Case Number: BC673138 Hearing Date: March 16, 2018 Dept: 50

Superior Court of California
County of Los Angeles
Department 50

notjustdenim, llc, et al.,

Plaintiffs,

vs.

bailey 44, llc, et al.

Defendants.

Case No.:

BC 673138

Hearing Date:

March 16, 2018

Hearing Time:

8:30 a.m.

[TENTATIVE] ORDER RE:

DEFENDANTS BAILEY 44, LLC, CHRISTOPHER TATE AND NORWEST VENTURE PARTNERS XI LP’S:

(1) MOTION AND APPLICATION TO FILE UNDER SEAL;

(2) DEMURRER TO FIRST AMENDED COMPLAINT; AND

(3) MOTION TO STRIKE

Background

Plaintiffs Notjustdenim, LLC (“Notjustdenim”), Serial Believers, Ltd. (“Serial Believers”), and Lucy Pinter (“Pinter”) (collectively, “Plaintiffs”) initiated the instant action on August 21, 2017. The operative First Amended Complaint (“FAC”) alleges nine causes of action against Defendants Bailey 44 LLC (“Bailey 44”), Christopher Tate (“Tate”), and Norwest Venture Partners XI LP (“NVP”) (collectively, “Defendants”).

Defendants now demur pursuant to Code of Civil Procedure section 430.10, subdivision (e) to the second cause of action (breach of Design Services Agreement), third cause of action (breach of the duty of loyalty and good faith), fourth cause of action (breach of the duty of care), fifth cause of action (intentional misrepresentation), sixth cause of action (fraudulent concealment), seventh cause of action (promissory fraud), eighth cause of action (declaratory relief) and ninth cause of action (accounting). Defendants also move to strike portions of the FAC relating to punitive damages. Finally, Defendants request an order permitting them to file under seal portions of the memorandum in support of the Motion to File Under Seal, the memorandum in support of their Demurrer, the memorandum in support of their Motion to Strike, and the respective reply briefs. Plaintiffs oppose all three motions, but have also applied to file their respective papers under seal in an abundance of caution.

Discussion

Motion and Application[1] to File Under Seal

Generally, court records are presumed to be open unless confidentiality is required by law. (Cal. Rules of Court, rule 2.550(c).) If the presumption of access applies, the court may order that a record be filed under seal “if it expressly finds facts that establish: (1) There exists an overriding interest that overcomes the right of public access to the record; (2) The overriding interest supports sealing the record; (3) A substantial probability exists that the overriding interest will be prejudiced if the record is not sealed; (4) The proposed sealing is narrowly tailored; and (5) No less restrictive means exist to achieve the overriding interest.” (Cal. Rules of Court, rule 2.550(d).)

Defendants assert that the parties voluntarily entered into two agreements that contain confidentiality clauses: the Operating Agreement and the Design Services Agreement. The Operative Agreement was entered into by Notjustdenim, Bailey 44, and Tate to form Superfine USA, LLC (“Superfine USA”). (FAC, ¶¶ 1-2, Ex. A) The Design Services Agreement was between Serial Believers and Superfine USA. (FAC, ¶ 4, Ex. C.)[2] Therefore, limited portions of the papers supporting the instant motions should be filed under seal because they contain confidential and proprietary business information not available to the public and subject to the confidentiality clauses in the operative agreements. (Tate Decl., ¶ 4.) Moreover, Defendants contend that they have a strong interest in keeping their business affairs confidential from third parties and potential competitors. (Tate Decl., ¶¶ 5-6.) Finally, Defendants assert that there is no less restrictive means to achieve the overriding interest. (Tate Decl., ¶ 7.)

“Courts have found that the protection of trade secrets is an interest that can support sealing records in a civil proceeding.” (McGuan v. Endovascular Technologies, Inc. (2010) 182 Cal.App.4th 974, 988.) “‘Trade secret’ means information, including a formula, pattern, compilation, program, device, method, technique, or process, that: (1) Derives independent economic value, actual or potential from not being generally known to the public or to other persons who can obtain economic value from its disclosure or use; and (2) Is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.” (McGuan v. Endovascular Technologies, Inc., supra, 182 Cal.App.4th at p. 988; Civ. Code, § 3426.1, subd. (d).) Courts have also found that enforcement of binding contractual obligations not to disclose “can constitute an overriding interest within the meaning of rule 243.1(d) [currently CRC 2.550].” (Universal City Studios, Inc. v. Superior Court (Unity Pictures Corp.) (2003) 110 Cal.App.4th 1273, 1283.) However, in ordering records sealed, the court must also find a substantial probability that the moving party would be prejudiced absent sealing. (Universal City Studios, Inc. v. Superior Court (Unity Pictures Corp.), supra, 110 Cal.App.4th at pp. 1282-1283)

In opposition, Plaintiffs contend that the confidentiality provisions in the operative agreements are overbroad and unenforceable; they contend that there is “no ‘substantial prejudice to an overriding interest” that would occur if most of the redactions were revealed to the public. (See Opp’n, p. 5: 10-20.)

The Court agrees with Plaintiffs. With regard to the items listed at page 7-8 of the Opposition, none of them meet the test set forth in CRC 2.550 and the Universal case. Defendants have not shown “how its legitimate confidential financial interests will be compromised or its competitive abilities adversely affected if the lodged documents are made available to the public.” Universal City Studios, Inc. v. Superior Court (Unity Pictures Cop.), supra, 110 Cal. App. 4th at p. 1284.) And they have not demonstrated that any trade secret information is contained in the redacted materials.

It is unclear to the Court, what if anything else remains as part of Defendants’ request to seal. At the hearing, Defendants can clarify what remains and why it meets the test set forth in CRC 2.550 and the Universal case. Otherwise, the motion and application to seal is denied.

Demurrer

Second Cause of Action – Breach of the Design Services Agreement

Defendants contend that Pinter lacks standing to sue for breach of the Design Services Agreement because she is not a party to the Design Services Agreement. Plaintiffs contend that Pinter has standing as a third party beneficiary of the Design Services Agreement. Civil Code section 1559 provides: “A contract, made expressly for the benefit of a third person, may be enforced by him [or her] at any time before the parties thereto rescind it.” (Civ. Code, § 1559.) A person seeking to enforce a contract as a third party beneficiary “must plead a contract which was made expressly for his [or her] benefit and one in which it clearly appears that he [or she] was a beneficiary.” (Schauer v. Mandarin Gems of Cal., Inc. (2005) 125 Cal.App.4th 949, 957 [internal citations omitted].) “[A]n intent to make the obligation inure to the benefit of the third party must have been clearly manifested by the contracting parties.” (Schauer v. Mandarin Gems of Cal., Inc., supra, 125 Cal.App.4th at pp. 957-958 [internal citations omitted].) Indeed, the promisor “must have understood that the promisee [] had such intent.” (Schauer v. Mandarin Gems of Cal., Inc., supra, 125 Cal.App.4th at p. 958 [internal citations omitted].) Here, Plaintiffs points out that Pinter is mentioned throughout the agreement, including in the recitals, which evidences the fact that the contract was made with the intent to benefit Pinter. (See FAC, ¶ 161; FAC, Ex. C, Recitals; FAC, Ex. C, § 4.a.) The Court agrees. The FAC sufficiently alleges that Pinter was a contemplated third party beneficiary of the Design Services Agreement. Therefore, the demurrer to the second cause of action as to Pinter is overruled.

Defendants also contend that Bailey 44 and Tate cannot be sued for allegedly breaching the Design Services Agreement because they are not parties to the Design Services Agreement. Plaintiffs contend, in opposition, that Bailey 44 and Tate are alter egos of Superfine USA. The test for applying the alter ego doctrine is 1) “whether there is sufficient unity of interest and ownership that the separate personalities of the individual and the corporation no longer exist” and 2) whether “adherence to the fiction of the separate existence of the corporation would sanction a fraud or promote injustice.” (Misik v. D’Arco (2011) 197 Cal.App.4th 1065, 1073.) “Among the many factors to be considered in applying the doctrine are one individual’s ownership of all stock in a corporation; use of the same office or business location; commingling of funds and other assets of the individual and the corporation; an individual holding out that he is personally liable for debts of the corporation; identical directors and officers; failure to maintain minutes or adequate corporate records; disregard of corporate formalities; absence of corporate assets and inadequate capitalization; and the use of a corporation as a mere shell, instrumentality or conduit for the business of an individual.” (Misik v. D’Arco, supra, 197 Cal.App.4th at p. 1073.) “No single factor is determinative, and instead a court must examine all the circumstances to determine whether to apply the doctrine.” (Ibid. [internal quotations omitted].) The Court finds that although Plaintiffs have sufficiently alleged unity of interest between Bailey 44/Tate and Superfine USA, Plaintiffs have not alleged facts to show that treating the entities as separate would promote an inequitable result. Therefore, the demurrer to the second cause of action as to Bailey 44 and Tate is sustained with leave to amend.

Third Cause of Action – Breach of the Duty of Loyalty and Good Faith

Fourth Cause of Action – Breach of the Duty of Care

Defendants contend that the third and fourth causes of action (together, a breach of fiduciary duty cause of action) must fail because Pinter lacks standing to sue. Additionally, the breach of fiduciary duty causes of action fails as against NVP because Plaintiffs have failed to plead the existence of duty or breach as to NVP. In opposition, Plaintiffs contend that, although Pinter and NVP were not members of Superfine USA, all Defendants owed a fiduciary duty to all Plaintiffs, by virtue of certain conduct enumerated in the FAC. The Court finds, however, that the facts alleged do not support the finding of a fiduciary duty as to Pinter and NVP, who are not members of Superfine USA. The Court finds no support for Plaintiffs’ position in their cited cases. In Cleveland v. Johnson (2012) 209 Cal.App.4th 1315, the Court of Appeal held that stock promoters owed fiduciary duties to an investor/stockholder, but expressly declined to hold that under “all circumstances, all corporations or promoters owe fiduciary duties to all ‘investors.’” (Cleveland v. Johnson, supra, 209 Cal.App.4th at p. 1342.) The Court of Appeal also noted that “it has long been held that ‘[p]romoters are fiduciaries.’” (Cleveland v. Johnson, supra, 209 Cal.App.4th at p. 1339.) Cleveland, then, is inapposite, as it was confined to analysis of a specific class (stock promoters). Plaintiffs also cite to a trial court order, Stearns v. R & H Invs., 2015 Cal. Super. LEXIS 6818, at *3. Another trial court’s orders are not binding precedent on this Court. (See Santa Ana Hospital Medical Center v. Belshé (1997) 56 Cal.App.4th 819, 831 [holding that a written trial court ruling has no precedential value and in many cases are not citable].) Finally, although it is true that a non-fiduciary may be liable for breach of a fiduciary duty “if he colludes with a disloyal fiduciary,” Plaintiffs have not alleged any facts to support a finding of collusion between members of the LLC and NVP. (St. James Armenian Church of Los Angeles v. Kurkjian (1975) 47 Cal.App.3d 547, 552.) Accordingly, the Court sustains the demurrer to the third and fourth causes of action as to Pinter and NVP with leave to amend.

Fifth Cause of Action – Intentional Misrepresentation

Sixth Cause of Action – Fraudulent Concealment

Seventh Cause of Action – Promissory Fraud

Defendants contend that all fraud causes of action must fail because the fraud claims arise out of Defendants’ purported breach of the Operating Agreement and Design Services Agreement. Defendants also contend that the fraud claims are barred by the integration clause in the Operating Agreement and Design Services Agreement. As noted by Plaintiffs, the FAC includes allegations that representations by Tate and Sonya Brown (“Brown”) about Tate’s intentions for the company and his business experience and acumen induced Plaintiffs to enter into the Operating Agreement and Design Services Agreement, that the representations were false, and that Tate and Brown knew that the representations were false. (See FAC, ¶¶ 38-40, 42, 44, 188-191, 200, 207, 210.) The Court finds that these allegations are independent of any allegations arising from Defendants’ purported breach of the operative agreements. Therefore, the economic loss rule does not apply to bar the fraud claims based on these allegations. (See Robinson Helicopter Co., Inc. v. Dana Corp. (2004) 34 Cal.4th 979, 989-990 [“…tort damages [are] permitted in contract cases …. where the contract was fraudulently induced.”] [internal citations omitted].) Furthermore, because a demurrer is properly sustained only if the complaint fails to state a cause of action under any possible legal theory, the Court declines to sustain the demurrer to the fifth, sixth, and seventh causes of action on the basis of the economic loss rule. (Sheehan v. San Francisco 49ers, Ltd. (2009) 45 Cal.4th 992, 998; see also Best v. California Apprenticeship Council (1987) 193 Cal.App.3d 1448, 1463 [“[T]he labeling of a pleading is not determinative, but rather the subject matter of the action is to be determined from its allegations, regardless of what they may be called.”].) Similarly, the parol evidence rule bars “[e]xtrinsic evidence of [an] agreement’s terms.” (Riverisland Cold Storage, Inc. v. Fresno-Madera Production Credit Assn. (2013) 55 Cal.4th 1169, 1174.) The allegations that support the fraud causes of action are independent of the terms of the operative agreements. (See FAC, ¶¶87-121 [describing Defendants’ purported breaches of the Operating Agreement and Design Services Agreement].) Therefore, the parol evidence rule does not apply.

Defendants contend that Plaintiffs fail to allege any actionable misrepresentations by Defendants; rather, the allegations of the FAC amount to representations of nonactionable opinion or nonactionable forecasts of future events. As an initial matter, the Court finds that the FAC sufficiently alleges agency such that Bailey 44 and NVP are implicated in the fraud causes of action. (See FAC, ¶¶ 37, 41-42, 91.) (See Tarmann v. State Farm Mut. Auto. Ins. Co. (1991) 2 Cal.App.4th 153, 157-158 [holding that a general allegation that an unnamed person was an “authorized agent” of a corporation was insufficiently specific to constitute a fraud cause of action].) The Court further finds that the FAC sufficiently alleged that Tate and Brown made actionable misrepresentations, including representations “about their intentions to build the Superfine brand” and representations about Tate’s experience and ability to do so. (FAC, ¶¶ 188, 190.) These representations are neither opinions nor forecasts of future events but “positive assertion[s] of fact,” which information could fairly be characterized as not “generally available.” (Public Employees’ Retirement System v. Moody’s Investors Service, Inc. (2014) 226 Cal.App.4th 643, 662, 664.) Again, because the Court may sustain a demurrer only if the complaint fails to state a cause of action under any possible legal theory, even if some of the alleged misrepresentations are opinions, the demurrer is still properly overruled. As for whether the alleged misrepresentations are pled with the requisite specificity, the Court finds that they are. As discussed above, the FAC contains specific allegations as to Defendants’ intentions for the Superfine brand and their experience and ability to follow through with those intentions. (See FAC, ¶¶ 38-40, 42, 44, 188-191, 200, 207, 210.) The fraud causes of action also sufficiently allege the remaining required elements, intent to induce reliance, justifiable reliance, causation, and damages. (See FAC, ¶¶ 191-197, 201-205, 210-214.) Accordingly, the demurrer to the fifth, sixth and seventh causes of action is overruled.

Eighth Cause of Action – Declaratory Relief

Defendants demur to the declaratory relief cause of action, which seeks a judicial determination that the confidentiality provisions in the Operating Agreement, the Design Services Agreement and the Assignment Agreement (assigning intellectual property rights from Superfine, UK Inc. to Superfine USA) are no longer enforceable. (FAC, ¶¶ 215-224.) The basis of Defendants’ demurrer is that 1) Pinter has no standing to challenge the confidentiality provisions in the Operating Agreement because she is not a member, and 2) the confidentiality provisions do not implicate any public policy or the First Amendment.

Plaintiffs contend that if the confidentiality provisions of the Operating Agreement are to apply to Pinter, then she has standing to challenge them. Plaintiffs add that Superfine USA’s Board cannot vote to enforce the LLC’s rights. This issue is not briefed in much detail by either party, but the Court notes that a “complaining party’s demonstration that the subject of a particular challenge has the effect of infringing some constitutional or statutory right may qualify as a legitimate claim of beneficial interest sufficient to confer standing on that party.” (CashCall, Inc. v. Superior Court (2008) 159 Cal.App.4th 273, 286, quoting Holmes v. Cal. Nat. Guard (2001) 90 Cal.App.4th 297, 314-315.) Since Plaintiffs have pled that the confidentiality provisions violate the First Amendment and public policy, the Court finds that Pinter has sufficient standing for this cause of action.

“Strictly speaking, a demurrer is not an appropriate weapon to attack a claim for declaratory relief inasmuch as the plaintiff is entitled to a declaration of its rights, even if adverse.” (Farmers Ins. Exchange v. Zerin (1997) 53 Cal.App.4th 445, 460.) “It is the general rule that in an action for declaratory relief the complaint is sufficient if it sets forth facts showing the existence of an actual controversy relating to the legal rights and duties of the respective parties under a contract and requests that the rights and duties be adjudged.” (Bennett v. Hibernia Bank (1956) 47 Cal.2d 540, 549-550.) The Court finds that the FAC sufficiently complies with this rule. Therefore, the demurrer to the eighth cause of action is overruled.

Ninth Cause of Action – Accounting

“A cause of action for an accounting requires a showing that a relationship exists between the plaintiff and defendant that requires an accounting, and that some balance is due the plaintiff that can only be ascertained by an accounting.” (Teselle v. McLoughlin (2009) 173 Cal.App.4th 156, 179.) “An action for accounting is not available where the plaintiff alleges the right to recover a sum certain or a sum that can be made certain by calculation.” (Teselle v. McLoughlin, supra, 173 Cal.App.4th at p. 179.) “[A] fiduciary relationship between the parties is not required to state a cause of action for accounting. All that is required is that some relationship exists that requires an accounting.” (Teselle v. McLoughlin, supra, 173 Cal.App.4th at p. 179.) The Court finds that the FAC sufficiently pleads the necessary elements of a cause of action for an accounting. Plaintiffs allege that they were in a profit-sharing relationship with Defendants and that they were members of the LLC. (FAC, ¶¶ 20-21, 226.) Plaintiffs also allege that some balance is due that can only be ascertained by an accounting. (FAC, ¶¶ 227-228.) Therefore, the demurrer to the ninth cause of action is overruled.

Motion to Strike

Defendants move to strike portions of the FAC relating to punitive damages, which are pled in the breach of fiduciary duty causes of action and the fraud causes of action. Because the breach of fiduciary duty causes of action (the third and fourth causes of action) were sustained with leave to amend, the motion to strike as to those causes of action are moot. With regard to the fraud causes of action, the Court has found, as discussed above, that the fraud allegations are pled with the requisite specificity, and therefore, the motion to strike punitive damages as to those causes of action is denied.

Conclusion

As set forth above, the Court rules as follows:

a) Defendants’ and Plaintiffs’ motion and application to file under seal the moving, opposition and reply papers for the Motion to File Under Seal, Demurrer and Motion to Strike are denied;

b) Defendants’ demurrer is sustained with leave to amend as to the second cause of action as to Tate and Bailey 44, as well as to the third and fourth causes of action as to Pinter and NVP;

c) Defendants’ demurrer is overruled as to the second cause of action as to Pinter, and the fifth, sixth, seventh, eighth, and ninth causes of action; and

d) Defendants’ motion to strike is moot in part and otherwise denied.

Plaintiffs may file and serve an amended complaint within 20 days of this Order. If Plaintiffs fail to do so, Defendants’ answer to the FAC must be filed and served within 30 days of this Order.

Defendants are to provide notice of this ruling.

DATED: March 16, 2018 ________________________________

Hon. Teresa A. Beaudet

Judge, Los Angeles Superior Court

[1] Plaintiffs filed an application to file under seal their opposition to the demurrer, motion to strike and motion to seal. “The Application [was] made in abundance of caution and in deference to the confidentiality provisions of the” subject agreements. (Notice of Application, p. 1:1-14.)

[2] Exhibit C is blank in the sealed version of the First Amended Complaint; it appears to be erroneously inserted behind Exhibit B.