Case Name: Patrick Rivelli, et al. v. Rodo Medical, Inc., et al.

Case No.: 18CV326785

(1) Motion of Frank Hemm to Quash Service of Summons
(2) Motion of Institut Straumann AG to Quash Service of Summons

Defendant Rodo Medical, Inc. (“Rodo”) is a medical device company that develops and produces retention devices for dental implant restorations. (Complaint, ¶19.) Defendants Frank Hemm, Young Seo, Amir Abolfathi, Greg Garfield, Kevin Mosher, and Mike Winzeler (collectively, “Director Defendants”) are Rodo directors. (Complaint, ¶¶5 – 10.)

In September 2010, shortly after Rodo’s formation, plaintiffs Patrick Rivelli and Pinecroft Ventures, LLC (“Pinecroft”) were among several investors who purchased Series A Preferred Stock in Rodo. (Complaint, ¶20.) Plaintiffs’ decision to invest in Rodo was based on representations by Rodo that (1) the Food and Drug Administration’s (“FDA”) approval of Rodo’s dental implant device would be obtained; (2) the Series A shareholders would have the opportunity to sell their holdings (“exit opportunity”) no later than 2014; (3) the Series A shareholders would retain a liquidation preference over common stock holders; (4) Series A shareholders would have their own representative on the Rodo board; (5) the Series A shareholders would have certain preemption and anti-dilution rights; (6) the Series A shareholders would have certain information and inspection rights; and (7) the Series A shareholders would be non-redeemable. (Id.)

Based on these and other representations, plaintiff Rivelli purchased 1,100,110 Series A Preferred shares and plaintiff Pinecroft purchased 330,033 Series A Preferred shares in September 2010. (Complaint, ¶21.) As part of their Stock Purchase Agreement, Series A investors entered into various agreements including a Voting Agreement and an Investor Rights Agreement. (Complaint, ¶22.) The Voting Agreement provides for Series A preferred shareholders, by voting as a separate class, to elect a director to represent their interests on the Rodo board. (Id.) Thereafter, the Series A shareholders elected a board representative, which at various times was plaintiff Rivelli and other times was plaintiff Pinecroft, through its representative, Garrett Roper. (Complaint, ¶23.)

Rodo did not obtain FDA approval for its dental implant device within the promised two years and instead obtained in November 2016. (Complaint, ¶24.) Series A shareholders were not afforded the promised exit opportunities in 2012 or 2014. (Id.) Rodo’s CEO repeatedly told plaintiff Rivelli that after Rodo obtained FDA approval, Rodo would pursue a liquidation event by which Series A preferred shareholders would realize a return on their investment. (Id.) Rodo’s directors were aware that obtaining FDA approval dramatically increases the company’s value and marketability. (Id.) A number of potential acquirers expressed interest in Rodo even prior to FDA approval. (Id.) After Rodo obtained FDA approval, with one exception, Rodo did not pursue any acquisition opportunities and did not retain a qualified investment banking professional to market the company to obtain the highest price or best possible terms for the shareholders. (Id.) Instead, Rodo’s directors caused Rodo to enter into a “sweetheart” transaction with defendant Institut Straumann AG (“Straumann”) benefitting Straumann and Rodo directors to the detriment of plaintiffs and other Series A Preferred shareholders (“Straumann Transaction”). (Id.)

Straumann is headquartered in Switzerland and develops, manufactures, and markets dental implants, instruments, prosthetics, and biomaterial. (Complaint, ¶25.) In 2014, Straumann acquired a 12% interest in Rodo and a seat on Rodo’s board for Straumann’s Executive Vice-President, defendant Frank Hemm (“Hemm”) in 2016. (Complaint, ¶25.)

In 2017, after Rodo obtained FDA approval for its dental implant device, Rodo entered into the Straumann Transaction which increased Straumann’s stake in Rodo from 12% to 30% and gave Straumann rights to distribute Rodo products internationally. (Complaint, ¶26.) Straumann also gained control of Rodo’s acquisitions and financing for the next four to six years, Rodo’s long-term viability and growth, and Straumann’s own call prices at the Majority and Acquisitions Calls. (Id.) The Straumann Transaction also gave Straumann the option to purchase Rodo below market value. (Id.)

Defendant Hemm orchestrated the Straumann Transaction as an officer of Straumann and director of Rodo. (Complaint, ¶27.) Defendant Hemm improperly used confidential Rodo information concerning other potential investors to give defendant Straumann a valuable and unfair advantage in negotiating with Rodo. (Id.) The other Rodo director defendants pushed the Straumann Transaction through in order to enrich themselves as owners of Rodo common stock. (Id.)

The Straumann Transaction disadvantaged Series A Preferred shareholders in several ways. One, it eliminated Series A shareholder’s rights including liquidation preference and a seat on the Rodo board. (Complaint, ¶28.) The Straumann Transaction also increased Series A Preferred investors’ holding period another four to six years. (Id.) Defendants obtained shareholder consent to the Straumann Transaction through a series of false and misleading statements and omissions in the Information Statement. (Complaint, ¶¶30 – 34.) Defendants repeatedly rebuffed plaintiff Rivelli’s requests for company information. (Complaint, ¶35.)

On April 18, 2018, plaintiffs Rivelli and Pinecroft filed a complaint against defendants Rodo, Straumann, and the Director Defendants asserting causes of action for:

(1) Fraud
(2) Breach of Fiduciary Duty
(3) Breach of Contract (Voting Agreement)
(4) Violation of Corporations Code §603(d)
(5) Declaratory Relief under Corporations Code §709(c)
(6) Breach of Contract (Investor Rights Agreement)
(7) Violation of Corporations Code §§213, 1600 – 1605
(8) Injunctive Relief

Defendant Straumann is alleged to be a foreign corporation with its primary place of business in Basel, Switzerland. (Complaint, ¶4.)

On June 25, 2018, defendant Straumann filed a motion to quash service of summons.

On September 4, 2018, defendant Rodo and the Director Defendants, with the exception of defendant Hemm, filed a demurrer to the Plaintiffs’ complaint.

On October 23, 2018, defendant Hemm, specially appearing, filed one of the motions now presently before the court, a motion to quash service of summons.

On October 26, 2018, the court granted defendant Straumann’s motion to quash service of summons.

On February 14, 2019, the court sustained, in part, and overruled, in part, defendants Rodo and the Director Defendants’, with the exception of defendant Hemm, demurrer to the Plaintiffs’ complaint.

On February 15, 2019, defendant Straumann filed the second motion now presently before the court, a motion to quash service of summons.

On March 1, 2019, Plaintiffs filed a first amended complaint (“FAC”). On April 5, 2019, the court issued an order pursuant to a stipulation by the parties that, in relevant part, “the motions to quash service of the summons and complaint filed by [Straumann] and [Hemm] shall be deemed to be addressed to the summonses and [FAC] without need for Plaintiffs to personally serve further summonses or FAC on either defendant and without need for either defendant to file new motions to quash.”

I. Defendant Hemm’s motion to quash service of summons is GRANTED.

“ ‘California courts may exercise personal jurisdiction on any basis consistent with the Constitution of California and the United States. [Citation.] The exercise of jurisdiction over a nonresident defendant comports with these Constitutions “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.” ‘ “ ‘ [Citations.] [¶] ‘The concept of minimum contacts … requires states to observe certain territorial limits on their sovereignty. It “ensure[s] that the States, through their courts, do not reach out beyond the limits imposed on them by their status as coequal sovereigns in a federal system.” ‘ [Citation.] To do so, the minimum contacts test asks ‘whether the “quality and nature” of the defendant’s activity is such that it is “reasonable” and “fair” to require him to conduct his defense in that State.’ [Citation.] The test ‘is not susceptible of mechanical application; rather, the facts of each case must be weighed to determine whether the requisite “affiliating circumstances” are present.’ ” (Snowney v. Harrah’s Entertainment, Inc. (2005) 35 Cal.4th 1054, 1061-1062 (Snowney).)

“Under the minimum contacts test, ‘[p]ersonal jurisdiction may be either general or specific.’ [Citation.] … ‘When determining whether specific jurisdiction exists, courts consider the “ ‘relationship among the defendant, the forum, and the litigation.’ ” [Citation.] A court may exercise specific jurisdiction over a nonresident defendant only if: (1) “the defendant has purposefully availed himself or herself of forum benefits” [citation]; (2) “the ‘controversy is related to or “arises out of” [the] defendant’s contacts with the forum’ “ [citation]; and (3) “ ‘the assertion of personal jurisdiction would comport with “fair play and substantial justice” ‘ “ [citation].’ “ (Snowney, supra, 35 Cal.4th at p. 1062.) The question of purposeful availment focuses on the defendant’s intentionality, and is “ ‘only satisfied when the defendant purposefully and voluntarily directs [its] activities toward the forum so that [it] should expect, by virtue of the benefit [it] receives, to be subject to the court’s jurisdiction based on’ [its] contacts with the forum.” (Pavlovich v. Superior Court (2002) 29 Cal.4th 262, 269 (Pavlovich).)

In Pavlovich, the California Supreme Court discussed the “effects test” of Calder v. Jones (1984) 465 U.S. 783, used in intentional tort cases for purposes of determining a defendant’s purposeful availment. (Pavlovich, supra, 29 Cal.4th at pp. 269-270.) It noted that in Calder, a libel action, the effects test was used to exercise jurisdiction over a magazine’s president and editor and a reporter “ ‘based on the “effects” of their Florida conduct in California.’ ” (Pavlovich, at p. 270, quoting Calder, 465 U.S. at p. 789.) “The court found jurisdiction proper because ‘California [was] the focal point both of the story and of the harm suffered.’ [Citation.] ‘The allegedly libelous story concerned the California activities of a California resident. It impugned the professionalism of an entertainer whose television career was centered in California … and the brunt of the harm, in terms both of [Jones’s] emotional distress and the injury to her professional reputation, was suffered in California.’ [Citation.] The court also noted that the individual defendants wrote or edited ‘an article that they knew would have a potentially devastating impact upon [Jones]. And they knew that the brunt of that injury would be felt by [Jones] in the State in which she lives and works and in which the National Enquirer has its largest circulation.’ ” (Pavlovich, at p. 270.)

Pavlovich explained, however, that to establish purposeful availment, it is generally not enough to assert that a defendant could foresee his or her conduct would have injurious effects in California. (Pavlovich, supra, 29 Cal.4th at pp. 270-271[“[M]ost courts agree that merely asserting that a defendant knew or should have known that his intentional acts would cause harm in the forum state is not enough to establish jurisdiction ….“] & fn. 1; e.g., Burger King Corp. v. Rudzewicz (1985) 471 U.S. 462, 474, fn. and italics omitted [“Although it has been argued that foreseeability of causing injury in another State should be sufficient to establish such contacts there when policy considerations so require, the Court has consistently held that this kind of foreseeability is not a ‘sufficient benchmark’ for exercising personal jurisdiction”].) The California Supreme court requires “additional evidence of express aiming or intentional targeting” to meet the effects test. (Pavlovich, at p. 273; see also Goehring v. Superior Court, supra, 62 Cal.App.4th at p. 909 [jurisdiction under effects test may be invoked only where the actor committed an out-of-state act intending to cause effects in California or reasonably expecting that effects in California would result].)

Plaintiffs opposing a motion to quash service of process for lack of personal jurisdiction have the initial burden to demonstrate facts establishing a basis for personal jurisdiction. (Snowney, supra, 35 Cal.4th at p. 1062; HealthMarkets, Inc. v. Superior Court (2009) 171 Cal.App.4th 1160, 1167-1168 (HealthMarkets); In re Automobile Antitrust Cases I and II (2005) 135 Cal.App.4th 100, 110.) The burden must be met by competent affidavits containing specific evidentiary facts or authenticated documentary evidence, not by allegations of an unverified complaint. (In re Automobile Antitrust Cases I and II, at p. 110.) If plaintiffs satisfy that burden, the burden shifts to the defendant to show the exercise of jurisdiction would be unreasonable. (HealthMarkets, at p. 1168; Snowney, at p. 1062.)

The decision upon which this court principally relies is Taylor-Rush v. Multitech Corp. (1990) 217 Cal.App.3d 103, 113 (Taylor). In Taylor, the former owner of a California corporation brought an action against six nonresident corporate officers and directors and a nonresident corporation for breach of contract, fraud, breach of a written employment contract, breach of an agreement to convey stock, conspiracy to defraud, conspiracy to induce a breach of contract, and fraudulent transfer of securities. The trial court granted the individual defendants’ motion to quash and plaintiff appealed. The following discussion from Taylor is relevant.

Appellant primarily bases her claim of jurisdiction over the individual respondents on their wilfull and conspiratorial acts and omissions – that their fraudulent misrepresentations and nondisclosures induced her execution of the buy/sell, employment and settlement agreements. “A state has a special interest in exercising jurisdiction over those who commit tortious acts within its territory. Therefore, it is reasonable that a state should exercise jurisdiction over those who commit or cause to be committed in the state what is claimed to be a tortious act.” (Kaiser Aetna v. Deal (1978) 86 Cal.App.3d 896, 901 [150 Cal.Rptr. 615].) (10) Jurisdiction is proper over a nonresident defendant who, while personally present in California, makes representations or nondisclosures to the plaintiff which constitute the gravamen of the action. (Ibid.) “If a defendant commits an act or omission outside the forum state with the intent to cause a tortious effect within the state, the state may exercise jurisdiction over the defendant as to any cause of action arising from the effects. The intent to cause tortious injury within the state where the tort actually occurs is generally a sufficient basis, without more, for the exercise of in personam jurisdiction. ‘ The act may have been done with the intention of causing effects in the state. If so, the state may exercise the same judicial jurisdiction over the actor, or over the one who caused the act to be done, as to causes of action arising from these effects as it could have exercised if these effects had resulted from an act done within its territory.’ [Citation.]” (Id., at p. 902.)

Corporate officers and directors cannot ordinarily be held personally liable for the acts or obligations of their corporation. However, they may become liable if they directly authorize or actively participate in wrongful or tortious conduct. (Frances T. v. Village Green Owners Assn. (1986) 42 Cal.3d 490, 503-504 [229 Cal.Rptr. 456, 723 P.2d 573, 59 A.L.R.4th 447]; see also Wyatt v. Union Mortgage Co. (1979) 24 Cal.3d 773, 785 [157 Cal.Rptr. 392, 598 P.2d 45].) Appellant also contends respondents are individually liable under Corporations Code sections 25401, 25504, and 25504.1 for the fraudulent acquisition of securities in California. She alleges that the aforementioned intentional misrepresentations and nondisclosures by respondents induced her to sell her stock in Bio-Health as part of the buy/sell agreement. [Footnote omitted.]

In the instant case appellant has made a compelling showing that, while in California, Messinger made fraudulent misrepresentations and nondisclosures which induced her to execute the buy/sell, employment and settlement agreements. Messinger’s declaration does not deny such misrepresentations and nondisclosures, but instead states that any and all dealings with appellant and Bio-Health were carried out exclusively in his capacity as an officer of TotalMed. There is no question that the minimum contacts test was met and personal jurisdiction over him was acquired by virtue of his tortious acts within California purposely directed at appellant.

Appellant also established that Carow made fraudulent misrepresentations and nondisclosures during their meeting in New York which led to her execution of the settlement agreement. Like Messinger, Carow does not deny the fraudulent conduct, but states that he acted exclusively in his capacity as director of TotalMed. While Carow’s contacts with California were not as extensive as those of Messinger, in that he only met with appellant in New York, his alleged tortious conduct outside California was purposely directed at appellant in California and had a tortious effect here. Thus, sufficient minimum contacts were established for personal jurisdiction.

(Taylor, supra, 217 Cal.App.3d at pp. 112–114; italics original; emphasis added.)

Similar to Taylor, Plaintiffs base their claim of jurisdiction over defendant Hemm on alleged fraudulent misrepresentations and nondisclosures, but critical to the Taylor court’s finding of personal jurisdiction against the individual defendants was undisputed evidence of fraudulent conduct. Here, however, notably absent from the evidence presented to this court is any evidence of fraudulent or tortious conduct by defendant Hemm. It is not enough for Plaintiffs to simply refer back to allegations of misconduct in the complaint.

Accordingly, specially appearing defendant Hemm’s motion to quash service of summons is GRANTED.

II. Defendant Straumann’s motion to quash service of summons is DENIED.

Straumann also moves to quash on the basis that it is not subject to personal jurisdiction in California. In opposition, Plaintiffs contend there is a basis for asserting specific jurisdiction over Straumann under a minimum contacts analysis. More particularly, Plaintiffs proffer evidence of the Straumann Transaction and that it has resulted in more than just Straumann’s ownership of a 30% interest in Rodo, but also an ongoing business relationship between Rodo and Straumann which includes an exclusive distribution agreement and line of credit between the two companies. (See ¶¶4 – 13 and Exh. C – K to the Declaration of Keith E. Johnson in Support of Plaintiffs’ Opposition to Motion of Institut Straumann AG to Quash Service of Summons (“Declaration Johnson”).)

Plaintiffs appear to argue Straumann purposefully availed itself of the forum by entering into contracts here in California. Plaintiffs cite to Safe-Lab, Inc. v. Weinberger (1987) 193 Cal.App.3d 1050 (Safe-Lab) for the proposition that an important factor to consider is whether a nonresident enters California to negotiate or perform a contract. What the Safe-Lab court actually stated, instead, is that, “Where the cause of action asserted against the defendant is based on a contract, the making and performance of that contract in California will be sufficient to sustain jurisdiction even if the defendant has no other California contacts.” (Safe-Lab, supra, 193 Cal.App.3d at pp. 1053 – 1054.) In their opposition, Plaintiffs proffer evidence of numerous contracts between defendant Straumann and Rodo. (See ¶¶4 – 13 and Exh. C – K to the Declaration Johnson.) Here, however, the operative pleading (FAC) asserts only two causes of action for breach of contract and the contracts at issue (Voting Agreement and Investor Rights Agreement) are between Rodo and investors such as Plaintiffs. The breach of contract causes of action alleged in the FAC do not concern the contracts entered into by Straumann. Instead, the gravamen of Plaintiffs’ claim against Straumann appear to be premised on allegations that Straumann obtained a “sweetheart” deal from Rodo, i.e., the Straumann Transaction through fraud and breach of fiduciary duty.

“ ‘Purposeful availment’ requires that the defendant ‘have performed some type of affirmative conduct which allows or promotes the transaction of business within the forum state.’ [Citation.] A contract with an out-of-state party does not automatically establish purposeful availment in the other party’s home forum. [Citations.] Rather, a court must evaluate the contract terms and the surrounding circumstances to determine whether the defendant purposefully established minimum contacts within the forum. Relevant factors include prior negotiations, contemplated future consequences, the parties’ course of dealings, and the contract’s choice-of-law provision. [Citation.]” (Stone v. Texas (1999) 76 Cal.App.4th 1043, 1048 (Stone).) “ ‘[W]ith respect to interstate contractual obligations . . . parties who “reach out beyond one state and create continuing relationships and obligations with citizens of another state” are subject to . . . sanctions in the other State for the consequences of their activities.’ [Citations.] Due process requires a ‘substantial connection’ between the contract at issue and the forum state.” (Stone, supra, 76 Cal.App.4th at pp. 1048 – 1049.)

Thus where the defendant “deliberately” has engaged in significant activities within a State, Keeton v. Hustler Magazine, Inc., supra, 465 U.S., at 781, 104 S.Ct., at 1481, or has created “continuing obligations” between himself and residents of the forum, Travelers Health Assn. v. Virginia, 339 U.S., at 648, 70 S.Ct., at 929, he manifestly has availed himself of the privilege of conducting business there, and because his activities are shielded by “the benefits and protections” of the forum’s laws it is presumptively not unreasonable to require him to submit to the burdens of litigation in that forum as well.

(Burger King Corp. v. Rudzewicz (1985) 471 U.S. 462, 475–476 (Burger King); emphasis added.)

Plaintiffs place great emphasis on the fact that not only did Straumann acquire rights in connection with the Straumann Transaction, but in conjunction with the Straumann Transaction, Straumann also entered into an ongoing business relationship with Rodo by virtue of the exclusive distributorship agreement and the revolving line of credit. The court is persuaded by Plaintiffs’ argument.

If the question is whether an individual’s contract with an out-of-state party alone can automatically establish sufficient minimum contacts in the other party’s home forum, we believe the answer clearly is that it cannot. The Court long ago rejected the notion that personal jurisdiction might turn on “mechanical” tests, International Shoe Co. v. Washington, supra, 326 U.S., at 319, 66 S.Ct., at 159, or on “conceptualistic … theories of the place of contracting or of performance,” Hoopeston Canning Co. v. Cullen, 318 U.S., at 316, 63 S.Ct., at 604. Instead, we have emphasized the need for a “highly realistic” approach that recognizes that a “contract” is “ordinarily but an intermediate step serving to tie up prior business negotiations with future consequences which themselves are the real object of the business transaction.” Id., at 316–317, 63 S.Ct., at 604–605. It is these factors—prior negotiations and contemplated future consequences, along with the terms of the contract and the parties’ actual course of dealing—that must be evaluated in determining whether the defendant purposefully established minimum contacts within the forum.

(Burger King, supra, 471 U.S. at pp. 478–479.)

In reviewing the various contracts which make up the Straumann Transaction, the court is persuaded that Straumann contemplated more than just a one-time acquisition of shareholder/ investor/ ownership rights, but instead obtained and contemplated an ongoing course of business dealing. Even if the controversy alleged by Plaintiffs here do not arise directly out of Straumann’s contacts with the forum, some of the claims are, at the very least, related to Straumann’s contacts with the forum. In entering into the Straumann Transaction, Straumann should expect that it would draw dissent from other shareholders/ investors and, thus, be subject to the court’s jurisdiction based on its contacts.

“[W]here a defendant who purposefully has directed his activities at forum residents seeks to defeat jurisdiction, he must present a compelling case that the presence of some other considerations would render jurisdiction unreasonable.” (Burger King, supra, 471 U.S. at p. 477.) No evidence has been presented for the court to consider whether the assertion of personal jurisdiction would comport with “fair play and substantial justice” or that jurisdiction would be unreasonable.

Accordingly, specially appearing defendant Straumann’s motion to quash service of summons is DENIED.