Case Name: Blade Ventures, LP v. MetricStream, Inc., et al.
Case No.: 2015-1-CV-287269

I. Background and Discovery Dispute

This is an action for fraud arising out of the reconveyance of stock warrants issued during a Series 1 round of financing brought by Blade Ventures, LP (“Blade”) against defendants MetricStream, Inc. (“MetricStream”) and its Director of Finance, William N. Williams (“Williams”).

According to the allegations in the first amended complaint, MetricStream makes enterprise and cloud-based software for corporate risk management and regulatory compliance. MetricStream needed additional capital. In late 2008, MetricStream received a loan from Advanced Equities Financial Corporation (“AEFC”) and its affiliated entities and funds (collectively, “AE”). In exchange for the loan, MetricStream executed a promissory note agreeing to issue AE seven-year stock warrants for the future purchase of preferred shares. Around the same time, MetricStream also began working with AE on a Series 1 round of financing. As part of its Series 1 financing, MetricStream issued stock warrants for preferred shares to AE as an investor.

As to Blade and AE, Blade loaned upwards of $1,000,000.00 to AE between July 2008 and December 2008. AE executed a promissory note in favor of Blade for this loan. The parties subsequently agreed AE would designate Blade as the recipient of the warrants for preferred shares it would receive as an investor during the Series 1 round of financing in satisfaction of its debt.

At some point prior to the closing of the Series 1 financing, Blade agreed to provide MetricStream with a bridge loan. In exchange for the bridge loan, MetricStream authorized issuance of an additional warrant for preferred shares to AE. The warrant issued in exchange for the bridge loan, unlike the original seven-year warrants issued pursuant to the promissory note for AE’s loan to MetricStream, was for an unspecified term and did not contain an expiration date. It appears, at some point in time, AE designated Blade as the recipient of the warrant issued in exchange for the bridge loan as Blade provided the capital for the bridge loan.
In July 2009, the Series 1 round of financing closed. Pursuant thereto, Blade received preferred shares of MetricStream stock pursuant to the warrant for the bridge loan for which AE designated Blade as the recipient. Blade also alleges it independently received a seven-year warrant for preferred shares as part of the Series 1 closing.

At the time of the closing, Blade also sold the promissory note AE executed in its favor, which was only partially repaid, back to AE. In exchange, AE conveyed to Blade shares of preferred stock obtained through redemption of the warrants it received as an investor during the Series 1 round of financing, unredeemed warrants for preferred shares, and shares of Series D-1 stock. AE conveyed these securities by means of a note purchase agreement (the “NPA”).

In 2012 and 2013, MetricStream confirmed Blade’s stock holdings and confirmed it held warrants set to expire in July 2016 in response to Blade’s request for this information as part of its annual financial audit and accounting. In February 2015, Blade once again asked MetricStream to confirm its stock and warrant holdings. In response, MetricStream informed Blade the warrants it held were for far fewer shares than previously indicated and that these warrants expired in 2014. Blade brought this discrepancy to Williams’s attention, but did not receive an explanation and was referred to MetricStream’s outside counsel. To date, MetricStream has refused to issue certificates for shares held by Blade and has failed to provide it with information and accounting. Blade also alleges MetricStream withheld information about the SEC’s investigation into AE for failing to provide investors with accurate information.

Based on these allegations, Blade asserts causes of action against MetricStream for: (1) intentional misrepresentation; (2) negligent misrepresentation; (3) fraudulent concealment; (4) breach of fiduciary duty; (5) negligence; (6) negligence per se; (7) breach of contract; (8) promissory estoppel; (9) conversion; (10) claim and delivery; and (11) unjust enrichment. Blade asserts causes of action against Williams for: (1) intentional misrepresentation; (2) negligent misrepresentation; (3) fraudulent concealment; (6) negligence per se; and (8) promissory estoppel.

Blade served MetricStream with requests for the production of documents, set one (“RPD”). (Doan Decl., Exh. A.) As to the only RPD at issue here, RPD No. 59, MetricStream served an objection-only response. (Doan Decl., Exh. B.) The parties met and conferred in an attempt to informally resolve their discovery dispute, but were unsuccessful in doing so. (Doan Decl., Exhs. C-F, H-I.) Currently before the Court is Blade’s motion to compel a further response to RPD No. 59.

II. Motion to Compel

A. Nature of the Motion

Blade’s motion is two-fold as it requests: (1) the production of documents responsive to RPD No. 59 and (2) that this production include documents in the custody of Guarav Kapoor (“Kapoor”), MetricStream’s Chief Operating Officer (“COO”). While the motion with respect to Kapoor is framed as an independent component of the motion, Blade does not articulate a statutory basis for this aspect of its motion. Both parties appear to be proceeding pursuant to federal procedures. Nonetheless, the resolution of Blade’s second request will necessarily be resolved in the context of evaluating MetricStream’s objections to RPD No. 59. The Court will therefore address Blade’s request as part of its motion to compel a further response.

B. Merits of the Motion

The propounding party may move for an order compelling a further response to an inspection demand if the party deems the responding party’s objections are too general or lack merit. (Code Civ. Proc., § 2031.310, subd. (a)(3).) The propounding party must first demonstrate good cause for the discovery sought. (Code Civ. Proc., § 2031.310, subd. (b)(1).) Once the propounding party establishes good cause for the discovery, the burden shifts to the responding party to justify any objections and responses. (Kirkland v. Superior Court (2002) 95 Cal.App.4th 92, 98.)

Blade moves to compel a further response to RPD No. 59, which requests communications between MetricStream and any Series 1 investor who received stock warrants MetricStream now claim to be expired. MetricStream objected to RPD No. 59 on the grounds of relevance, failure to identify documents with particularity, overbreadth, undue burden, the attorney-client privilege and work-product doctrine, and “any other applicable privilege, protection, or immunity.” MetricStream attempts to justify its objections on the grounds of relevance, overbreadth, and undue burden. MetricStream’s remaining objection on the ground of failure to identify documents with particularity is therefore overruled. Its objections on the grounds of the attorney-client privilege and the work product doctrine, although undefended, are preserved. (See Best Products, Inc. v. Superior Court (2004) 119 Cal.App.4th 1181, 1188-89.)

1. Good Cause, Relevance Objection, and Overbreadth Objection

Blade argues there is good cause for the discovery sought because it is relevant to its fraud and negligence claims. MetricStream argues there is no good cause for the discovery and that RPD No. 59 is overbroad and seeks irrelevant information because other investors’ problems and informal complaints with respect to the expiration of the stock warrants are not germane to Blade’s breach of contract claim.

To demonstrate good cause for discovery, the moving party must make “a fact-specific showing of relevance.” (Glenfeld Development Corp. v. Superior Court (1997) 53 Cal.App.4th 1113, 1117.) Discovery is allowed for any matters not privileged that are either relevant to the subject matter involved in the action or reasonably calculated to lead to the discovery of admissible evidence. (Code Civ. Proc., § 2017.010.) Information is relevant to the subject matter if it might reasonably assist a party in evaluating its case, preparing for trial, or facilitating settlement. (Gonzalez v. Superior Court (1995) 33 Cal.App.4th 1539, 1546.) “Admissibility is not the test and information, unless privileged, is discoverable if it might reasonably lead to admissible evidence.” (Ibid., original italics.) Courts liberally construe the relevance standard, and any doubts as to whether a request seeks information within the scope of discovery are generally resolved in favor of discovery. (Colonial Life & Accident Ins. Co. v. Superior Court (1982) 31 Cal.3d 785, 790.)

Documents responsive to RPD No. 59 are relevant to Blade’s claims, the majority of which sound in fraud, because they appear likely to show what representations MetricStream made about the quality, term, and expiration date of stock warrants issued around the time of and as part of its Series 1 round of financing. Similarly, the requested communications may demonstrate whether other investors were either deceived or had a similar misunderstanding as to the quality, term, and expiration date of the stock warrants. While RPD No. 59 seeks discovery that is relevant, the discovery sought is also calculated to lead to the discovery of admissible evidence because responsive documents may lead Blade to additional information about the Series 1 financing, additional capitalization tables, and further information about the stock warrants at issue that will assist it in marshaling evidence, preparing for trial, and evaluating its claims.

MetricStream presents several arguments in opposition, all of which suffer from the same two flaws. MetricStream’s arguments confuse admissibility and the standard for relevance for purposes of discovery, and fail to address whether the discovery sought is relevant in relation to Blade’s claims other than breach of contract.

Specifically, MetricStream argues communications with other investors who also had warrants it now claims are expired would not be admissible and would be barred by the parol evidence rule. MetricStream suggests such communications would be inadmissible because communications with other investors could not be used to contradict the express terms of the NPA, to which only AEFC and Blade were parties. First, admissibility is not the standard for relevance for purposes of discovery. Second, even if communications with other investors could be inadmissible under the parol evidence rule or any other rule, MetricStream fails to explain how, as discussed above, such communications would not otherwise be calculated to lead to the discovery of admissible evidence relevant to the allegations of fraud. Third, MetricStream’s argument is predicated on a hyper-technical interpretation of the NPA and analysis of the merits of the breach of contract claim.

MetricStream essentially argues Blade may not obtain communications even with respect to the other AE entities that invested during the Series 1 financing because AEFC is the only AE entity identified in the NPA through which Blade obtained the stock warrants at issue. As previously stated, such an analysis is too narrow and neglects to address relevance or overbreadth considering the broad standards for relevance in discovery.

The factual claims made by MetricStream are not properly resolved at this stage in the litigation, and in any event the facts remain unclear. For example, MetricStream itself asserts AEFC is referred to by several different names within the NPA and the schedule of investors. Even under MetricStream’s version of events it is not clear which AE entity conveyed the stock warrants, and the Court finds discovery of communications between MetricStream and these other entities and investors to be appropriate. Moreover, AE appears to have obtained stock warrants with different expiration dates through several different transactions. Blade then obtained some of these warrants from AE in addition to directly obtaining stock warrants on its own as part of the Series 1 financing. Under these circumstances, the Court is not prepared to conclude which particular stock warrants Blade obtained and whether those warrants were for terms of five years, seven years, an unspecified number of years, or some combination of these terms, and deny discovery based on those conclusions.

MetricStream’s insistence that Blade obtained a five-year warrant and therefore could not benefit from information about other warrants issued to other investors, whether of the same quality and term or not, is not justified based on facts which are not yet proven. The Court will not consider or make conclusions as to the merits of a party’s defenses or theories of the case in resolving a discovery motion.

Blade has therefore established good cause for the discovery. None of MetricStream’s arguments have merit, and its objections on the grounds of relevance and overbreadth are overruled. This conclusion pertains to RPD No. 59 as a whole.

The Court also finds there is good cause for the discovery sought to the extent documents responsive to RPD No. 59 are in Kapoor’s possession. While MetricStream argues that Kapoor had limited involvement in the securities transactions at issue here, it subsequently concedes Kapoor had communications with investors about sales, marketing, and due diligence. Such communications may include discussion of the characteristics and expiration dates of stock warrants issued by MetricStream. Given that the gravamen of this action is fraud, such communications are relevant. Blade has therefore established good cause for the discovery with respect to documents in the custody of Kapoor. MetricStream’s objections on the grounds of relevance and overbreadth are therefore overruled with respect to documents specifically in Kapoor’s custody as well.

2. Undue Burden Objection

MetricStream argues locating and producing documents in Kapoor’s custody would be burdensome and generically bemoans the burden that would be imposed upon it in the event the Court were to grant Blade’s motion.

“[S]ome burden is inherent in all demands for discovery.” (West Pico Furniture Co. of Los Angeles v. Superior Court (“West Pico”) (1961) 56 Cal.2d 407, 417-18.) “The objection of burden is valid only when that burden is demonstrated to result in injustice.” (Ibid.) “If a party objects to the discovery of electronically stored information on the grounds that it is from a source that is not reasonably accessible because of undue burden or expense . . . the responding party shall identify in its response the types or categories of sources of electronically stored information that it asserts are not reasonably accessible.” (Code Civ. Proc., § 2031.210, subd. (d).) The responding party bears the burden of justifying its objection to the production of ESI. (Code Civ. Proc., § 2031.310, subd. (d); see also West Pico, supra, 56 Cal.2d at p. 417 [must articulate specific facts demonstrating time and effort required exceed value of discovery].) Even if the responding party can establish the ESI sought “is not reasonably accessible because of the undue burden or expense, the court may nonetheless order discovery [of ESI] if the demanding party shows good cause.” (Code Civ. Proc., § 2031.310, subd. (e).) In making such an order, a court shall limit the frequency or extent of the discovery of ESI if the “likely burden or expense of the proposed discovery outweighs the likely benefit, taking into account the amount in controversy, the resources of the parties, the importance of issues in the litigation, and the importance of the requested discovery in resolving the issues.” (Code Civ. Proc., § 2031.310, subd. (g)(4).)

As an initial matter, MetricStream failed to identify in its responses themselves which types or categories of sources of ESI it asserts are not reasonably accessible due to the burden and expense of accessing them. Its objection on the ground of undue burden was generic and did not specify it was objecting specifically to ESI. MetricStream therefore failed to effectively object to the production of ESI in compliance with Code of Civil Procedure section 2031.210, subdivision (d).

Even if MetricStream had properly objected to this request, it fails to articulate or present specific evidence of the burden or expense of the proposed discovery. MetricStream does not present evidence of the number of hours or financial cost it would incur locating and producing documents responsive to RPD No. 59 or documents in the custody of Kapoor. MetricStream does not identify how doing so would be unduly burdensome given there is only one RPD at issue or address how the purported burden outweighs factors such as the amount in controversy, the resources of the parties, the importance of issues in the litigation, and the importance of the requested discovery in resolving the issues.

MetricStream has therefore failed to substantiate its objection on the ground of undue burden with respect to RPD No. 59. Its objection on the ground of undue burden is overruled.

3. Substantive Response

As indicated above, MetricStream gave an objection-only response to RPD No. 59. While MetricStream did not provide a substantive response, it asserts there are likely not many responsive documents in Kapoor’s custody. The Court notes this argument is misplaced given MetricStream did not provide a code-compliant statement of its inability to comply in its response itself. If a party is unable to comply with an inspection demand, the party must “affirm that a diligent search and reasonable inquiry has been made in an effort to comply with that demand.” (Code Civ. Proc., § 2031.230.) The party must also “specify whether the inability to comply is because the particular item or category has never existed, has been destroyed, has been lost, misplaced, or stolen, or has never been or is no longer, in the possession, custody, or control of the responding party.” (Code Civ. Proc., § 2031.230.) MetricStream has not satisfied either of these requirements either in its response itself or in opposition to the instant motion, and similarly did not submit a declaration from Kapoor supporting this assertion.

III. Conclusion

Based on the foregoing, the motion to compel a further response to RPD No. 59 is GRANTED. MetricStream shall serve Plaintiffs with a verified, code-compliant further response to RPD No. 59, without objections (except for objections on the grounds of the attorney-client privilege or work product doctrine), within 20 calendar days of this order and produce all documents, including documents in the custody of Kapoor, in accordance with this response.

If any responsive document is withheld on the basis of the attorney-client privilege or the work product doctrine, Defendant must produce a privilege log identifying each document withheld and setting forth sufficient facts for other parties to evaluate the merits of the asserted objection. (See Best Products, Inc. v. Superior Court, supra, 119 Cal.App.4th at pp. 1188-89; see also Code Civ. Proc., § 2031.240, subd. (c).)

The Court will prepare the order.