Case Name:   Matthew Barrie, et al. v. Intel Corporation, et al.

 

Case No.:       1-14-CV-265651

 

Demurrer to Plaintiffs’ Complaint and Motion for an Order Sealing Exhibit 1 to the Declaration of J. Tyler McGaughey in Support of Intel Corporation’s Request for Judicial Notice by Defendant Intel Corporation

 

Plaintiffs Matthew Barrie, Nathan Davis, Nicholas De Jong, David Harrison, Alan Liddle, and Darren Williams (“Plaintiffs”) are, at all relevant times, owners of shares of common stock of Sensory Networks, Inc. (“SNI”). (Complaint, ¶¶3 – 9.) In the fall of 2013, defendant Intel Corporation (“Intel”) acquired SNI by merger with 15 Corporation, a wholly owned subsidiary of Intel. (Complaint, ¶13.) Intel, SNI, and 15 Corporation entered into an “Agreement and Plan of Merger” on September 9, 2013. (Complaint, ¶14.) Plaintiffs were not parties to the Agreement and Plan of Merger. (Id.) On or about October 16, 2013, SNI and 15 Corporation filed an Agreement of Merger (“Merger Agreement”) with the California Secretary of State. (Complaint, ¶16.) The form of Merger Agreement was attached to the Agreement and Plan of Merger and agreed to by Intel. (Complaint, ¶17.)

 

Pursuant to the Merger Agreement, each share of SNI common stock would be cancelled and extinguished and automatically converted into the right to receive specified consideration at the effective time of the merger. (Complaint, ¶18.)

 

Instead of abiding by the terms of the Merger Agreement, Intel withheld consideration unless shareholders, including Plaintiffs, agreed to additional terms and conditions. (Complaint, ¶19.) One such term required Plaintiffs to execute a “Letter of Transmittal” in which Plaintiffs would release all claims (“Release”) and agree to potential uncapped liability (“Uncapped Liability”). (Complaint, ¶¶20 – 21.) Plaintiffs tendered their share certificates and Letter of Transmittal or struck out the Release and Uncapped Liability provisions or refused to return the Letter of Transmittal due to the additional terms. (Complaint, ¶22.) Intel refused to provide Plaintiffs with the consideration specified in the Merger Agreement. (Complaint, ¶23.)

 

On May 22, 2014, Plaintiffs commenced this action by filing a complaint against Intel asserting a single cause of action for declaratory relief.

 

On August 8, 2014, Intel filed the motions presently before the court: (1) a demurrer to the complaint; and (2) a motion for an order sealing exhibit 1 to the declaration of J. Tyler McGaughey in support of Intel Corporation’s request for judicial notice.

 

On September 3, 2014, Plaintiffs filed opposition to Intel’s motions.

 

Discussion

 

1. Defendant Intel’s demurrer is SUSTAINED.

 

1. Defendant Intel’s request for judicial notice is GRANTED.

 

In support of its demurrer, Intel requests judicial notice of (1) the Agreement and Plan of Merger and (2) the Merger Agreement. Intel relies, in part, upon Align Technology, Inc. v. Tran (2009) 179 Cal.App.4th 949, 956, fn. 3 (Align), where the court took judicial notice of a settlement agreement referred to by the plaintiff in the complaint. The Align court, in turn, relies upon Ingram v. Flippo (1999) 74 Cal.App.4th 1280, 1285, fn. 3 where the court took judicial notice of a letter and media release which had not been attached to the complaint. However, the complaint excerpted quotes from the letter and summarized parts in detail. “Since the contents of the letter and media release form the basis of the allegations in the complaint, it is essential that we evaluate the complaint by reference to these documents. Respondents have requested that we take judicial notice of the letter and media release under Evidence Code section 452, subdivision (h), and appellant has not opposed this.”

 

Plaintiffs do not oppose Intel’s request for judicial notice of the Merger Agreement. However, Plaintiffs do oppose the request for judicial notice of the Agreement and Plan of Merger. Plaintiffs do not deny the existence of the Agreement and Plan of Merger. Plaintiffs do, however, contend the specific request here lacks a proper foundation and that Intel has not sufficiently demonstrated that the Agreement and Plan of Merger submitted is the exact Agreement and Plan of Merger at issue here.

 

In Gould v. Maryland Sound Industries, Inc. (1995) 31 Cal.App.4th 1137, 1145 (Gould), the court held that “the existence of a contract between private parties cannot be established by judicial notice under Evidence Code section 452, subdivision (h).”  However, in Gould, the parties had a dispute with one party claiming employment under an oral contract and the other party claiming that the employment was made pursuant to a written contract.  The Gould court’s holding was specifically limited to

 

…attempts to establish the existence of a contract under the “indisputable facts” provision of Evidence Code section 452, subdivision (h).  This is the only ground urged by MSI and the only ground even conceivably applicable under the circumstances here.  We do not rule out the possibility the existence of a contract could be established by judicial notice under different circumstances, e.g., through reference to the plaintiff’s pleadings or discovery responses in the same or a different action.

 

(Gould, supra, 31 Cal.App.4th at p. 1145, fn. 1.)

 

One of the alternative means suggested by the Gould court (reference to plaintiff’s pleadings) would allow the court to take judicial notice of the Agreement and Plan of Merger. In spite of Plaintiff’s objection, the facts here are distinguishable from Gould primarily because Plaintiffs do not dispute the existence of the Agreement and Plan of Merger or of the terms therein.

 

Accordingly, defendant Intel Corporation’s request for judicial notice in support of demurrer is GRANTED. (See Evid. Code, §452, subd. (h); see also Align Technology, Inc. v. Tran (2009) 179 Cal.App.4th 949, 956, fn. 3; cf. Gould v. Maryland Sound Industries, Inc. (1995) 31 Cal.App.4th 1137, 1145.)

 

1. Failure to state a cause of action for declaratory relief.

 

“A complaint for declaratory relief should show the following: (a) A proper subject of declaratory relief within the scope of C.C.P. 1060; (b) An actual controversy involving justiciable questions relating to the rights or obligations of a party.”  (5 Witkin, California Procedure (5th ed. 2008) Pleading, §853, p. 268.)  Code of Civil Procedure section 1060 specifically provides for a declaration of rights and duties between two persons.  “Any person … who desires a declaration of his or her rights or duties with respect to another, may bring an action for a declaration of his or her rights or duties with respect to another.  The action may be brought before any breach of the obligation regarding which the declaration is sought.”  (Weil & Brown, et al., CAL. PRAC. GUIDE: CIV. PROC. BEFORE TRIAL (The Rutter Group 2014) ¶6:186, p. 6-59 citing Code Civ. Proc., §1060.)  “The existence of an actual, present controversy must be pleaded specifically.  General statements about a controversy are useless; the facts of the respective claims concerning the subject must be given.”  (5 Witkin, California Procedure (5th ed. 2008) Pleading, §862, p. 277.)

 

The court in Gafcon, Inc. v. Ponsor & Associates (2002) 98 Cal.App.4th 1388, 1403 wrote, “declaratory relief operates prospectively, and not merely for the redress of past wrongs.  It serves to set controversies at rest before they lead to repudiation of obligations, invasion of rights or commission of wrongs; in short, the remedy is to be used in the interests of preventive justice, to declare rights rather than execute them.”  (Internal quotations omitted.  Emphasis added.)  “Hence, where there is an accrued cause of action for an actual breach of contract or other wrongful act, declaratory relief may be denied.”  (5 Witkin, California Procedure (4th ed. 1997) Pleading, §823, p. 279.)

 

Intel demurs by arguing that Plaintiffs’ claim for violation of the Merger Agreement has already accrued into a breach of contract claim and Plaintiffs have an adequate remedy at law, i.e., the consideration specified in the Merger Agreement. At paragraph 25 of the complaint, Plaintiffs allege, pursuant to the Merger Agreement, they “have the right, by operation of law, to receive the consideration specified therein for their Common Stock.” At paragraph 26 of the complaint, Plaintiffs allege, “Defendants refused to tender to Plaintiffs the consideration specified in the Merger Agreement.” In the prayer for relief, Plaintiffs specifically seek “a declaration that the Plaintiffs … are entitled to the consideration specified in the Merger Agreement in such amount as the Court may determine in excess of the jurisdictional amount of this Court and a Court order requiring Intel to pay such consideration.” Since the claim has already ripened into a breach of contract, Intel contends a declaratory relief action is not proper. “The rule in this state is that injunctive and declaratory relief will not be granted where there is a plain, complete, speedy, and adequate remedy at law.” (Flying Dutchman Park, Inc. v. City and County of San Francisco (2001) 93 Cal.App.4th 1129, 1138.) “Where … a party has a fully matured cause of action for money, the party must seek the remedy of damages, and not pursue a declaratory relief claim.” (Canova v. Trustees of Imperial Irrigation Dist. Employee Pension Plan (2007) 150 Cal.App.4th 1487, 1497.)

 

In opposition, Plaintiffs now contend the controversy is not the payment of consideration, but rather the Plaintiffs’ future exposure in agreeing to the Release and Uncapped Liability provisions. Even if this constituted a valid distinction, this is not clear from the complaint. Moreover, Plaintiffs’ concern (potential liability under the Release and Uncapped Liability provisions) does not amount to an actual present controversy. As framed by Plaintiffs, this issue presents a potential future controversy.

 

For these reasons, defendant Intel Corporation’s demurrer to Plaintiffs’ complaint on the ground that the pleading does not state facts sufficient to constitute a cause of action [Code Civ. Proc., §430.10, subd. (e)] for declaratory relief is SUSTAINED with 10 days’ leave to amend.

 

1. Inability to state a cause of action for breach of contract.

 

“[I]t is an abuse of discretion to sustain a demurrer without leave to amend if the plaintiff shows there is a reasonable possibility any defect identified by the defendant can be cured by amendment.” (Aubry v. Tri-City Hospital Dist. (1992) 2 Cal.4th 962, 967.) “[H]owever, leave to amend should not be granted where, in all probability, amendment would be futile.” (Vaillete v. Fireman’s Fund Ins. Co. (1993) 18 Cal.App.4th 680, 685.) Intel argues amendment would be futile in this case because Plaintiffs cannot restate their claim as a breach of contract. The complaint identifies two contracts: (1) the Agreement and Plan of Merger and (2) the Merger Agreement.

 

Plaintiffs’ complaint recognizes the Merger Agreement is the document filed with the California Secretary of State pursuant to Corporations Code section 1103.[1] “The ‘agreement of merger’ is not necessarily the same merger agreement that is executed by the parties and presented to the shareholders. To avoid public disclosure of the full merger agreement, practitioners customarily file a separate agreement of merger containing only the information required by Corps.C. §1101.” (Friedman, Fotenos & Rybka, CAL. PRAC. GUIDE: CORPORATIONS (The Rutter Group 2014) ¶8:189.2, p. 8-58.)

 

Here, the Agreement and Plan of Merger is the full merger agreement while the Merger Agreement is the shortened version filed with the Secretary of State. On its face, the Merger Agreement is based “upon the terms and subject to the conditions set forth in the” Agreement and Plan of Merger dated as of September 9, 2013. Intel directs the court to section 1.8, subsection (b) of the Agreement and Plan of Merger which states, in relevant part, “Upon surrender of a Company Stock Certificate for cancellation to the Payment Agent, together with the Letter of Transmittal, duly completed, not substantially altered, and validly executed in accordance with the instructions thereto, (i) the holder of such Company Stock Certificate shall be entitled to receive in exchange for each Share formerly represented by such Company Stock Certificate an amount that such holder has the right to receive therefore pursuant to the provisions of Section 1.6.”

 

Based on this contract language, Intel contends the execution of the Letter of Transmittal (including the Release and Uncapped Liability provisions) is a condition precedent[2] to Plaintiffs’ receipt of the consideration. According to Intel, Plaintiffs cannot truthfully plead that they performed this condition precedent.[3] Intel acknowledges paragraph 22 of the complaint where Plaintiffs allege, “All PLAINTIFFS returned their share certificates and the so called Letters of Transmittal or a document entitled ‘Replacement Letter of Transmittal’ striking out the Release and Uncapped Liability provisions or refused to return their so called Letters of Transmittal due to the additional terms.” However, Intel contends Plaintiffs, through counsel, acknowledge “that no Plaintiff has submitted a completed Letter of Transmittal.” This assertion is based on facts extrinsic to the complaint. “The demurrer tests the pleading alone, not evidence or other matters; defendants cannot set forth allegations of fact in their demurrers which, if true, would defeat plaintiff’s complaint.” (Fuhrman v. California Satellite Systems (1980) 179 Cal.App.3d 408, 422 – 423 (disapproved on other grounds in Silberg v. Anderson (1990) 50 Cal.3d 205.)) Consequently, Intel has not sufficiently demonstrated that amendment would be futile. Plaintiffs shall have leave to amend their complaint.

 

1. Uncertainty.

 

Additionally, Intel demurs to the complaint on grounds of uncertainty. “‘A demurrer for uncertainty will not lie where the ambiguous facts alleged are presumptively within the knowledge of the demurring party.  [Citations.]  A special demurrer should not be sustained if the allegations are sufficiently clear to apprise the defendant of the issues that must be met, even if the allegations of the complaint may not be as clear and as detailed as might be desired. [Citations.] . . . [a] demurrer for uncertainty will not lie as to even uncertain and ambiguous allegations, if such allegations refer to immaterial matters.  In such event, they will be treated as surplusage and disregarded.  [Citations.]’” (Gonzales v. State of California (1977) 68 Cal.App.3d 621, 631.) “A demurrer for uncertainty is strictly construed, even where a complaint is in some respects uncertain, because ambiguities can be clarified under modern discovery procedures.”  (Khoury v. Maly’s of California, Inc. (1993) 14 Cal.App.4th 612, 616.) A “[d]emurrer for uncertainty will be sustained only where the complaint is so bad that the defendant cannot reasonably respond; i.e. he or she cannot reasonably determine what issues must be admitted or denied, or what counts or claims are directed against him.” (Ibid.)

 

Intel contends the complaint is uncertain for various reasons. However, the complaint is not so uncertain that defendant Intel cannot determine what issues are presented and which allegations to admit or deny. Defendant Intel Corporation’s demurrer to Plaintiffs’ complaint on the ground that the pleading is uncertain [Code Civ. Proc., §430.10, subd. (f)] is OVERRULED.

 

1. Defendant Intel’s motion for an order sealing exhibit 1 to the declaration of J. Tyler McGaughey in support of Intel Corporation’s request for judicial notice.

 

In conjunction with its demurrer, defendant Intel moves to seal the Agreement and Plan of Merger which is attached as an exhibit in support of the demurrer.  A court has the authority to order that a record be filed under seal only 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.)

 

The California Rules of Court do not define what constitutes an “overriding interest.”  Instead, this has been left to case law.  Different “[c]ourts have found that, under appropriate circumstances, various statutory privileges, trade secrets, and privacy interests, when properly asserted and not waived, may constitute overriding interests.”  (In re Providian Credit Card Cases (2002) 96 Cal.App.4th 292, 298, fn.3 (quoting Judicial Council advisory committee comment to Rule 243.1) (affirming lower court order unsealing certain records over defendants’ objection that the materials contained proprietary trade secrets); see also NBC Subsidiary (KNBC-TV), Inc. v. Superior Court (1999) 20 Cal.4th 1178, 1222, fn.46 (overriding interests found in various cases include: protection of minor victims of sex crimes from further trauma and embarrassment, privacy interests of a prospective juror during individual voir dire, protection of witnesses from embarrassment or intimidation so extreme that it would traumatize them or render them unable to testify, protection of trade secrets, protection of information within the attorney-client privilege, and enforcement of binding contractual obligations not to disclose, safeguarding national security, ensuring the anonymity of juvenile offenders in juvenile court, ensuring the fair administration of justice, and preservation of confidential investigative information).)

 

A declaration supporting a motion to seal should be specific, not conclusory, as to the facts supporting the overriding interest.  If the court finds that the supporting declarations are conclusory or otherwise unpersuasive, it may conclude that the moving party has failed to demonstrate an overriding interest that overcomes the right of public access.  (In re Providian Credit Card Cases, 96 Cal.App.4th at 301, 305.)

 

According to the two supporting declarations, the Agreement and Plan of Merger qualifies for sealing because the document contains highly confidential proprietary business information and competitively sensitive commercial and business information which the parties agreed to keep in confidence. Furthermore, the supporting declarations state that the matters contained in the Agreement and Plan of Merger are not publicly available and do not concern public interest or public safety. Plaintiffs oppose the motion on the basis that the request is not narrowly tailored. Plaintiffs contend the supporting declaration offered by Intel is conclusory.

 

Defendant Intel Corporation’s motion for an order sealing exhibit 1 to the declaration of J. Tyler McGaughey in support of Intel Corporation’s request for judicial notice is GRANTED.

 

[1] Corporations Code section 1103 states, “After approval of a merger by the board and any approval of the outstanding shares (Section 152) required by Chapter 12 (commencing with Section 1200), the surviving corporation shall file a copy of the agreement of merger with an officers’ certificate of each constituent corporation attached stating the total number of outstanding shares of each class entitled to vote on the merger, that the principal terms of the agreement in the form attached were approved by that corporation by a vote of a number of shares of each class which equaled or exceeded the vote required, specifying each class entitled to vote and the percentage vote required of each class, or that the merger agreement was entitled to be and was approved by the board alone under the provisions of Section 1201. If equity securities of a parent of a constituent corporation are to be issued in the merger, the officers’ certificate of that constituent corporation shall state either that no vote of the shareholders of the parent was required or that the required vote was obtained. The merger and any amendment of the articles of the surviving corporation contained in the merger agreement shall thereupon be effective (subject to subdivision (c) of Section 110 and subject to the provisions of Section 1108) and the several parties thereto shall be one corporation. The Secretary of State may certify a copy of the merger agreement separate from the officers’ certificates attached thereto.”

[2] “A condition is a fact, the happening or nonhappening of which creates (condition precedent) or extinguishes (condition subsequent) a duty on the part of the promisor. If the promisor makes an absolute or unconditional promise, he or she is bound to perform when the time arrives; but if the promisor makes a conditional promise, he or she is bound to perform only if the condition precedent occurs, or is relieved from the duty if the condition subsequent occurs. The condition may be the happening of an event, or an act of a party.”  (1 Witkin, Summary of California Law (10th ed. 2010) Contracts, §776.)

[3] Plaintiff’s performance is an element of a breach of contract claim.  (Acoustics, Inc. v. Trepte Construction Co. (1971) 14 Cal.App.3d 887, 913.) “The plaintiff cannot enforce the defendant’s obligation unless the plaintiff has performed the conditions precedent imposed on him. [Citation.] Accordingly, the allegation of performance is an essential part of his cause of action. [Citation.]”  (4 Witkin, California Procedure (4th ed. 1997) Pleading, §491, pp. 581 – 582.) See also Civil Code section 1439—“Before any party to an obligation can require another party to perform any act under it, he must fulfill all conditions precedent thereto imposed upon himself.”