Case Name: Sabrina Herrera v. Peter Gombrich, et al.
Case No.: 17-CV-313800

I. Background

Plaintiff Sabrina Herrera (“Plaintiff”) commenced this lawsuit to recover unpaid wages and compensation from her former employer. Plaintiff relocated from Modesto to Morgan Hill, California, to work for defendant Oncogenesis, “a point-of-care diagnosis medical device company that specialized in cervical cancer screening and human papilloma disease detection products.” (Compl., ¶ 3.) She relocated and began working for Oncogenesis in October 2016 based on representations by defendant Peter Gombrich (“Gombrich”), the founder and Chairman of the Board of Directors, about the company’s viability, incoming funding for the company, and the wages and stock options she would receive as compensation for her work. (Compl., ¶¶ 6, 30-37.)

Plaintiff primarily worked on preparing quarterly financial statements, but also completed other administrative tasks at the direction of Gombrich. (Compl., ¶¶ 41-43.) In the course of her work, Plaintiff discovered Gombrich used the business account and his personal account interchangeably, often claiming personal expenses as business expenses, and failed to maintain records of these expenses. (Compl., ¶¶ 43-44.) Plaintiff thereafter learned Oncogenesis had incurred significant debt, which it could not repay, and that no outside funding or investments were forthcoming. (Compl., ¶¶ 45-46.) Oncogenesis lacked sufficient funds to pay for basic expenses, such as insurance, and regularly failed to pay employees. (Compl., ¶¶ 47-54.)

“By December 14, 2016, Plaintiff was owed back wages of $5,941.56.” (Compl., ¶ 56.) Gombrich promised to pay Plaintiff wages due in two installments so long as she signed a nondisclosure and non-disparagement agreement. (Compl., ¶¶ 55-56.) Plaintiff signed the agreement, and Gombrich gave her a check for the first installment. (Compl., ¶ 58.) Plaintiff waited several days to cash the check, as instructed by Gombrich, but when she went to the bank, it refused to honor the check due to insufficient funds in Oncogenesis’s bank account. (Compl., ¶¶ 59-60.) Plaintiff learned that Gombrich had, in fact, been writing lots of bad checks. (Compl., ¶¶ 59-60.) After this incident, Gombrich told Plaintiff she must agree not to disparage him personally in order for the check to be “made good.” (Compl., ¶ 61.) Plaintiff declined. (Compl., ¶ 61.)

Later that month, Plaintiff emailed members of Oncogenesis’s Board of Directors, particularly defendants Laurence Barcelo, Margi Wiest, Michael McNulty, Greg Yap, Tim Fischell, and Jimmy Lee. (Compl., ¶ 63.) Plaintiff told the Board about Gombrich’s misconduct and requested payment of back wages. (Compl., ¶ 63.) Plaintiff received no response to this email or the two follow-up emails she sent thereafter. (Compl., ¶¶ 64-67.) Plaintiff resigned from Oncogenesis on December 21, 2016, and still “has not received any of her back wages . . . in the amount of $5,941.56.” (Compl., ¶ 68.)

Plaintiff asserts eighteen causes of action against Oncogenesis and individual members of the Board of Directors, particularly Gombrich, Laurence Barcelo, Margi Wiest, Michael McNulty, Greg Yap, Tim Fischell, and Jimmy Lee (collectively, “Defendants”) for: (1) breach of contract; (2) breach of implied in fact contract; (3) quantum meruit; (4) promissory estoppel; (5) breach of the implied covenant of good faith and fair dealing; (6) failure to pay final wages; (7) waiting time penalties; (8) failure to provide wage statements; (9) solicitation of an employee by misrepresentation; (10) intentional misrepresentation; (11) intentional false promise; (12) negligent misrepresentation; (13) conditioning wages due on release of claim; (14) fraud in the offer or sale of securities; (15) fraud in connection with the purchase or sale of securities (16) sale of securities by means of untrue statement or omission; (17) unjust enrichment; and (18) violation of California’s unfair competition law (the “UCL”).

Currently before the Court is Defendants’ demurrer to the complaint and/or individual causes of action therein.

II. Preliminary Procedural Matters

As a preliminary matter, when challenging a pleading by demurrer, a party must file a notice of hearing on the demurrer, the demurrer itself, and a supporting memorandum of points and authorities. (Cal. Rules of Court, rule 3.1112(a).) “Each ground of demurrer must be in a separate paragraph and must state whether it applies to the entire complaint . . . or to specified causes of action therein.” (Cal. Rules of Court, rule 3.1320(a).) “The grounds for a demurrer are those listed in Code of Civil Procedure section 430.10,” and “differ from the reasons for sustaining a demurrer on a particular ground.” (Fremont Indemnity Co. v. Fremont General Corp. (2007) 148 Cal.App.4th 97, 111.)

Although Defendants filed a notice of hearing, a demurrer, and a supporting memorandum of points and authorities, they do not identify the ground for their demurrer in the demurrer itself or, for that matter, in any other document submitted to the Court. In their demurrer, Defendants simply list their supporting arguments. Defendants generically cite Code of Civil Procedure section 430.10 in their memorandum of points and authorities, but fail to identify any particular statutory ground enumerated therein. This is wholly improper. Nevertheless, the Court will treat the demurrer as being made on the ground of failure to state facts sufficient to constitute a cause of action (Code Civ. Proc., § 430.10, subd. (e)) because Defendants generally address whether sufficient facts are alleged in the complaint.

Having established the ground for Defendants’ demurrer, the Court next addresses the scope thereof. In their demurrer, Defendants challenge the first through twelfth causes of action, the eighteenth cause of action, and the complaint as a whole on the basis Plaintiff cannot assert causes of action against the individual members of the Board of Directors (excluding Chairman Gombrich), particularly Laurence Barcelo, Margi Wiest, Michael McNulty, Greg Yap, Tim Fischell, and Jimmy Lee (collectively, “Directors”). (Dem., ¶¶ 1-14, 26.) Defendants otherwise challenge the thirteenth through seventeenth causes of action on the basis Plaintiff does not state a viable claim against Oncogenesis, Gombrich, or Directors. (Dem., ¶¶ 15-25.) Inconsistent with the scope of the demurrer as articulated in the demurrer itself, in their memorandum of points and authorities, Defendants additionally and collectively challenge the fifth through eighth causes of action as asserted against all of them. Although Defendants’ presentation lacks clarity, the Court must necessarily address these arguments to evaluate whether a cause of action has been stated against Directors. Consequently, the Court will treat the demurrer to the fifth through eighth causes of action as directed to these causes of action as asserted against all of the defendants, not just Directors.

Except for the eighteenth cause of action, Plaintiff’s causes of action generally fall into one of four categories: (1) contract; (2) wage and hour; (3) fraud; and (4) securities. The Court considers the demurrer to the complaint as a whole before addressing each category of claims as well as the outlier claim.

III. Demurrer

A demurrer on the ground of failure to state facts sufficient to constitute a cause of action tests the legal sufficiency of the pleading. (Linear Technology Corp. v. Applied Materials, Inc. (2007) 152 Cal.App.4th 115, 122.) For purposes of a demurrer, a court assumes the truth of the factual allegations in the pleading, but not the truth of legal conclusions, to determine whether a cause of action has been stated under any legal theory. (Ibid.) When a plaintiff alleges facts in general or conclusionary terms that are inconsistent with more specific allegations in the pleading, the specific allegations control. (Gentry v. eBay, Inc. (2002) 99 Cal.App.4th 816, 827.)

A. Complaint as a Whole

Directors demur to the complaint as a whole on the basis they cannot be held individually liable for any of Plaintiff’s claims. Although not clearly articulated by Directors, it appears their position is that Plaintiff does not allege they engaged in any of the conduct giving rise to her claims and that she does not otherwise allege facts sufficient to hold them vicariously liable for the conduct of Oncogenesis.

Although omitted by Defendants, it is necessary to first establish the legal standard for a demurrer to a complaint as a whole. “A demurrer which attacks an entire pleading should be overruled if one of the counts therein is not vulnerable to the objection.” (Lord v. Garland (1946) 27 Cal.2d 840, 850.) In other words, a demurrer to the complaint as a whole is not sustainable if any cause of action therein is properly stated. (See, e.g., Warren v. Atchison, Topeka & Santa Fe Ry Co. (1971) 19 Cal.App.3d 24, 36.)

Here, Directors do not adequately explain how their arguments support the conclusion that no cause of action has been stated. For example, even accepting their assertion that the facts are insufficient to state any claim against them directly, they do not adequately address how particular theories of vicarious liability relate to the different categories of claims. Significantly, Plaintiff asserts statutory claims under the Labor Code, which do not necessarily depend on a common-law theory of vicarious liability for corporate acts. For example, section 588.1 of the Labor Code explicitly extends liability for wage and hour violations to directors and corporate officers. Thus, Directors do not demonstrate, as explained in more detail below, that no cause of action has been stated. Directors do not substantiate their demurrer to the complaint as a whole, which is therefore OVERRULED.

The Court will address Directors’ arguments about direct and vicarious liability in evaluating the demurrer to individual causes of action below. The Court will first address the fraud and contract claims before addressing the two categories of statutory claims, and ultimately, the UCL claim.

B. Fraud Claims

Plaintiff alleges three species of fraud occurred. Specifically, Plaintiffs asserts the tenth cause of action for intentional misrepresentation, the eleventh cause of action for intentional false promise, and the twelfth cause of action for negligent misrepresentation. Directors argue Plaintiff does not allege they made any misrepresentations and otherwise fails to allege facts sufficient to hold them vicariously liable for any misrepresentations attributable to Oncogenesis.
“It is well settled that corporate directors cannot be held vicariously liable for the corporation’s torts in which they do not participate.” (Frances T. v. Village Green Owners Assn. (1986) 42 Cal.3d 490, 503.) “An officer or director will not be liable for torts in which he does not personally participate, of which he has no knowledge, or to which he has not consented.” (Id. at pp. 503-04.) “Their liability, if any, stems from their own tortious conduct, not from their status as directors or officers of the enterprise.” (Id. at p. 503.) “This liability does not depend on the same grounds as ‘piercing the corporate veil,’ on account of inadequate capitalization for instance, but rather on the officer or director’s personal participation or specific authorization of the tortious act.” (Id. at p. 504.) “Directors are liable to third persons injured by their own tortious conduct regardless of whether they acted on behalf of the corporation and regardless of whether the corporation is also liable.” (Ibid.)
“To maintain a tort claim against a director in his or her personal capacity, a plaintiff must first show that the director specifically authorized, directed or participated in the allegedly tortious conduct [citation] or that although they specifically knew or reasonably should have known that some hazardous condition or activity under their control could injure plaintiff, they negligently failed to take or order appropriate action to avoid the harm [citations].” (Id. at pp. 508-09.) “The plaintiff must also allege and prove that an ordinarily prudent person, knowing what the director knew at that time, would not have acted similarly under the circumstances.” (Id. at p. 509.)

It follows that, here, Plaintiff must allege Directors personally participated in or failed to prevent the harmful conduct giving rise to her fraud claims. The essential conduct upon which any species of fraud claim is based is a misrepresentation. (See West v. JPMorgan Chase Bank, N.A. (2013) 214 Cal.App.4th 780, 792 [setting forth essential elements of claim for intentional misrepresentation]; Small v. Fritz Companies, Inc. (2003) 30 Cal.4th 167, 173-74 [comparing elements of claims for negligent and intentional misrepresentation]; Tarmann v. State Farm Mutual Automobile Ins. Co. (1991) 2 Cal.App.4th 153, 159 [false promise is a specific type of intentional misrepresentation].)

Plaintiff does not allege Directors made any misrepresentations or knew of the misrepresentations by Gombrich and failed to stop him. Although the complaint contains a section entitled “Personal Liability of Directors for Tort Claims,” there are no factual allegations about their personal involvement in this section. (Compl. at p. 19.) Instead, Plaintiff quotes case law and includes conclusory allegations made on information and belief. Although Plaintiff otherwise alleges she emailed Directors to tell them about “Gombrich’s unethical and illegal business activities and to plead for her wages due,” it is not clear she told them about the fraud. Furthermore, even if she had informed them of Gombrich’s misrepresentations in her email, she sent the email after the fact. Consequently, the allegations in the complaint do not reflect Directors knew fraud was ongoing and failed to stop it. For these reasons, Plaintiff does not allege facts sufficient to hold Directors personally and individually liable for any of her fraud claims.

Plaintiff also alleges Directors are vicariously liable based on an alter ego theory. “A claim against a defendant, based on the alter ego theory, is not itself a claim for substantive relief, e.g., breach of contract. . ., but rather, procedural, i.e., to disregard the corporate entity as a distinct defendant and to hold the alter ego individuals liable on the obligations of the corporation where the corporate form is being used by the individuals to escape personal liability, sanction a fraud, or promote injustice.” (Greenspan v. LADT, LLC (2010) 191 Cal.App.4th 486, 516 [internal citation and quotation marks omitted].)

“Alter ego is an extreme remedy, sparingly used.” (Sonora Diamond Corp. v. Super Ct. (2000) 83 Cal.App.4th 523, 538.) “In California, two conditions must be met before the alter ego doctrine will be invoked.” (Ibid.) “First, there must be such a unity of interest and ownership between the corporation and its equitable owner that the separate personalities of the corporation and the shareholder do not in reality exist.” (Ibid.) “Second, there must be an inequitable result if the acts in question are treated as those of the corporation alone.” (Ibid.) A plaintiff must allege facts with respect to both conditions. (Vasey v. California Dance Co. (1977) 70 Cal.App.3d 742, 749.) Conclusory allegations are not sufficient. (Ibid.) “‘The allegations that a corporation is the alter ego of the individual stockholder is insufficient to justify the court in disregarding the corporate entity in the absence of allegations of facts from which it appears that justice cannot otherwise be accomplished.’ [Citation.]” (Ibid.; compare Rutherford Holdings, LLC v. Plaza Del Rey (2014) 223 Cal.App.4th 221, 235-36.)

Again, Plaintiff includes a section in her complaint entitled “Alter Ego Liability of Board Members,” but instead of alleging facts to support her alter ego theory of liability, she includes conclusory allegations and quotations from various cases. (Compl. at pp. 16-17.) Even looking beyond this section of the complaint, Plaintiff does not allege facts sufficient to show a unity of interest or an inequitable result. In her opposition, Plaintiff does not identify any allegations to support a contrary conclusion. Although she cites paragraphs 65 and 66 of the complaint, these paragraphs concern the email she sent to collect her wages; she does not explain, and it is not otherwise obvious, how these factual allegations relate to or support her alter ego theory of liability. Accordingly, Plaintiff’s alter ego allegations are insufficient.

Based on the foregoing, the demurrer to the tenth, eleventh, and twelfth causes of action as asserted against Directors is SUSTAINED with 10 days’ leave to amend.

C. Contract Claims

The first five causes of action and the seventeenth cause of action fall into the contract category, particularly the causes of action for: (1) breach of contract; (2) breach of implied in fact contract; (3) quantum meruit; (4) promissory estoppel; (5) breach of the implied covenant of good faith and fair dealing; and (17) unjust enrichment.

An essential element of claims for breach of contract and breach of the implied covenant of good faith and fair dealing is the existence of a valid contract. (McKell v. Washington Mutual, Inc. (2006) 142 Cal.App.4th 1457, 1489; Racine & Laramie, Ltd. v. Department of Parks & Recreation (1992) 11 Cal.App.4th 1026, 1031.) The contract may be express or implied-in-fact as the “only distinction between an implied-in-fact contract and an express contract is that, in the former, the promise is not expressed in words but is implied from the promisor’s conduct.” (Weitzenkorn v. Lesser (1953) 40 Cal.2d 778, 794.)

When a plaintiff cannot establish the existence of a contract, he or she may, nevertheless, seek to recover based on a quasi-contract theory. (Civic Partners Stockton, LLC v. Youssefi (2013) 218 Cal.App.4th 1005, 1013; accord Weitzenkorn, supra, 40 Cal.2d at pp. 794-95.) The equitable doctrine of promissory estoppel allows the enforcement of a promise that is not enforceable as a contract in order to prevent an unjust result. (Douglas E. Barnhart, Inc. v. CMC Fabricators, Inc. (2012) 211 Cal.App.4th 230, 242.) When a promise is made without consideration, it may be enforced if the promisor reasonably expected the other party to act in reliance on the promise and if enforcement of the promise is the only means of avoiding injustice. (Ibid.) Similarly, “[t]o recover on a claim for the reasonable value of services under a quantum meruit theory, a plaintiff must establish that he or she was acting pursuant to either an express or implied request for services from the defendant and that the services rendered were intended to and did benefit the defendant.” (Ochs v. PacifiCare of California (2004) 115 Cal.App.4th 782, 794.)

Thus, here, the six causes of action depend on the existence of either a valid contract, an exchange of services, or a promise that, although unenforceable as a contract, may be equitably enforced to prevent Directors from unjustly profiting from Plaintiff’s labor. Although Plaintiff generically refers to an agreement and promise by “Defendants” and states “Defendants” will be unjustly enriched in these causes of action, the preceding factual allegations incorporated by reference therein are silent as to Directors. (Compl., ¶¶ 86, 95-96, 100, 105-06, 109-110, 200.) In actuality, Plaintiff alleges Gombrich failed to pay her wages when due or fulfill his promise to pay her back wages after the fact. These specific allegations, which make no mention of Directors, control over the generic and conclusionary allegations. Consequently, Plaintiff fails to allege the existence of a contract, an exchange of services, or a promise sufficient to state a cause of action directly against Directors based on either a contract or quasi-contract theory. Furthermore, for the reasons articulated above, Plaintiff’s alter ego allegations are not sufficient to hold Directors vicariously liable on a contract or alternative theory of recovery. Directors’ demurrer is therefore sustainable.

Defendants also argue “[a]n at-will employee cannot plead breach of bad faith.” (Mem. of Pts. & Auth. at p. 6:26.) Presumably, Defendants intended to state that an at-will employee cannot assert a cause of action for bad faith breach of the implied covenant of good faith and fair dealing. Defendants do not, however, cite any authority espousing such a categorical rule. In actuality, and contrary to Defendants’ representation, the authority upon which they rely simply establishes the general rule that the implied covenant of good faith and fair dealing protects the parties’ expectations and right to receive the benefits of their bargain from frustration but does not create any independent obligations beyond those expressly agreed upon. (Guz, supra, 24 Cal.4th at p. 350.) Thus, the implied covenant of good faith and fair dealing does not require an employer to terminate an at-will employee only for cause because such a requirement was not actually bargained for and agreed upon by the parties. (Ibid.) Significantly, the fifth cause of action is not based on a wrongful termination without just cause. Consequently, even accepting Defendants’ premise that Plaintiff was presumptively an at-will employee, it is fundamentally unclear how this premise supports the conclusion that no cause of action has been stated. This argument does not justify sustaining the demurrer to the fifth cause of action as asserted against Gombrich, Oncogenesis, or Directors.

Based on the foregoing, the demurrer to the first, second, third, fourth, fifth, and seventeenth causes of action as asserted against Directors is sustainable, but the demurrer to the fifth cause of as asserted against Gombrich and Oncogenesis is not. When a court sustains a demurrer, it may deny leave to amend if there is no reasonable possibility the plaintiff can amend the complaint to state a viable claim. (Goodman v. Kennedy (1976) 18 Cal.3d 335, 349.) A “[p]laintiff must show in what manner he [or she] can amend his [or her] complaint and how that amendment will change the legal effect of the pleading.” (Ibid.) Unjust enrichment is not a cause of action, and so there is no reasonable possibility Plaintiff can amend the complaint to state such a cause of action. Although the Court is skeptical that Plaintiff will be able to allege new facts to state any viable contract or quasi-contract claims against Directors, it will, nevertheless give her an opportunity to do so.

In conclusion, the demurrer to the first, second, third, fourth, and fifth causes of action as asserted against Directors is SUSTAINED with 10 days’ leave to amend. Defendants’ demurrer to the seventeenth cause of action as asserted against Oncogenesis, Gombrich, and Directors is SUSTAINED WITHOUT LEAVE TO AMEND. The demurrer to the fifth cause of action as asserted against Oncogenesis and Gombrich is OVERRULED.

D. Wage and Hour Claims

The sixth, seventh, eighth, ninth, and thirteenth causes of action based on various provisions of the Labor Code fall into the wage and hour category, particularly the causes of action for: (6) failure to pay final wages; (7) waiting time penalties; (8) failure to provide wage statements; (9) solicitation by misrepresentation; and (13) conditioning wages due on release of claim. Due to the extremely limited and conclusory analysis provided by Defendants in support of their demurrer, the Court provides the following background before addressing the arguments presented in support of the demurrer to these wage and hours claims.

For context, “wage and hour claims are today governed by two complementary and occasionally overlapping sources of authority: the provisions of the Labor Code, enacted by the Legislature, and a series of 18 wage orders, adopted by the [Industrial Welfare Commission or] IWC.” (Brinker Restaurant Corp. v. Super. Ct. (2012) 53 Cal.4th 1004, 1026.)

Here, the sixth cause of action for failure to pay wages is based on Labor Code section 202, which requires an employer to tender payment of final wages to the employee no later than 72 hours after his or her notice of resignation. The seventh cause of action is based on Labor Code section 203, which authorizes a plaintiff to recover, as a penalty for willful non-payment of final wages, continued wages from the time of his or her resignation. (See Ling v. P.F. Chang’s China Bistro, Inc. (2016) 245 Cal.App.4th 1242, 1261.) The eighth cause of action is based on Labor Code section 226, which requires an employer to provide itemized statements of an employee’s wages, along with other information, when the wages are paid. The ninth cause of action is based on Labor Code section 970, which prohibits an employer from inducing an employee to relocate based on misrepresentations about the nature, existence, and duration of the job. (Tyco Industries, Inc. v. Super. Ct. 164 Cal.App.3d 148, 155.) Finally, the thirteenth cause of action is for violation of Labor Code section 206.5, which prohibits an employer from requiring “the execution of a release of a claim or right on account of wages due, or to become due, or made as an advance on wages to be earned, unless payment of those wages has been made.”

Because these provisions of the Labor Code necessarily govern the relationship between an employer and an employee, such a relationship is a prerequisite for a wage and hour claim based thereupon. (See Futrell v. Payday California, Inc. (2010) 190 Cal.App.4th 1419, 1430-31.) Defendants challenge the existence of this fundamental prerequisite in support of their demurrer to the wage and hour claims.

Defendants argue Plaintiff does not allege she was an employee within the meaning of the Labor Code. Defendants simply assert this conclusion without any explanation or valid authority. The sole case they cite has been explicitly disapproved of by the California Supreme Court. (See Bono Enterprises, Inc. v. Bradshaw (1995) 32 Cal.App.4th 968, disapproved in Tidewater Marine Western, Inc. v. Bradshaw (1996) 14 Cal.4th 557, 572-73.) Furthermore, Defendants do not provide any pin cite, and it is not otherwise obvious what portion of the case they rely upon. Defendants’ analysis is insufficient to substantiate their demurrer.

In their reply, Defendants attempt to support their argument by pointing to the allegation that “Plaintiff agreed to work as a contractor consultant at $30 per hour, 3 days per week. . . [and] was to become a full time employee with a yearly salary of $60,000, [and] stock options (50,000 shares @ $.025 per share).” (Compl., ¶ 84.) But Defendants’ approach, in addition to being taken for the first time in their reply, is misguided. Significantly, the label used by the parties to describe their relationship does not control. (Futrell, supra, 190 Cal.App.4th at p. 1434, citing Estrada v. FedEx Ground Package System, Inc. (2007) 154 Cal.App.4th 1, 10-11 [“The parties’ label is not dispositive and will be ignored if their actual conduct establishes a different relationship.”].)

In actuality, the existence of an employment relationship under the common-law test requires a factual determination about the degree of control exercised over the work based on consideration of the Borello factors. (Estrada, supra, 154 Cal.App.4th at p. 10, citing S.G. Borello & Sons, Inc. v. Dept. of Indust. Relations (1989) 438 Cal.3d 341, 353-55.) Additionally, the common-law test, although frequently applied, is not the only test used to determine the existence of an employment relationship. (See Futrell, supra, 190 Cal.App.4th at pp. 1428-29 [courts look to IWC wage orders for purposes of defining employment relationship].) Defendants do not analyze any of the Borello factors or identify and analyze any other test for the existence of an employment relationship. Furthermore, Defendants do not cite any authority, and the Court is not otherwise aware of authority, to support the conclusion that this determination may be made at the pleading stage.

In sum, Defendants do not substantiate their argument that Plaintiff was not an employee. The demurrer to the wage and hour claims is not sustainable on the basis there was no employment relationship.

Additionally, although it is not entirely clear, it appears Directors may be arguing that they cannot be individually liable for wage and hour claims because they, as distinct from Oncogenesis, were not Plaintiff’s employer. To the extent Directors take this position, it is wholly without merit because Labor Code section 558.1 explicitly extends liability to directors and managing agents of an employer.

With respect to the thirteenth cause of action, Defendants also argue Plaintiff does not allege she signed a release. Defendants’ argument is meritorious because Plaintiff in fact alleges she signed a nondisclosure and non-disparagement agreement but does not allege she signed a release of her wage and hour claim or any other type of release. Consequently, Plaintiff does not allege facts constituting a violation of Labor Code section 206.5.

In conclusion, the demurrer to the sixth, seventh, eighth, and ninth causes of action as asserted against Defendants, inclusive of Directors, Gombrich, and Oncogenesis is OVERRULED. The demurrer to the thirteenth cause of action as asserted against Defendants is SUSTAINED with 10 days’ leave to amend.

E. Securities Claims

Plaintiff asserts two causes of action for violation of federal securities laws, including the Securities Act of 1933 and the Securities Exchange Act of 1934: (14) fraud in the offer or sale of securities; and (15) fraud in the sale of securities. Plaintiff also asserts a sixteenth cause of action for violation of California’s securities law, specifically Corporations Code section 25401. Defendants argue Plaintiff has not stated a viable claim against any of them. The Court first addresses the federal claims before addressing Plaintiff’s claim based on California law.

For context, section 10(b) of the Securities Exchange Act of 1934, codified as 15 U.S.C. § 78j, prohibits short sales, stop-loss orders, and the use of manipulative or deceptive devices in connection with the purchase or sale of securities, which prohibited conduct is set forth more specifically in Rule 10b-5 of the Securities Exchange Commission. Thus, “[t]he characteristics of a private action under Rule 10b–5 are not derived from, or identical to, the common law of deceit.” (Mirkin v. Wasserman (1993) 5 Cal.4th 1082, 1089.) The same is true of actions brought pursuant to section 17(a) of the Securities Act of 1933, codified as 15 U.S.C. § 77q, which prohibits fraudulent securities sales made through means of interstate commerce. (See Moran v. Paine, Webber, Jackson and Curtis (W.D.Pa. 1966) 279 F.Supp. 573, 577; see also Gervase v. Super. Ct. (1995) 31 Cal.App.4th 1218, 1242-43 [“To implicate federal law[,] the fraud must be involved in the actual purchase or sale of a security, and thus a broad range of general business or corporate misconduct is excluded.”].)

Here, Defendants are correct that “[w]ithout the purchase or sale of a security, there can be no cause of action for securities fraud pursuant to § 10(b) and Rule 10b–5” or § 17(a). (Childers v. Northwest Airlines, Inc. (D.Minn. 1988) 688 F.Supp. 1357, 1363.) Plaintiff does not allege she ever purchased any stock. She alleges only that she was supposed to receive stock options in the future. Furthermore, even if Plaintiff alleged she received stock, participants in an employee stock ownership plan generally do not qualify as purchasers of a security within the meaning of the statute. (Ibid.) Ultimately, Plaintiff cannot convert her common law fraud claim into a securities fraud claim simply because stock options were part of the compensation she believed she would receive in the future. Consequently, Plaintiff fails to state a cause of action for securities fraud under either federal securities law.

“California’s securities law is patterned after the Securities Act of 1933 (1933 Act) (15 U.S.C. § 77a et seq.) [ ].” (People v. Simon (1995) 9 Cal.4th 493, 507.) Corporations Code section 25401 prohibits “the sale or purchase of securities by means of oral or written communications which either contain false or misleading statements or omit material facts. . . .” (Id. at p. 496.) Plaintiff does not allege she purchased any securities. Thus, Plaintiff’s securities fraud claim under California law falls with her federal claims.

Based on the foregoing, Plaintiff does not state a cause of action for securities fraud under either federal or California law. The Court cannot conceive of, and Plaintiff does not articulate, how she could amend the complaint to state a viable claim. The demurrer to the fourteenth, fifteenth, and sixteenth causes of action is therefore SUSTAINED WITHOUT LEAVE TO AMEND.
F. UCL Claim

The eighteenth cause of action is for violation of the UCL. (See Bus. & Prof. Code, § 17200.) Directors argue the cause of action cannot be asserted against them because Plaintiff does not allege “any actionable wrong by [them]” individually. (Mem. of Pts. & Auth. at p. 6:26.) Directors do not provide any other explanation or authority to support their argument. Contrary to Directors’ assertion, Plaintiff does allege they are liable as individuals for the wage and hour violations. Consequently, Directors’ argument lacks merit. The demurrer to the eighteenth cause of action is therefore OVERRULED.

IV. Professionalism

The Court is concerned by the quality of Defendants’ presentation and the accuracy of written materials submitted to the Court. Before addressing what is expected of Defendants and their counsel going forward, the Court gives Defendants the benefit of the doubt and discusses some aspects of the pleading that may have led (in part) to the lack of clarity in their presentation.

The Court acknowledges the complaint is not a model of clarity. As explained above, there are defects in the complaint, particularly with respect to Plaintiff’s attempt to assert all of her claims against all of the defendants. (See, e.g., Applied Equipment Corp. v. Litton Saudi Arabia Ltd. (1994) 7 Cal.4th 503, 510-11 [discussing theories of third-party liability for tort and contract claims].) Additionally, the complaint is pleaded like a chain letter and contains allegations on information and belief that are not properly pleaded.

First, Plaintiff’s complaint is pleaded, as is a common practice, like a “chain letter,” “wherein each claim for relief incorporates by reference all preceding paragraphs.” (Internat. Billing Services v. Emigh (2000) 84 Cal.App.4th 1175, 1179.) Although prolific, this style of pleading is disfavored because it creates ambiguities. (Ibid.; accord Sanowicz v. Bacal (2015) 234 Cal.App.4th 1027, 1041, fn. 14 [“Such ‘shotgun’ or ‘chain letter’ pleading is to be discouraged as it renders imprecise the true nature of the claims.”].) This style of pleading creates confusion for all, including the responding party. The Court discourages Plaintiff from pleading her claims in this manner, particularly given the sheer number and variety of those asserted. The Court notes it is often entirely unnecessary to incorporate every single preceding paragraph in order to incorporate the prefatory factual allegations upon which multiple counts are based.

Second, Plaintiff alleges facts on information belief by simply uttering that phrase before certain allegations without actually identifying the information upon which the belief is based. Again, although prolific, this pleading practice is improper. “A verified pleading is itself an affidavit and may be considered as such.” (Atkins, Kroll & Co. v. Broadway Lumber Co. (1963) 222 Cal.App.2d 646, 654.) “Of course, it is true that an affidavit is normally presumed to state matters personally known to the affiant and lacks evidentiary value, in a variety of civil contexts, when based on information and belief, or hearsay.” (City of Santa Cruz v. Municipal Ct. (1989) 49 Cal.3d 74, 87.) Nevertheless, “courts have long held that affidavits on information and belief may be sufficient in a variety of contexts where the facts would otherwise be difficult or impossible to establish.” (Ibid.) “‘Information and belief’ is, of course, a common legal term used to indicate that ‘the allegation is not based on the firsthand knowledge of the person making the allegation, but that person nevertheless, in good faith, believes the allegation to be true.’” (Id. at p. 93, fn. 9.) When alleging facts in a verified complaint on information and belief, it is not sufficient to simply state they are “on information and belief.” (See Gomes v. Countrywide Home Loans, Inc. (2011) 192 Cal.App.4th 1149, 1158-59.) Rather, a plaintiff must allege the facts or information that led him or her to infer or believe the truth of the ultimate factual allegation. (Ibid.)

Although these improper pleading practices and the other defects addressed above for purposes of the demurrer may have made Defendants’ task more difficult, they do not excuse Defendants and their counsel from presenting materials to the Court in conformity with the Code of Civil Procedure, California Rules of Court, and the Santa Clara County Bar Association’s Code of Professionalism.

At the beginning of its discussion, the Court enumerated several ways in which Defendants’ demurrer and supporting papers did not comply with the California Rules of Court and Code of Civil Procedure. The Court points out that the paucity of analysis overall, misrepresentations as to the holdings of particular cases, and reliance on disapproved authority runs afoul of the Court’s expectation that materials submitted will be based on a fair and accurate representation of the law and facts (here, the facts alleged). (Cal. Rules of Court, rule 3.1113(b) [contents of supporting memorandum]; accord SCCBA, Code of Professionalism, § 7.) The Court expects Defendants and their counsel to meet these expectations going forward.