SUPERIOR COURT OF CALIFORNIA

COUNTY OF SANTA CLARA

HOWARD CHO, an individual; STEVE LACOMBE, an individual; Derivatively on Behalf of NEWCO MATERIALS TECHNOLOGY, INC.,

Plaintiffs,

vs.

CHANG-KIL KIM; YOUNG-YUP KIM; KUMKANG QUARTZ CO., LTD.; QUARTZ MATERIALS CO., LTD; and DOES 1-20 inclusive,

Defendants, and

NEWCO MATERIALS TECHNOLOGY, INC.,

Nominal Defendant.

Case No. 18CV323993

TENTATIVE RULING RE: MOTION TO QUASH

The above-entitled action comes on for hearing before the Honorable Thomas E. Kuhnle on March 8, 2019, at 11:00 a.m. in Department 5. The Court now issues its tentative ruling as follows:

I. INTRODUCTION
II.
This is a shareholder derivative action brought on behalf of Newco Materials Technology, Inc. (“Newco”). (Shareholder’s Derivative Complaint (“Complaint”), ¶ 1.) Plaintiffs Howard Cho and Steve Lacombe (together, “Plaintiffs”) allege Newco was formed in late 2011 by agreement of four individuals, including Plaintiffs, all of whom had vast experience in the business of quartz, silicon, and CVD SiC consumable parts for etch and diffusion process in semiconductor wafer manufacturing. (Complaint, ¶ 18.) In 2011, defendant Chang-Kil Kim, the CEO and controlling owner of Kumkang Quartz Co., Ltd. (“Kumkang”), and the controlling owner of Kumkang’s fully owned subsidiary Quartz Materials Co., Ltd. (“Quartz”), expressed interest in entering into a business venture with Newco. (Complaint, ¶¶ 11 and 18.) Kumkang, Quartz , and Quartz’s predecessor SungRim Co., Ltd. (collectively, “KKQ”) proposed it would invest in Newco in exchange for a 70% stake in Newco and the proceeds would be used to form “Newco Taiwan,” a wholly owned subsidiary of Newco, that would be a Taiwan-based quartz part manufacturing facility for consumable spare parts used in semiconductor manufacturing equipment. (Complaint, ¶ 20.) Newco and KKQ consummated their agreement and Newco Taiwan was formed. (Complaint, ¶ 21.)

Defendant Young-Yup Kim was appointed to the board of directors of Newco by KKQ in 2015 and was appointed president of Newco Taiwan. (Complaint, ¶ 22.) In early 2016, the business prospects for Newco and Newco Taiwan looked very bright and the companies were preparing to ramp up for production of millions of parts for Taiwan Semiconductor Manufacturing Company (“TSMC”), Micron, and others. (Complaint, ¶ 23.) By March 2017, Young-Yup Kim was reporting to the board of Newco that there was “no hope” for success and Newco Taiwan should be shut down. (Complaint, ¶ 24.)

In May 2017, Chang-Kil Kim invited Howard Cho, a director of Newco, and Young-Yup Kim, to the KKQ headquarters in Korea to develop the Global Foundry Singapore (“GFS”) etch business in Singapore. (Complaint, ¶ 26.) At the meeting, instead of discussing how to develop business for Newco and Newco Taiwan, Chang-Kil Kim and Young-Yup Kim informed Cho they wanted to drive the business to KKQ instead of Newco. (Complaint, ¶ 26.)

On July 7, 2017, Chang-Kil Kim convened a meeting of the board of directors of Newco in Korea, attended by Young-Yup Kim and Cho. (Complaint, ¶ 27.) An agenda was circulated proposing to change the name of the company to KKQ US and the name of the subsidiary to KKQ Taiwan, and transferring customers such as GFS and Micron to KKQ in Korea. (Complaint, ¶ 27.) Cho informed the board the proposals were an illegitimate attempt to divert business away from Newco, a breach of fiduciary obligations to minority shareholders, and a breach of the business venture agreed to between Newco and KKQ. (Complaint, ¶ 27.) Chang Kil Kim “tabled” the agenda items. (Complaint, ¶ 27.)

On July 9, 2017, Lacombe, the Director of Applications Engineering of Newco, was asked to meet privately with the VP, Sr. Manager, and Assistant Manager of KKQ at Semicon West in San Francisco outside the presence of Cho. (Complaint, ¶ 29.) LaCombe informed Cho of the private meeting request and Cho informed LaCombe of the attempt by Chang-Kil Kim and Young-Yup Kim to divert Newco business to KKQ. (Complaint, ¶ 29.) In the fall of 2017, Cho discovered accounting improprieties at Newco Taiwan. (Complaint, ¶ 40.)

Ultimately, Plaintiffs allege Defendants have repeatedly conspired to convert corporate opportunity and divert business away from Newco and Newco Taiwan to KKQ for the self-interested benefit of Defendants. (Complaint, ¶ 43.)

The Complaint, filed on March 1, 2018, sets forth the following causes of action: (1) Breach of Fiduciary Duty for Abuse of Control; (2) Breach of Fiduciary Duty for Gross Mismanagement; (3) Waste of Corporate Assets; and (4) Unjust Enrichment.

Defendants now move to quash service of summons for lack of personal jurisdiction.

III. LEGAL STANDARD
IV.
A defendant may move to quash service of summons on the ground of lack of jurisdiction of the court over him or her. (Code Civ. Proc., § 418.10.) “[O]nce a defendant files a motion to quash the burden is on the plaintiff to prove by a preponderance of the evidence the validity of the service and the court’s jurisdiction over the defendant.” (Bolkiah v. Superior Court (1999) 74 Cal. App. 4th 984, 991.)

V. DISCUSSION
VI.
Defendants argue they are not subject to personal jurisdiction in California. As explained by the California Supreme Court:

California’s long-arm statute authorizes California courts to exercise jurisdiction on any basis not inconsistent with the Constitution of the United States or the Constitution of California. A state court’s assertion of personal jurisdiction over a nonresident defendant who has not been served with process within the state comports with the requirements of the due process clause of the federal Constitution if the defendant has such minimum contacts with the state that the assertion of jurisdiction does not violate traditional notions of fair play and substantial justice.

…

Personal jurisdiction may be either general or specific. A nonresident defendant may be subject to the general jurisdiction of the forum if his or her contacts in the forum state are substantial, continuous and systematic. In such a case, it is not necessary that the specific cause of action alleged be connected with the defendant’s business relationship to the forum. Such a defendant’s contacts with the forum are so wide-ranging that they take the place of physical presence in the forum as a basis for jurisdiction.

…

If the nonresident defendant does not have substantial and systematic contacts in the forum sufficient to establish general jurisdiction, he or she still may be subject to the specific jurisdiction of the forum, if the defendant has purposefully availed himself or herself of forum benefits, and the controversy is related to or arises out of a defendant’s contacts with the forum.

(Vons Companies, Inc. v. Seabest Foods, Inc. (1996) 14 Cal. 4th 434, 444-446, internal citations, quotation marks, brackets, and ellipses omitted.)

A. General Jurisdiction
B.
Plaintiffs contend defendants Kumkang and Quartz are subject to general jurisdiction in California under the representative services doctrine. The representative services doctrine “supports the exercise of jurisdiction when [a] local subsidiary performs a function that is compatible with, and assists the parent in the pursuit of, the parent’s own business, but the doctrine does not support jurisdiction where the parent is merely a holding company whose only business pursuit is the investment in the subsidiary.” (Sonora Diamond Corp. v. Superior Court (2000) 83 Cal.App.4th 523, 543, emphasis in original; see also Paneno v. Centres for Academic Programmes Abroad Ltd. (2004) 118 Cal.App.4th 1447, 1456.) If a parent uses a subsidiary to do what it otherwise would have done itself, it has purposely availed itself of the privilege of doing business in the forum. (Ibid.)

Plaintiffs argue Defendants used Newco as an instrumentality to procure quartz for Kumkang’s recurring needs and engage in millions of dollars of recurring business in California without any financial benefit to Newco. Plaintiffs contend KKQ could not have fulfilled its supply needs without Newco.

Defendants argue the representative services doctrine is no longer good law following the United States Supreme Court’s opinion in Daimler AG v. Bauman (2014) 571 U.S. 117, 137. In Daimler, the Court stated the representative services doctrine is an agency theory that “appears to subject foreign corporations to general jurisdiction whenever they have an in-state subsidiary or affiliate,” an outcome beyond a sprawling view of general jurisdiction already rejected in a previous case. (Id. at p. 136.) Ultimately, however, the Court did not specifically hold the representative services doctrine is no longer good law.

As explained in a later California case: “While the Bauman II court questioned the formulation and application of the Ninth Circuit’s agency test, in the end it assumed agency and still concluded that MBUSA’s California contacts were insufficient to confer general jurisdiction over Daimler in California.” (Young v. Daimler AG (2014) 228 Cal.App.4th 855, 866-867; see also Daimler AG v. Bauman, supra, 571 U.S. at p. 137.) In other words, the Bauman court did not find it necessary to invalidate the representative services doctrine to reach its conclusion that general jurisdiction did not exist in that case. Therefore, although the Bauman case casts some doubt on the continuing viability of the representative services doctrine, the doctrine has not been struck down.

Defendants contend that, even if the representative services doctrine is still good law, it does not apply because Newco does not exist only to further the business of any of the defendants. Defendants first assert Plaintiffs’ argument regarding the acquisition of quartz for Kumkang has no application to Quartz or the individual defendants. Defendants are correct that Plaintiffs have provided no evidence and made no argument why the individual defendants should be subject to general jurisdiction under the representative services doctrine. However, Plaintiffs do provide evidence with regard to Quartz.

Plaintiffs present evidence Newco was instructed to acquire raw quartz materials and turn them over to KKQ at list price, without any mark up for overhead administrative expense, or general profit, to provide Kumkang with annual recurring quartz requirements. (Declaration of Howard Cho in Support of Plaintiffs’ Opposition to Defendant’s Motion Quash (“Cho Decl.”), ¶¶ 14 and 16.) Between 2013 and 2016, KKQ procured raw quartz through Newco with great frequency at the direction of Quartz. (Id. at ¶ 19.) These procurement orders constituted the major source of Newco revenue in 2013, 2014, and 2015. (Id. at ¶ 18.)

This evidence demonstrates KKQ was not merely a holding company whose only business pursuit was the investment in Newco. Rather, KKQ actively directed Newco, a California corporation, to acquire quartz on behalf of KKQ over a period of years with no financial benefit to Newco. Under these circumstances, Kumkang and Quartz are subject to general jurisdiction in California.

C. Specific Jurisdiction
D.
Plaintiffs first argue Defendants are subject to specific jurisdiction because they intentionally engaged in tortious conduct aimed at California. Specifically, Plaintiffs point to conduct such as (1) proposing at Newco board meetings diversion of Newco business development efforts to KKQ; (2) proposing at Newco board meetings diverting existing customers from Newco to KKQ; (3) expressly articulating and developing plans to divert Newco’s major client relationships to KKQ; (4) directing KKQ employees to conscript key Newco personnel to participate in a plot to divert Newco’s business; and (5) purchasing excess materials to artificially deflate Newco revenue when Newco became cash positive in a series of self-dealing transactions.

It has been held that “where corporate officers are alleged to have engaged in intentional tortious activity, directed at a California resident, jurisdiction over them is proper.” (Seagate Technology v. A. J. Kogyo Co. (1990) 219 Cal.App.3d 696, 703.) Where a defendant’s actual contact with the forum is limited, jurisdiction can be based “on the concept of causing an ‘effect’ in the forum state.” (Id. at p. 704.)

Defendants argue the “effects test” has been rejected by the United States Supreme Court. The effects test was first articulated in the case of Calder v. Jones (1984) 465 U.S. 783, where the Supreme Court found jurisdiction over the defendants was properly based on their intentional conduct in Florida (writing and editing a newspaper article) that was calculated to cause injury to the plaintiff in California. Defendants contend Calder was clarified and narrowed in the case of Walden v. Fiore (2014) 571 U.S. 277.

In Walden, the defendant was a police officer working as a deputized agent of the Drug Enforcement Administration at the Atlanta Hartsfield-Jackson Airport. (Walden v. Fiore, supra, 571 U.S. at p. 279.) The officer seized approximately $97,000 in cash from the plaintiffs while they were at the Atlanta airport on the way from Puerto Rico to Las Vegas. (Id. at p. 280.) The funds were ultimately returned. (Id. at p. 281.) The Ninth Circuit held the delay in returning the funds to respondents caused them “foreseeable harm” in Nevada and that the exercise of personal jurisdiction over petitioner was therefore reasonable. (Id. at p. 282.)

The question before the Supreme Court was “whether a court in Nevada may exercise personal jurisdiction over a defendant on the basis that he knew his allegedly tortious conduct in Georgia would delay the return of funds to plaintiffs with connections to Nevada.” (Walden v. Fiore, supra, 571 U.S. at p. 279.) The Court stated “the plaintiff cannot be the only link between the defendant and the forum. Rather, it is the defendant’s conduct that must form the necessary connection with the forum State that is the basis for its jurisdiction over him.” (Id. at p. 285.) In other words, it is “insufficient to rely on a defendant’s ‘random, fortuitous, or attenuated contacts’ or on the ‘unilateral activity’ of a plaintiff. [Citation.] A forum State’s exercise of jurisdiction over an out-of-state intentional tortfeasor must be based on intentional conduct by the defendant that creates the necessary contacts with the forum.” (Id. at p. 286.) The Court concluded the defendant lacked the “minimal contacts” with Nevada and was not subject to jurisdiction there. (Id. at p. 288.)

The conduct at issue in this case is distinguishable from Walden. The case does not involve a random contact with an individual who happens to be a resident of California. Defendants are alleged to have intentionally targeted Newco, a corporation incorporated in California and with its principal place of business in California. Plaintiffs assert the conduct was directed at Newco’s business in California and its California personnel. Both of the individual defendants are directors of Newco.

Plaintiffs provide evidence of the intentional conduct directed at Newco. For example, Chang Kil-Kim instructed Newco to acquire raw quartz materials and turn them over to KKQ at list price. (Cho Decl., § 14.) Newco absorbed costs associated with time expended, administrative expenses, and overhead, while KKQ used Newco as a conduit to fulfill its quartz materials requirements. (Cho Decl., § 21.)

In 2017 Chang-Kil Kim invited Cho to KKQ headquarters in Korea, ostensibly to discuss how Newco could obtain and service a new relationship with GFS and Micron Singapore. (Cho Decl., ¶ 26.) Instead, Chang-Kil Kim and Young-Yup Kim proposed driving the GFS business to KKQ. (Cho Decl., ¶ 26.)

On November 8, 2017, Young-Yup Kim asked Cho by email whether Newco had received new etch qualification orders from Micron and told Cho the orders were supposed to go to KKQ. (Cho Decl., ¶ 31.) In the fourth quarter of 2017, when Newco became cash flow positive, Young-Yup Kim used Newco resources to buy enormous amounts of materials from a company for whom he was a materials agent in a series of self-dealing transactions. (Cho Decl., § 33.)

Under these circumstances, it should be no surprise to the individual defendants that they are subject to suit in California with regard to their conduct targeting Newco.

VII. CONCLUSION
VIII.
Defendants’ motion to quash is DENIED.

The Court will prepare the final order if this tentative ruling is not contested.