Case Name: Manuel Fernandez, et al. v. RealtyShares, Inc., et al.
Case No.: 2015-1-CV-283865

Currently before the Court is the demurrer by plaintiffs and cross-defendants Manuel Fernandez (“Fernandez”) and Daniel Jacuzzi (“Jacuzzi”) (collectively “Plaintiffs”) to the cross-complaint of defendant and cross-complainant RealtyShares, Inc. (“RealtyShares”).

According to the allegations of the cross-complaint, Fernandez met with RealtyShares’ founders—Trey Clark (“Clark”) and Navjot Athwal (“Athwal”)—in June 2013, and made various misrepresentations regarding his qualifications, skill, and experience and “the things he could do for RealtyShares.” (Cross-Complaint, ¶¶ 5, 17.) In reliance on Fernandez’s representations, “Clark and Athwal negotiated with Fernandez for his participation or investment in Realty Shares” and “discussed Fernandez serving as an advisor to RealtyShares” and “[his] possible investment of cash in the company in exchange for equity.” (Id., at ¶ 6.) “To memorialize these negotiations, Fernandez signed a non-binding Memorandum of Terms (Memorandum) …, which summarized the principal terms proposed by RealtyShares for a possible sale of securities to Fernandez.” (Id., at ¶ 7.)

During the following months, “the parties continued to negotiate the terms of an eventual investment by Fernandez” and “RealtyShares granted Fernandez access to [its] confidential business information, including but not limited to client information, investor information, its source code, its business strategies and processes, and other confidential and proprietary information.” (Cross-Complaint, ¶ 9.)

In October 2013, “Jacuzzi negotiated on Fernandez’s behalf for the purchase of equity in RealtyShares.” (Cross-Complaint, ¶ 10.) Athwal then emailed Fernandez and Jacuzzi “all documents needed to complete Fernandez’s purchase of 11.5% of RealtyShares equity for $50,000.” (Id., at ¶ 11.) After reviewing the proposed terms of an unrelated third-party’s investment in RealtyShares, Jacuzzi demand that RealtyShares provide Fernandez with the same terms for his investment. (Id., at ¶¶ 12-13.) RealtyShares rejected the demand and Athwal emailed Fernandez and Jacuzzi, advising that “RealthyShares would cease further negotiations for Fernandez’s purchase of equity in RealtyShares.” (Id., at ¶¶ 13-14.) “After negotiations concluded, Fernandez proposed to Jacuzzi by email that they pursue a competing business, Real Circle, and suggested ‘[w]e now have a great story, because as an early investor in RealtyShares we [sic] seen … the issues from the inside.” (Id., at ¶ 15.)

Based on the foregoing, RealtyShares filed the cross-complaint against Plaintiffs, alleging causes of action for: (1) intentional misrepresentation (against Fernandez); (2) concealment (against Fernandez); (3) conversion (against Fernandez); and (4) violation of Business and Professions Code section 17200, et seq. (the “UCL”) (against Plaintiffs).
Plaintiffs demur to each and every cause of action of the cross-complaint on the ground of failure to allege sufficient facts to constitute a cause of action. (See Code Civ. Proc., § 430.10, subd. (e).)

I. Meet and Confer

As an initial matter, as RealtyShares persuasively argues, Plaintiffs failed to comply with Code of Civil Procedure section 430.41 (effective January 1, 2016), which provides that the moving party must meet and confer prior to filing a demurrer and must provide a declaration regarding the parties’ meet and confer efforts. Here, the instant demurrer was filed on February 24, 2016. Plaintiffs failed to provide the required meet and confer declaration and there is no indication that they attempted to meet and confer prior to filing the instant motion as required by the statute. In the interest of addressing the issues raised by the demurrer and moving the case forward, the Court will overlook—in this instance only—Plaintiffs’ failure to meet and confer. Plaintiffs are admonished to remain apprised of, and to comply with, newly applicable law going forward.

II. Legal Standard

“In reviewing the sufficiency of a complaint against a general demurer, we are guided by long settled rules. ‘We treat the demurrer as admitting all material facts properly pleaded, but not contentions, deductions or conclusions of fact or law.’ ” (Blank v. Kirwan (1985) 39 Cal.3d 311, 318.) “A demurrer tests only the legal sufficiency of the pleading. It admits the truth of all material factual allegations in the complaint; the question of plaintiff’s ability to prove these allegations, or the possible difficulty in making such proof does not concern the reviewing court.” (Committee on Children’s Television, Inc. v. General Foods Corp. (1983) 35 Cal.3d 197, 213–214.)

III. First and Second Causes of Action

In the first cause of action for intentional misrepresentation, RealtyShares alleges that Fernandez misrepresented his qualifications, skill, and experience in order to induce it to enter into a business relationship with him; the representations were false; Fernandez intended to defraud it and knew the representations were false when he made them; it relied on the misrepresentations and was induced to enter into the non-binding Memorandum and grant Fernandez access to its confidential business information; and “[a]s a proximate result of Fernandez’s deceit, [it] has been damaged.” (Cross-Complaint, ¶¶ 17-21.)

In the second cause of action for concealment, RealtyShares alleges that Fernandez failed to disclose various facts in order to induce it to enter into a business relationship with him; Fernandez intended to deceive it by concealing the subject facts; had Fernandez disclosed those facts, it “would not have entered into any business relationship with [him];” and “[a]s a proximate result of Fernandez’s concealment, [it] has been damaged.” (Cross-Complaint, ¶¶ 24-29.)

Plaintiffs argue that the first and second causes of action fail to state a claim because RealtyShares does not plead specific facts demonstrating causation or damages. Plaintiffs point out that while the parties engaged in discussions and negotiations about entering into a business relationship, RealtyShares alleges that no agreement was ever reached. Plaintiffs also point out that while RealtyShares allegedly entered into the Memorandum in reliance on Fernandez’s misrepresentations, the Memorandum was not binding. Plaintiffs assert that there are no facts showing that RealtyShares was damaged by the alleged misrepresentations because it voluntarily granted Fernandez access to its confidential business information, without requiring him to enter into a non-disclosure or confidentiality agreement, and there is no allegation that Fernandez used that information to actually compete with RealtyShares.

In opposition, RealtyShares states that its claim for damages is predicated on Fernandez’s email to Jacuzzi, in which he proposed using its information to form a competing venture. RealtyShares also states that “Fernandez knows what he took from [it] under false pretenses, and how he has put that to use to the company’s detriment,” and it “is entitled to ‘a little discovery’ to evaluate the extent of its damages resulting from Fernandez’s misrepresentations and fraudulent omissions.” (Opp’n., pp. 4-5.)

“In an action for [common law] fraud, damage is an essential element of the cause of action. [Citation.] Misrepresentation, even maliciously committed, does not support a cause of action unless the plaintiff suffered consequential damages. [Citation.] A complete causal relationship between the fraud or deceit and the plaintiff’s damages is required. [Citations.] At the pleading stage, the complaint must show a cause and effect relationship between the fraud and damages sought; otherwise no cause of action is stated. [Citation.]” (Small v. Fritz Companies, Inc. (2003) 30 Cal.4th 167, 202, internal quotation marks omitted.)

Here, as Plaintiffs persuasively argue, RealtyShares fails to allege any facts demonstrating that the alleged misrepresentations or concealment of facts caused them to suffer damages. While RealtyShares alleges that Fernandez induced it to enter into the Memorandum, the Memorandum was non-binding and it is wholly unclear from the pleading how entering into the non-binding Memorandum caused RealtyShares injury. Furthermore, while RealtyShares alleges that Fernandez induced it to grant him access to its confidential business information, it is unclear whether RealtyShares sustained any damages whatsoever as a result of disclosing its confidential information to Fernandez. RealtyShares states that its alleged damages are based on Fernandez’s email to Jacuzzi, in which he “proposed to Jacuzzi … that they pursue a competing business, Real Circle, and suggested ‘[w]e now have a great story, because as an early investor in RealtyShares we seen … the issues from the inside.” (Id., at ¶ 15, emphasis added.) However, there are no allegations that a competing business venture was ever formed, the business venture actually competed with RealtyShares, or the business venture’s competition with RealtyShares caused damage to RealtyShares (e.g., lost profits, business, or clients).

Accordingly, the demurrer to the first and second causes of action is SUSTAINED, with 10 days’ leave to amend.
IV. Third and Fourth Causes of Action

In the third cause of action for conversion, RealtyShares alleges that it granted Fernandez access to its confidential business information, including but not limited to client information, investor information, source code, business strategies and processes; Fernandez took possession of its confidential business information and “used it for unfair and unlawful purposes, including to unfairly compete against [it];” it did not consent to Fernandez’s use of its information; and, as a result of Fernandez’s use of its information, it has been damaged. (Cross-Complaint, ¶¶ 9, 32-35.)

In the fourth cause of action for violation of the UCL, RealtyShares merely incorporates the preceding allegations of the cross-complaint and alleges that Plaintiffs’ “acts and omissions … constitute ‘unfair competition.’” (Cross-Complaint, ¶¶ 37, 39.)

Plaintiffs argue, amongst other things, that the third and fourth causes of action fail to state a claim because they are preempted by the California Uniform Trade Secrets Act (“CUTSA”). In opposition, RealtyShares argues that the CUTSA does not bar its claims because it does not allege that its confidential business information is a trade secret. For the reasons set forth below, Plaintiffs are correct.

The CUTSA is codified in Civil Code sections 3426 through 3426.11 and provides for the civil recovery of “actual loss” or other injury caused by the misappropriation of trade secrets. Under the CUTSA, misappropriation means improper acquisition, or non-consensual disclosure or use of another’s trade secret. (Civ. Code,
§ 3426.1, subd. (b).) The CUTSA “has been characterized as having a ‘comprehensive structure and breadth.’ ” (K.C. Multimedia, Inc. v. Bank of America Technology & Operations, Inc. (2009) 171 Cal.App.4th 939, 954 (“K.C. Multimedia”), quoting AccuImage Diagnostics Corp. v. Terarecon, Inc. (N.D. Cal. 2003) 260 F.Supp.2d 941, 953 (“Acculmage”).) The Sixth District Court of Appeal has held that the breadth of the statute “suggests a legislative intent to preempt the common law.” (Id.) In other words, “[a]t least as to common law trade secret misappropriation claims, ‘UTSA occupies the field in California.’” (Id., quoting AccuImage, supra, 260 F.Supp.2d at p. 954.)

The CUTSA includes a specific provision concerning preemption, which provides, in pertinent part, as follows: “(a) Except as otherwise expressly provided, this title does not supersede any statute relating to misappropriation of a trade secret, or any statute otherwise regulating trade secrets. [¶] (b) This title does not affect (1) contractual remedies, whether or not based upon misappropriation of a trade secret, (2) other civil remedies that are not based upon misappropriation of a trade secret, or (3) criminal remedies ….” (Civ. Code, § 3426.7.)

The preemption inquiry for those causes of action not specifically exempted by section 3426.7 focuses on whether the common law claims are based on the same “nucleus of facts” that would be used to support a claim for misappropriation of trade secrets. (K.C. Multimedia, supra, 171 Cal.App.4th at pp. 958-959.) A claim cannot simply depend on a “different theory of liability” to avoid the CUTSA’s preemptive effect. (Id., at p. 957-959 & n. 7.) Rather, a claim avoids preemption only if it is “based on facts [independent] [and] distinct from the facts that support the misappropriation claim.” (Angelica Textile Services, Inc. v. Park (2013) 220 Cal.App.4th 495, 499.) While the determination of whether a claim is based on trade secret misappropriation is largely factual and determined on a case-by-case basis, the courts have held that preemption applies to claims for conversion, unjust enrichment, negligence, unfair competition both under common law and under the UCL, breach of confidence, fraud, and interference with contract. (See e.g., Silvaco Data Systems v. Intel Corp. (2010) 184 Cal.App.4th 210, 236 (“Silvaco”) [holding that claims for conversion, common count, common law unfair business practices, intentional and negligent misrepresentation were superseded by the CUTSA] disapproved on other grounds in Kwikset Corp. v. Super. Ct. (2011) 51 Cal.4th 310, 337; see also K.C. Multimedia, supra, 171 Cal.App.4th at p. 960 [concluding that the plaintiff’s breach of confidence claim was superseded because “the conduct at the heart of” both the breach of confidence claim and the UTSA claim was “the asserted disclosure of trade secrets”].)

Moreover, the CUTSA preempts claims based on the misappropriation of confidential information, whether or not that information meets the statutory definition of trade secret, unless the plaintiff can identify some other law that confers property rights protecting the information. (Mattel, Inc. v. MGA Entm’t, Inc. (2010) 782 F.Supp.2d 911, 986-987; Loop AI Labs Inc v. Gatti (N.D. Cal., Sept. 2, 2015, No. 15-CV-00798-HSG) 2015 WL 5158461, at *3 [“the Court agrees with the vast majority of courts that have addressed this issue, and finds that CUTSA supersedes claims based on the misappropriation of information that does not satisfy the definition of trade secret under CUTSA, absent a property interest conferred on that information by some other provision of law”]; SunPower Corp. v. SolarCity Corp. (N.D. Cal., Dec. 11, 2012, No. 12-CV-00694-LHK) 2012 WL 6160472, at *3-5 [“In order for the taking of information to constitute wrongdoing, the information must be property. Information is not property unless some ‘positive law’ makes it so. [Citation.] Thus, … in order to state a claim based on the taking of information, a plaintiff must show that he has some property right in such information (i.e. that the information is proprietary). [Citation.] If the basis of the alleged property right is in essence that the information is that it is ‘not … generally known to the public,’ [citation] then the claim is sufficiently close to a trade secret claim that it should be superseded notwithstanding the fact that the information fails to meet the definition of a trade secret. To permit otherwise would allow plaintiffs to avoid the preclusive effect of CUTSA (and thereby plead potentially more favorable common-law claims) by simply failing to allege one of the elements necessary for information to qualify as a trade secret.”]; see also Silvaco, supra, 184 Cal.App.4th at p. 239, fn. 22 [“We emphatically reject the … suggestion that the uniform act was not intended to preempt ‘common law conversion claims based on the taking of information that, though not a trade secret, was nonetheless of value to the claimant.’ ”].)

Here, the third and fourth causes of action are based on Fernandez’s alleged misappropriation of RealtyShares’ confidential business information and RealtyShares does not identify any other law that confers property rights on its confidential business information. Since the basis of the alleged property right is that RealtyShares’ information is confidential and not generally known, the claims are sufficiently close to a trade secret claim that they are superseded by the CUTSA notwithstanding the fact that the information may fail to meet the definition of a trade secret. To hold otherwise would undercut the CUTSA’s primary goal of uniformity.

Accordingly, the demurrer to the third and fourth causes of action is SUSTAINED, with 10 days’ leave to amend.