Case Name: Small v. Percy, et al.
Case No. 2015-1-CV-281006

I. Background

This case arises out of a dispute amongst providers of internet time servers and their investors. Internet time servers are used by high-frequency traders and stock exchanges to time-stamp trades of securities. Precise time-stamps are critical to determining the chronology of transactions because high-frequency trading computer platforms utilize algorithms to execute large volume security trades at such a rapid pace.

According to the allegations in the underlying complaint, David Small, Kimball Small, and Timothy Costello (“Plaintiffs”) invested in defendant Certichron, Inc. (“Certichron”), an internet time server provider. In exchange for their investments, Certichron issued convertible notes to Plaintiffs. In late 2012, Plaintiffs and defendant Todd Glassey (“Glassey”), Certichron’s President and Chief Executive Officer, revised the shareholder capitalization table in anticipation of soliciting new investors. He represented that any new dilution or further revision of the capitalization table made to accommodate a new investor would take Plaintiffs’ previous investments into account.

Subsequently, Glassey secured funding from defendant Perseus (formerly known as Perseus Telecom Limited), owned by defendant Jock Percy (“Percy”), and affiliated with Percy’s other entities including defendants Perseus Technology Holdings USA, Inc. and Atlas Technology Holding Company (collectively the “Perseus Defendants”). Plaintiffs claim the sale of 100 percent of Certichron’s outstanding shares to the Perseus Defendants violated their rights as creditors in possession of convertible notes and resulted in a dilution and revision of the capitalization table, thereby failing to account for their previous investments in Certichron as promised by Glassey.

Based on these factual allegations, Plaintiffs asserted causes of action against the Perseus Defendants for fraud, intentional interference with contractual relations, inducement of breach of contract, and intentional and negligent interference with prospective economic relations. Plaintiffs also asserted causes of action for fraud against Glassey and Certichron and for breach of contract against Atlas Technology Holding Company.

The entire transaction involving the Perseus Defendants’ investment in Certichron, including the sale of the outstanding Certichron shares, took place subject to an exclusive licensing agreement (“ELA”) executed by Perseus, Certichron, and Glassey; a stock purchase agreement (“SPA”) executed by Glassey and Perseus; and an independent contractor agreement (“ICA”) executed by Perseus and Glassey.
In August 2015, the Perseus Defendants filed a cross-complaint against Glassey and Certichron alleging they misrepresented the stock dilution by indicating Plaintiffs were shareholders instead of creditors and breached the SPA.

Then, Glassey and Certichron filed a first amended cross-complaint (“FACC”) against Plaintiffs and the Perseus Defendants, which is the subject of the motions and demurrer currently before the Court.

As relevant to the pending matters, Certichron alleges in the FACC that the Perseus Defendants, pursuant to the ELA, were to pay Certichron 35 percent of gross profits earned through the licensing and cross-marketing of its internet time server technology in addition to assuming responsibility for some of Certichron’s operations and business responsibilities. Glassey and Certichron allege the Perseus Defendants thereafter failed to cross-market its technology, failed to account for and pay profits due under the ELA, and failed to operate Certichron’s brick and mortar facilities. Additionally, they allege the Perseus Defendants did not maintain Certichron as a corporation in good standing, actively sought to harm their other internet time server ventures, and ultimately failed to return computers, network equipment and other technology when the business relationship deteriorated.

Based on these allegations, Glassey and Certichron assert causes of action for breach of contract against Perseus; intentional misrepresentation against the Perseus Defendants and their in-house counsel, Rachel Zublatt (“Zublatt”); declaratory relief against the Perseus Defendants and Zublatt; conversion against the Perseus Defendants and Zublatt; and conspiracy against Percy and Zublatt. They also assert causes of action for breach of contract and declaratory relief against Plaintiffs.

Previously, Plaintiffs demurred to the FACC. The Perseus Defendants and Zublatt contemporaneously filed a demurrer to the FACC. In addition, they filed several other motions and a request for judicial notice combined as a single “omnibus motion.”

At the hearing on these matters, the Court adopted its tentative ruling sustaining in part and overruling in part Plaintiffs’ demurrer. The Court declined to rule on the morass of motions filed by the Perseus Defendants and Zublatt and directed them to properly notice and file any future motions in compliance with the California Rules of Court.

Subsequently, Zublatt and the Perseus Defendants separately noticed the following matters pending before the Court: (1) motion to dismiss claims against Zublatt for lack of personal jurisdiction; (2) motion to transfer claims to the courts of the State of New York; (3) motion to compel arbitration; and (4) demurrer and accompanying request for judicial notice. The Court considers each in turn.
II. Motion to Dismiss

The Perseus Defendants and Zublatt move to dismiss the claims against Zublatt for lack of personal jurisdiction. This motion is brought pursuant to Code of Civil Procedure section 418.10, subdivision (a)(1), which authorizes a motion to quash service for lack of personal jurisdiction.

As a preliminary matter, the Court notes the Perseus Defendants do not have standing to challenge personal jurisdiction on Zublatt’s behalf. The statute specifically states: “A defendant, on or before the last day of his or her time to plead or within any further time that the court may for good cause allow, may serve and file a notice of motion. . . [t]o quash service of summons on the ground of lack of jurisdiction of the court over him or her.” (Code Civ. Proc., § 418.10, subd. (a)(1).) On its face, the statute clearly contemplates a motion brought by the person who is challenging personal jurisdiction and not by other parties to the action. The Court thus treats the motion as being solely brought by Zublatt.

Zublatt argues the Court lacks personal jurisdiction over her because she lacks sufficient minimum contacts with California.

A court may exercise personal jurisdiction over a defendant in a variety of ways including: (1) service on persons physically present in the forum state; (2) domicile within the state; or (3) consent or appearance in the action. (Weil & Brown, Cal. Prac. Guide: Civ. Pro. Before Trial (Rutter Group 2015) at § 3:131.) When any one of these three traditional bases for personal jurisdiction are not established, a court may exercise personal jurisdiction over a defendant based on his or her minimum contacts with the forum state. (See Burdick v. Superior Court (2015) 233 Cal.App.4th 8, 17-18.)

The outer limit of a court’s power to exercise personal jurisdiction is set forth in California’s long-arm statute, which states personal jurisdiction may be exercised “on any basis not inconsistent with the Constitution of this state or of the United States.” (Code Civ. Proc., § 410.10.) “The United States Constitution permits a state to exercise jurisdiction over a nonresident defendant if the defendant has sufficient ‘minimum contacts’ with the forum such that ‘maintenance of the suit does not offend traditional notions of fair play and substantial justice.’ [Citations.]” (Burdick v. Superior Court, supra, 233 Cal.App.4th at p. 17-18, quoting International Shoe Co. v. Washington (1945) 326 U.S. 310, 316.)

Personal jurisdiction based on minimum contacts may be either general or specific. (Burdick v. Superior Court, supra, 233 Cal.App.4th at p. 18.) To establish general jurisdiction, a plaintiff must show the nonresident defendant had substantial, continuous, and systematic contacts with the forum state. (Ibid.) To establish specific jurisdiction, a plaintiff must demonstrate the defendant (1) purposefully availed himself or herself of benefits in the forum state with respect to the controversy; (2) the controversy relates to or arose out of the contacts with the forum state; and (3) the exercise of personal jurisdiction would comport with traditional notions of fair play and substantial justice. (Ibid.)

Here, none of the parties argue Zublatt was served while in California, is domiciled in California, or has consented to personal jurisdiction. Additionally, the FACC states only that she is an attorney licensed to practice in the State of New York, which although not determinative, suggests she is domiciled in New York and not within California. (FACC, ¶ 10.) While Glassey and Certichron do not affirmatively offer evidence as to Zublatt’s domicile, the parties tacitly agree she is not domiciled in California and is thus a nonresident defendant. The Court therefore looks to whether Zublatt has minimum contacts with California sufficient to allow it to exercise personal jurisdiction over her.

Certichron and Glassey bear the burden of establishing by a preponderance of the evidence that Zublatt had minimum contacts with California. (Elkman v. National States Insurance Co. (2009) 173 Cal.App.4th 1305, 1312.) Certichron and Glassey fail to explain or present evidence demonstrating Zublatt had minimum contacts with the forum state. While they argue Zublatt aided and abetted the alleged fraud, which they claim was committed in California, they do not elaborate or present evidence in support of this argument. They also fail to cite any legal authority.

Certichron and Glassey also argue their ties with California make personal jurisdiction proper. This is misguided. It is well established that the defendant’s or cross-defendant’s contacts with the forum state and not the plaintiff’s or cross-complainant’s contacts serve as a basis for personal jurisdiction. (See, e.g., Burdick v. Superior Court, supra, 233 Cal.App.4th 8, 17-19.)

In conclusion, Certichron and Glassey failed to establish Zublatt had minimum contacts with California or any basis for the proper exercise of personal jurisdiction over her. The motion to quash service for lack of personal jurisdiction is therefore GRANTED.

III. Motion to Transfer

The Perseus Defendants move to transfer “those aspects of claims asserted under the Exclusive License Agreement” to “the Courts of the State of New York” based on a provision within the ELA. (Memo. of Pts. & Auth., p. 3:7-9, 4:14-16.) The sole authority cited as the statutory basis for the motion is Code of Civil Procedure section 395, subdivision (a).

As an initial matter, the Court observes the substance of the motion to transfer is nearly identical to their motion to compel arbitration. Such similarity is not in and of itself a basis for denying the motion, but rather, demonstrates the paucity of arguments and authority presented in support of their motion. While they cite Code of Civil Procedure section 395, subdivision (a) in their notice of motion, they do not discuss this provision or any applicable law. Section 395, subdivision (a) simply sets forth the proper basis for establishing venue in different types of cases. Even if the Perseus Defendants had discussed this subdivision, they still failed to provide the Court with any statutory authority for transferring this action within the State of California.

The companion statute to Code of Civil Procedure section 395 that governs transferring a case is section 396b, which authorizes the Court to transfer a case to the county where venue properly lies within California. Section 396b does not authorize the Court to transfer an action to another state. Accordingly, even if the Perseus Defendants had cited section 396b, that statute does not provide authority for transferring an action to another state.

When venue properly lies in another state or when the courts of another state would serve as a more convenient forum, a party may move to dismiss or stay an action based on the doctrine of forum non conveniens. (See, e.g., Thomson v. Continental Insurance Co. (1967) 66 Cal.2d 738, 742.) The Perseus Defendants do not raise forum non conveniens as a basis for transferring the action. Additionally, even if the doctrine of forum non conveniens was raised, the Court is limited to staying or dismissing the action and cannot transfer the action to another state. (See ibid.)

Finally, even absent the aforementioned impediments to granting their motion, the Perseus Defendants fail to articulate which causes of action are subject to the forum selection clause. Even had they requested transfer of complete causes of action and not simply aspects of some causes of action, they neither identified specific causes of action nor explained the legality or propriety of bifurcating the resolution of claims in the FACC.

Based on the foregoing, the motion to transfer is DENIED.

IV. Motion to Compel Arbitration

The Perseus Defendants move to compel arbitration of “the claims asserted under the Independent Contractor Agreement” pursuant to Code of Civil Procedure section 1281.2.

“On petition of a party to an arbitration agreement alleging the existence of a written agreement to arbitrate a controversy and that a party thereto refuses to arbitrate such controversy, the court shall order the petitioner and the respondent to arbitrate the controversy if it determines that an agreement to arbitrate the controversy exists.” (Code Civ. Proc., § 1281.2.) “The only reasonable construction of the statutory language that conforms to such intent, is to require for a petition to compel arbitration the pleading and proof of (1) the parties’ written agreement to arbitrate a controversy [citation]; (2) a request or demand by one party to the other party or parties for arbitration of such controversy pursuant to and under the terms of their written arbitration agreement; and (3) the refusal of the other party or parties to arbitrate such controversy pursuant to and under the terms of their written arbitration agreement. (Mansouri v. Superior Court (2010) 181 Cal.App.4th 633, 641, original italics.)

The Perseus Defendants assert the ICA contains a written agreement to arbitrate and cite to the following provision in support: “Any controversies arising out of the terms or interpretation of this Agreement shall be settled in the applicable court in the State of New York in accordance with the rules of the Chamber of Commerce Arbitration Rules, and the judgment upon award may be entered in any court having jurisdiction thereof.” (Memo. of Pts. & Auth., p. 3:6-8; see also Cross-Complaint, Exh. 3 [ICA].)

First, this clause does not state controversies shall be resolved through arbitration. Rather, it states they shall be resolved in the applicable court. The Court agrees that it is thus peculiar that the clause then purports to incorporate the Chamber of Commerce Arbitration Rules. While the International Chamber of Commerce is a leading forum for arbitration, the face of the agreement does not state the parties agreed to arbitrate there, or in fact to arbitrate at all. The Perseus Defendants do not explain how this provision equates to an agreement to arbitrate. They have thus failed to satisfy their burden of pleading and proving the existence of an agreement to arbitrate.

Second, the Perseus Defendants do not address whether they made a demand for arbitration or whether Glassey subsequently refused their demand, if one was even made. They have thus also failed to carry their threshold burden of demonstrating a demand for arbitration and subsequent refusal.

Additionally, the Perseus Defendants fail to demonstrate the applicability of the purported arbitration provision in the ICA to any of the claims at issue in this case. They point to paragraphs 27-28 of the FACC and state “those aspects of claims asserted under the independent [contractor] agreement between Todd Glassey and Perseus Telecom Limited must be arbitrated in New York.” (Memo. of Pts. & Auth., p. 2:8-11.) Therein, Certichron and Glassey allege the terms of the ICA, including Glassey’s compensation in the form of consulting fees and stock, and state Perseus Telecom Limited still owes Glassey business expenses and consulting fees incurred prior to the termination of the ICA. (FACC, ¶¶ 27-28.)

Paragraphs 27-28 of the FACC are prefatory factual allegations. Nowhere in the FACC do Certichron or Glassey indicate they are asserting a cause of action based on the ICA. The ICA is not expressly referenced in any of the causes of action. Rather, the individual causes of action are based on the ELA. Accordingly, while there are factual allegations related to the ICA, there are no causes of action based on this specific agreement. The Perseus Defendants failed to coherently identify any causes of action that must be arbitrated, even if the parties had agreed to arbitration.

The petition to compel arbitration is DENIED.

V. Request for Judicial Notice in Support of Demurrer

The Perseus Defendants request judicial notice of an order denying various motions and dismissing the second amended complaint in an unrelated action filed by Glassey in federal court. They also request judicial notice of the appellate decision affirming the order of the district court. The Perseus Defendants request judicial notice of these court records in an attempt to justify their characterization of Glassey as litigious.

A matter must be relevant to a material issue in order for the Court to take judicial notice of it. (Silverado Modjeska Recreation and Park Dist. v. County of Orange (2011) 197 Cal.App.4th 282, 307, fn. 18.)

Here, the Perseus Defendants do not rely on or cite to these records in discussing the merits of their demurrer and concede the records are only germane to their characterization of Glassey. Whether Glassey is litigious is not a material issue before the Court. The records are therefore not relevant to the demurrer.

The request for judicial notice is DENIED.

VI. Demurrer

The Perseus Defendants demur to the sixth and seventh causes of action on the grounds they fail to state facts sufficient to constitute a cause of action and are uncertain. They also demur to the punitive damages allegations on the ground they fail to state sufficient facts. The parties met and conferred prior to the filing of the demurrer in compliance with Code of Civil Procedure section 430.41, subdivision (a). (See Lederman Decl., ¶ 3.)

A. Sixth and Seventh Causes of Action

1. Choice of Law

As a preliminary matter, the Perseus Defendants state, without elaboration, that the demurrer must be decided based on New York law because the ELA contains a choice of law provision selecting New York law as the controlling law.

First, the Perseus Defendants provide no discussion or analysis of why New York law should apply; they simply assert the conclusion that it applies and begin discussing New York law in support of their arguments on demurrer.

Second, the Perseus Defendants fail to address the substance and scope of the choice of law provision in the ELA. The relevant provision in the ELA states: “The Agreement shall be governed by, and construed in accordance with, the laws of New York, without regard to conflict of law principles.” (Cross-Complaint, Exh. 2, p. 9.) The demurrer is directed to claims sounding in tort, not contract. The Court is thus not presented with issues of contract interpretation or breach of contract, and issues regarding tort claims appear to be beyond the scope of the choice of law provision.

The Perseus Defendants have not adequately discussed whether New York law should apply and therefore have not provided the Court with a basis for displacing California law in considering the demurrer. The Court will therefore apply California law in ruling on the demurrer.

2. Failure to State Sufficient Facts

The Perseus Defendants argue the sixth cause of action fails because Glassey and Certichron have not adequately alleged any actionable misrepresentations. Additionally, they contend the sixth and the seventh causes of action fail to the extent they are asserted against Percy because Glassey and Certichron have not sufficiently alleged a basis for his liability as an individual.

a. Sixth Cause of Action Against Perseus Defendants

The sixth cause of action for intentional misrepresentation is based upon the ELA. In the FACC, Glassey and Certichron allege the Perseus Defendants promised, in part, to cross-market Certichron’s technology and pay them a portion of the gross profits, but never intended to do so or to perform in accordance with the terms of the ELA. The Perseus Defendants argue Glassey and Certichron fail to state a claim for intentional misrepresentation because the terms of the agreement coupled with a contemporaneous intent not to perform at the time the promises were made are not actionable as fraud. Additionally, they argue Glassey and Certichron fail to state a claim for intentional misrepresentation because there are no allegations of specific misrepresentations within the body of the FACC, and Glassey and Certichron simply attached the ELA instead.

“The elements of fraud are (1) the defendant made a false representation as to a past or existing material fact; (2) the defendant knew the representation was false at the time it was made; (3) in making the representation, the defendant intended to deceive the plaintiff; (4) the plaintiff justifiably relied on the representation; and (5) the plaintiff suffered resulting damages.” (West v. JPMorgan Chase Bank, N.A. (“West”) (2013) 214 Cal.App.4th 780, 792.) “A promise to do something necessarily implies the intention to perform; hence, where a promise is made without such intention, there is an implied misrepresentation of fact that may be actionable fraud.” (Lazar v. Superior Court (1996) 12 Cal.4th 631, 638; see also Tarmann v. State Farm Mutual Auto Insurance Co. (1991) 2 Cal.App.4th 153, 159 [“The allegation of a promise (which implies a representation of intention to perform) is the equivalent of the ordinary allegation of a representation of fact.”]) The elements of fraud must be pleaded with specificity. (West, supra, 214 Cal.App.4th at p. 793.) A cross-complainant will be deemed to have pleaded misrepresentations with the requisite specificity when he or she attaches to the pleading a document containing promises to perform some act and alleges such promises were made with the intent not to perform. (See id. at p. 793-94 [specificity requirement satisfied where mortgagor attached letter and agreement promising reevaluation of loan modification plan and alleged bank did not actually intend to consider a loan modification at the time it prepared the letter and agreement].)

Here, Glassey and Certichron allege the Perseus Defendants made the specific promises in the ELA while contemporaneously intending not to perform. Accordingly, Glassey and Certichron have indeed alleged the Perseus Defendants made misrepresentations of fact that are actionable as fraud.

First, contrary to what the Perseus Defendants suggest, there are indeed specific allegations in the FACC as to the terms of the ELA that Certichron and Glassey allege the Perseus Defendants never intended to perform. Additionally, even if Glassey and Certichron did not include these specific allegations, this argument would still fail because, as in West, allegations are sufficiently specific even where they appear in an agreement attached to the relevant pleading and not in the actual body of the pleading itself.

In conclusion, the arguments advanced by the Perseus Defendants in support of their demurrer to the sixth cause of action for failure to state facts are unmeritorious and do not provide a basis for sustaining the demurrer.

b. Sixth and Seventh Causes of Action Against Percy

The Perseus Defendants also argue, in a conclusory manner, that Glassey and Certichron failed to state claims for intentional misrepresentation and conversion against Percy because the FACC does not allege he profited personally or “[identify] any factual basis for suing [him] personally.” (Memo. of Pts. & Auth. at p. 8:1-3.)

The Perseus Defendants neither elaborate nor cite any authority in support of this assertion, and the Court will not speculate as to their position. They have therefore failed to adequately support this argument as well.

c. Conclusion

Based on the foregoing, the demurrer to the sixth and seventh causes of action on the ground each fails to state a claim is OVERRULED.

3. Uncertainty

The Perseus Defendants state the sixth and seventh causes of action are fatally uncertain. They do not provide an explanation for this assertion.

A party may demur on the ground of uncertainty to challenge a pleading as uncertain, ambiguous, or unintelligible. (Code Civ. Proc., § 430.10, subd. (f).) “[D]emurrers for uncertainty are disfavored and are granted only if the pleading is so incomprehensible that a defendant cannot reasonably respond.” (Lickiss v. Financial Industry Reg. Authority (2012) 208 Cal.App.4th 1125, 1135.)

The Perseus Defendants do not assert, and it is not otherwise apparent to the Court, that the FACC is so incomprehensible they cannot respond. They fail to articulate any specific ambiguities or uncertainties, let alone any that rise to the level of rendering the FACC unintelligible. The Perseus Defendants have therefore failed to adequately justify their demurrer on the ground of uncertainty as to the sixth and seventh causes of action. The demurrer on the ground of uncertainty is therefore OVERRULED.

B. Punitive Damages Allegations

The Perseus Defendants also demur to the punitive damages allegations on the ground they fail to state a cause of action.

“‘There is no cause of action for punitive damages. Punitive or exemplary damages are remedies.’” (Grieves v. Superior Court (1984) 157 Cal.App.3d 159, 163, quoting Gold v. Los Angeles Democratic League (1975) 49 Cal.App.3d 365, 373, fn. 3.) While a demurrer is the proper vehicle for challenging the sufficiency of a cause of action, a demurrer does not lie to punitive damages allegations. (Grieves v. Superior Court, supra, 157 Cal.App.3d at p. 164.) The proper method for challenging punitive damages allegations is a motion to strike. (Ibid.; see also Code Civ. Proc., § 436.) “A notice of motion to strike a portion of a pleading must quote in full the portions sought to be stricken except where the motion is to strike an entire paragraph, cause of action, count, or defense. Specifications in a notice must be numbered consecutively.” (Cal. Rules of Court, rule 3.1322(a).)

First, the Perseus Defendants did not separately notice and file a motion to strike in order to challenge the punitive damages allegations in the FACC. Instead, they improperly demurred to the punitive damages allegations. Even if the Court were inclined to consider the demurrer to the punitive damages as a motion to strike, it declines to do so because the Perseus Defendants also failed to quote verbatim or specify the paragraphs containing the allegations they seek to challenge in any of their papers. The Court is thus unable to determine what particular allegations are at issue.

The demurrer to the punitive damages allegations is therefore OVERRULED.

The Court will prepare the order.