at 7. 21 2. The Discovery Dispute. On February 9, 2024, Plaintiffs filed an ex parte motior 22 ||to compel TuSimple to produce certain documents. ECF No. 70. Plaintiffs argued that 23 || TuSimple had not searched for or requested documents in China, in violation of the 24 || -———_ 26 TuSimple filed its motion to dismiss the same day it filed its Opposition to the TRO. 27 || See ECF Nos. 27-28. The motion to dismiss raised the FSC and demand futility 4g || arguments in greater detail.

1 ||expedited discovery ordered by the TRO. /d. at 4. The Court referred this motion to 2 || Magistrate Judge Michael Berg. ECF No. 77. After a hearing on March 7, 2024, Judge 3 || Berg ordered TuSimple to “search for documents located in China that are responsive to 4 January 23, 2024 Order and produce any such documents by April 22, 2024.” ECF 5 ||No. 122. 6 3. Preliminary Injunction Hearing. The Court held a preliminary injunction 7 |{hearing on March 12, 2024. ECF No. 129. Plaintiffs indicated while they felt they could 8 succeed on the evidence in their possession, TuSimple had not yet produced any 9 ||responsive documents from China. ECF No. 131, (“Hrg. Trans.”) at 19:20-25. The 10 || Court agreed that a more developed record would assist the Court evaluating Plaintiffs’ 11 |)motion. /d. at 68:11-14. The Court indicated it would extend the TRO thirty (30) days 12 allow Plaintiffs to depose certain individuals as an alternative means of developing 13 record. Id. 14 On March 13, 2024, the Court modified and extended the TRO. ECF No. 130 15 ||(“March 13 TRO”). The March 13 TRO modified four of the original TRO’s conditions, 16 || generally lessening some restrictions on transfers of assets outside of the United States. 17 ||Id. at3. The March 13 TRO extended the duration an additional twenty-seven (27) days 18 ||and was set to expire April 8, 2024. Id. at 4.3 19 4. TuSimple’s Interlocutory Appeals & Further TRO Extensions. On March 15, 20 2024, TuSimple filed a Notice of Interlocutory Appeal. ECF No. 135. The Notice of 21 || Appeal cited the March 13 TRO, and “all prior rulings incorporated within the [Order].” 22

24 II, Plaintiffs also requested a longer extension to accommodate completion of the 25 ||(disputed) document discovery. /d. at 68:19-23. The Court was skeptical of this request %6 in view of the ordered depositions. /d. at 68:24-25. 27 This was the second time the TRO was extended; the first extension was only four (4) 28 days to accommodate a change in the date of the preliminary injunction hearing (from March 8" to March 12"), See ECF No. 115.

1 at 1.4 On March 20, 2024, TuSimple filed a document with the Ninth Circuit 2 || describing the case and the basis for its appeal. See Case No. 24-1608, Dkt 7.1 at 2. 3 TuSimple “anticipate[d] challenging at least: (1) the district court’s implicit finding that 4 || Plaintiffs demonstrated a likelihood of success because: (a) TuSimple’s forum selection 5 clause requires suit be brought in the Delaware Court of Chancery, (b) Plaintiffs have not 6 |/established standing to sue derivatively, and...(4) the district court’s conclusion that 7 ||expedited discovery was appropriate.” Jd. 8 On March 26, 2024, the Ninth Circuit denied TuSimple’s motion to stay the March 9 {113 TRO and related orders. Case No. 24-1608, Dkt. 16.1 at 2. The Ninth Circuit also 10 |}denied the Plaintiffs’ request to dismiss the appeal for lack of jurisdiction without 11 prejudice. /d. Finally, the Ninth Circuit granted the request to expedite the appeal. □□□ [2 On March 28, 2024, Plaintiffs filed an ex parte motion to extend the TRO and reset 13 ||the supplemental preliminary injunction briefing schedule to accommodate the 14 || depositions ordered at the preliminary injunction hearing. ECF No. 152. The next day, 15 || Judge Berg held a discovery conference regarding the depositions ordered by the Court at 16 || the preliminary injunction hearing. ECF No. 154. On March 29, 2024, the Court 17 extended the TRO an additional twenty-one (21) days. ECF No. 160 (“March 29 TRO”). 18 || The March 29 TRO was set to expire April 29, 2024. Jd. TuSimple filed its second 19 || Notice of Interlocutory Appeal citing the March 29 TRO extension and “all previous 20 orders” connected therewith. ECF No. 161 at 1. 21 5. Appeal Jurisdiction Briefing. On April 3, 2024, the Court ordered parties to 22 || brief the issue of the Court’s jurisdiction given the scope of TuSimple’s appeal 23 ||arguments. ECF No. 169. The briefing was completed on April 11, 2024. See ECF Nos. 24 180-181, 186-187. 25 26 2 28 4 This same day, TuSimple filed a motion to set aside Magistrate Judge Berg’s March 7th Order on the parties’ discovery dispute. See ECF No. 134.

] On April 17, Plaintiffs filed another ex parte motion to extend the TRO. ECF No. 2 Plaintiffs requested an additional fourteen (14) day extension of the TRO, again 3 citing the need to complete the depositions ordered at the preliminary injunction hearing. 4 ||/d. at 1. The Court granted this motion on April 22nd, extending the TRO fourteen (14) 5 ||days. ECF No. 194 (“April 22 TRO”). The April 22 TRO re-set the preliminary 6 injunction hearing to May 13, 2024. /d. at 2. TuSimple filed a third Notice of 7 ||Interlocutory Appeal citing the April 22 TRO. ECF No. 200. 8 On May 9, 2024, the Court continued the Preliminary Injunction hearing to June 9 || 10, 2024, and extended the TRO a further twenty-eight (28) days in order to 10 ||accommodate the change of hearing. ECF No. 216 (“May 9 TRO”). TuSimple filed a 11 fourth Notice of Interlocutory Appeal regarding the May 9 TRO. ECF No. 217. All four 12 appeals have been consolidated at the Ninth Circuit. See Case No. 24-1608, Dkt. 45. 13 || The Ninth Circuit is currently considering hearing oral argument on all four appeals in 14 || September 2024. Jd. at Dkt. 39. 15 6. Current Pending Motions. The Court has eight (8) substantive motions currently 16 || pending in this case. First, TuSimple’s motion to dismiss, filed in January 2024. ECF 17 || No. 27. Second, Plaintiffs’ motion for preliminary injunction, filed in February 2024, 18 || which has undergone supplemental briefing. ECF No. 73, 208, 215. Third, TuSimple’s 19 || motion to set aside Magistrate Judge Berg’s order regarding responsive documents in 20 ||China. ECF No. 134. Fourth, Defendant Charles Chao filed a motion to quash service 21 ||and dismiss the complaint. ECF No. 32. Finally, Defendants Cheng Lu, Mo Chen and 22 || Xiaodi Hou have each filed motions to dismiss. See ECF Nos. 172, 184, 234. 23 Il. LEGAL STANDARDS & DISCUSSION 24 A. Court’s Jurisdiction & Stay Pending Appeals 25 The Court must now determine whether it retains jurisdiction to rule on any of the 26 || pending motions, or whether, as Defendant TuSimple argues, the interlocutory appeals 27 ||have divested all jurisdiction from this Court. 28

1 In general, an appeal “divests the district court of its control over those aspects of 2 ||the case involved in the appeal.” Griggs v. Provident Consumer Discount Co., 459 US. 3 ||56, 58 (1982). The principle outlined in Griggs was a judge-made rule to “promote 4 judicial economy and avoid the confusion that would ensue from having the same issues 5 || before two courts simultaneously.” Natural Res. Def. Council, Inc. v. Southwest Marine, 6 || Inc., 242 F.3d 1163, 1166 (9th Cir. 2001). An exception to this jurisdictional transfer 7 || principle was that “[t]he district court retain[ed] jurisdiction during the pendency of an 8 || appeal to act to preserve the status quo.” Natural Res. Def: Council, 252 F.3d at 1166. 9 || This exception was codified by Federal Rule of Civil Procedure 62(c). Jd. Notably this 10 || exception “does not restore jurisdiction to the district court to adjudicate anew the merits 11 the case[,]” and the district court may not “materially alter the status of the case on 12 ||appeal.” Jd. (citations omitted). “The status quo is measured at the time the appeal is 13 || filed.” Nat’! Grange of the Ord. of Patrons of Husbandry v. California State Grange, 14 || 182 F.Supp.3d 1065, 1072-73 (E.D. Cal. 2016) (citing Natural Res. Def: Council, at 15 || 1166). 16 In Coinbase Inc. v. Bielski, the Supreme Court applied Griggs in the arbitration 17 || context. 599 U.S. 736 (2023). The Court ruled the district court was required to stay 18 || pretrial and trial proceedings during an appeal from an order denying a motion to compel 19 || arbitration. Coinbase, at 741-42. The Court reasoned, “[b]ecause the question on appeal 20 ||is whether the case belongs in arbitration or instead in the district court, the entire case is 21 |/essentially ‘involved in the appeal.’” Jd. at 741. oa TuSimple argues that the principle articulated in Coinbase is applicable here 23 || because an arbitration clause is essentially just a “specialized kind of forum selection 24 clause.” Because the forum selection clause and derivative standing issues are central to 25 || TuSimple’s appeals, TuSimple argues Coinbase directs this Court to stay the entire case 26 || pending resolution of these appeals. Plaintiffs argue Coinbase in inapposite because the 27 ||mandatory stay contemplated by the Supreme Court applies to a statutory provision of the 28

1 |)Federal Arbitration Act, which allows a party to appeal a district court’s denial of a 2 ||motion to compel arbitration. The Supreme Court commented: 3 “(U]nlike § 16(a) arbitrability appeals, Congress has not created a right to an 4 interlocutory appeal for cases involving forum selection clauses. So, a stay in the forum selection context could be required only in those cases where there is a 5 certified 1292(b) interlocutory appeal of the forum selection clause issue.” 6 Coinbase, 599 U.S. at 746. Plaintiffs also argue that TuSimple’s appeals are improper because the forum selection clause and derivative standing issues are not yet ripe, and accordingly the Court is not divested of any jurisdiction.> This argument is not without logical appeal given the original TRO declined to address the merits of TuSimple’s forum selection clause arguments.° Nonetheless, these are the issues being briefed and under consideration at the Ninth Circuit. Given the above, and in the abundance of caution, the Court agrees with Defendant TuSimple that ruling on the pending motions could impermissibly alter the status of the core issues on appeal. The Court concludes a stay of 14 proceedings in this case is appropriate. In Flores v. Bennett, Judge Thurston authored a published opinion considering the applicable test for a stay of a case at the district court level pending appeal. 675 F.Supp.3d 1052 (E.D. Cal. 2023). The court in Flores noted a split in authority regarding the applicable test for a stay of proceedings pending appeal which the Ninth Circuit had not definitively resolved. Flores, 675 F.Supp.3d at 1056-57 (noting differences and use 20 ee 22 ws > Plaintiffs concede that TROs are appealable under certain conditions. ECF No. 181 at 23 || 4. 24 In the original TRO briefing, both parties referenced raising the forum selection clause 25 |/issue in more detail in the forthcoming motion to dismiss briefing. See ECF Nos. 28, %6 TuSimple’s Opposition to Motion for Temporary Restraining Order at 10 f.n. 6; ECF No. 33, Plaintiffs’ Reply In Support of Temporary Restraining Order at 11, “...as will be set 27 || forth in detail in Plaintiffs’ forthcoming opposition to TuSimple’s motion to dismiss their 28 complaint.

1 ||of Nken’ test and Landis® test). Flores ultimately concluded, persuasively, that the 2 Landis test is appropriate for a district court considering a stay of proceedings, and the 3 || Nken test was applicable to stay an injunction pending appeal. Jd. at 1057.’ 4 When considering a stay of proceedings under the Landis test, a court considers: 5 ||(1) the possible damage that may result from the grant of a stay; (2) the hardship or 6 ||inequity which a party may suffer in being required to go forward; and (3) the orderly 7 ||course of justice. Id. at 1056-57 (citations omitted). The Court concludes the balance of 8 ||these factors weigh in favor of issuing a stay. The potential balance of harms considered 9 ||in the first two factors is offset in this case by the Court’s ability to maintain the TRO. 10 || With the TRO in place during the pendency of TuSimple’s appeals, Plaintiffs’ concerns 11 ||regarding dissipation of assets should be diminished. Additionally, the Court concludes 12 || Plaintiffs will not be substantially harmed from the delay of discovery, given some 13 ||expedited discovery has already taken place (even with unresolved issue regarding 14 ||documents located in China). Cf Flores, 675 F.Supp.3d at 1061-62. Regarding the third 15 || Landis factor, as noted in Flores, “courts typically stay cases when the outcome of 16 || another proceeding will have preclusive effect on the pending issues.” /d. at 1063 (citing 17 || Safari Club Intl’l v. Bonta, No. 22-cv-01395-DAD-JDP, 2023 WL 3505373 at *1 (E.D. 18 || Cal. May 17, 2023)). This is exactly the case here, where the Ninth Circuit’s decision 19 ||regarding either the forum selection clause issue or the derivative standing issue would 20 || effectively dismiss the case from this Court. 21 22 23 24 |p

25 ||? Nken v. Holder, 556 U.S. 418, 422 (2009). 26 Is Landis v. N. Am. Co., 299 U.S. 248, 249-50 (1936). Here, while TuSimple cites to Flores, it urges the Court to apply the Nken factors for a stay pending appeal.

1 Accordingly, the Court hereby orders that this case be STAYED pending 2 ||resolution of TuSimple’s consolidated Ninth Circuit Appeals. All pending deadlines and 3 ||hearings are hereby VACATED. 4 B. Maintenance of the TRO 5 Noted above, both parties appear to agree that the Court retains jurisdiction to 6 renew time-bound injunctions which would “preserve the status quo” but not “materially 7 alter[] the status of the appeal.” ECF Nos. 180 at 1, 181 at 5; see Mayweathers v. 8 || Newland, 258 F.3d 930, 935 (9th Cir. 2001) (“[T]he present case involves defendants 9 || who were subject to an injunction at the time of appeal, and the renewed injunction was 10 |/identical to the original one.”). Here, although the TRO has been extended, it has not 11 been modified since TuSimple’s first appeal, nor does the Court currently anticipate any 12 changes during the stay pending resolution of TuSimple’s appeals. 13 IV. ORDER 14 For the reasons set forth above, the Court ORDERS as follows: 15 1. This case is hereby STAYED and all hearings VACATED pending the 16 resolution of TuSimple’s Ninth Circuit Appeals (Case No. 24-1608); and 17 2. The TRO shall be extended to September 15, 2024. 18 19 IT IS SO ORDERED. Mh 20 Dated: June 5, 2024 MW lttiz, 54 (HON AKOGER T. BENITEZ United States DistrictJudge 22 23 24 25 26 27 28