Case Name: Share Edge LLC, et al. v. Hispanicize Media Group, LLC, et al.

Case No.: 17CV320935

Demurrer of Defendant Hispanicize Media Group, LLC to the Complaint

Factual and Procedural Background

Full Bottle Group, Inc. (“Full Bottle”) was founded in 2013 by Reed Berglund (“Berglund”), Natalie Enright (“Enright”), and Eric Wachs (“Wachs”). (Complaint, ¶1.) Full Bottle created and managed an online advertising platform that allowed brands to solicit bids for advertising campaigns from Full Bottle’s roster of highly influential social media personalities (known as “influencers”). (Id.) Influencers are celebrities and other people who have large followings on social media platforms such as Instagram, Snapchat, YouTube and Facebook. (Id.) Influencers post content on their social media channels which is viewed by followers over the Internet. (Id.) Advertisers seek to work with influencers, who position themselves as experts in a field (e.g., make-up demonstration, fitness, fashion) relating to the products being marketed. (Id.)

There are tens of thousands of social media influencers who work with advertisers to promote products through social media. (Complaint, ¶23.) Traditionally, influencer marketing was highly decentralized. (Id.) Full Bottle eliminated inefficiencies with the traditional approach. (Id.) To run a campaign through Full Bottle, a brand would post a project or product, solicit bids from influencers in a competitive auction, and approve the campaign’s creators, content, and pricing simultaneously. (Complaint, ¶24.) Knight & Bishop, L.P. (“K&B”) saw the promise of the Full Bottle platform and invested approximately $2.5 million in K&B. (Complaint, ¶25.)

In December 2016, Berglund and Full Bottle’s management concluded Full Bottle lacked resources to stave off its creditors. (Complaint, ¶26.) Full Bottle had a cash flow shortfall of $785,000 and a projected a cash flow shortfall of $1.7 million by October 2017. (Complaint, ¶27.) Berglund and Full Bottle management began marketing the company for sale, identifying Hispanicize Media Group, LLC (“HMG”), a Hispanic-focused media organization with its own influencer network, as a potential purchaser. (Id.)

On May 23, 2017, HMG delivered a letter of intent proposing terms for the purchase of Full Bottle’s assets. (Complaint, ¶29.) On June 6, 2017, Berglund and HMG representatives held a teleconference to discuss the proposed transaction including discussions about what to do with Full Bottle’s three largest unsecured creditors: ZeptoLab, MiniClip, and K&B. (Id.) Full Bottle also disclosed to HMG its unpaid liabilities to influencers. (Id.) After learning of Full Bottle’s outstanding liabilities, HMG quickly reduced its offer price. (Complaint, ¶30.)

By late June 2017, Full Bottle’s finances continued to deteriorate until the company had no choice but to transfer its assets through an assignment for the benefit of creditors (“ABC”) or file for bankruptcy. (Complaint, ¶31.) On June 26, 2017, Full Bottle transferred its assets to a new entity managed by Sherwood Partners, Inc. (“Sherwood”) called Full Bottle (assignment for the benefit of creditors), LLC (“Full Bottle ABC”). (Complaint, ¶¶4 and 31.)

The day after the ABC, Sherwood emailed K&B informing of the ABC and assessing whether K&B was interested in acquiring Full Bottle’s assets including all of its valued intellectual property. (Complaint, ¶33.) On July 17, 2017, K&B, through an affiliate entity, Share Edge, LLC (“Share Edge”), offered to purchase Full Bottle’s assets for $1.8 million. (Id.)

Armed with full knowledge of Full Bottle’s liabilities and damaged goodwill in the influencer community, HMG did not counter K&B’s bid. (Complaint, ¶34.) Instead, HMG hired Berglund and misappropriated the intellectual property and business Berglund developed at Full Bottle. (Id.) In HMG’s July 5, 2017 offer to Berglund, a description of the scope of work included recruiting influencers, “merging client lists,” and “transfer[ring] all current FB client invoices to HMG.” (Id.) Berglund immediately began misappropriating Full Bottle’s intellectual property for the benefit of his new employer. (Complaint, ¶35.) A few days later, HMG used Full Bottle’s proprietary information to solicit business with Universal McCann and Interpublic Group, two global media and advertising agencies. (Complaint, ¶36.)

After K&B placed the winning bid for Full Bottle ABC’s assets, Full Bottle ABC and K&B’s designee, Share Edge, executed an Asset Purchase Agreement (“Agreement”). (Complaint, ¶38.) Under the Agreement, Share Edge acquired the assets of Full Bottle ABC in exchange for approximately $1.8 million. (Id.) The deal closed on July 28, 2017. (Id.) The Agreement gives Share Edge sole ownership of all trade secrets and intellectual property assigned by Full Bottle to Full Bottle ABC, and Full Bottle’s rights as against employees and former employees. (Complaint, ¶39.)

Full Bottle ABC, through Sherwood, made various representations and warranties in the Agreement. (Complaint, ¶40.) Despite knowing of threatened and actual litigation filed by ZeptoLab against Full Bottle and later Full Bottle ABC, Full Bottle ABC represented in the Agreement that no claim, suit, or proceeding was pending or threatened that “might affect in any way the Purchased Assets, Assumed Liability or the transaction contemplated by this Agreement, nor is Seller aware or have grounds to know of any reasonable basis therefor.” (Id.) Sherwood, through Full Bottle ABC, represented that all representations and warranties would be accurate as the date of closing. (Complaint, ¶41.) Each of the representations and warranties was false as of the date of closing and had Share Edge known of the falsity, it would not have entered into the Agreement. (Complaint, ¶42.)

Contrary to the terms of the Agreement which required Sherwood and Full Bottle ABC to effect a complete transfer of all outstanding purchased assets, Sherwood and Full Bottle ABC failed to turn over the assets necessary to run the business until November 9, 2017, nearly three months after the transaction closed. (Complaint, ¶¶44 and 48.) Full Bottle ABC and others, including Wachs and Sherwood, represented to influencers who were owed for campaigns run prior to closing that Share Edge was responsible for outstanding debts even though Share Edge was not responsible for such obligations under the Agreement. (Complaint, ¶45.) Due to false statements by Wachs and others, Share Edge received complaints from influencers who claimed to be owed payments for Full Bottle campaigns. (Complaint, ¶46.) Influencers organized online and sought legal counsel to bring action against Share Edge. (Id.) Influencers discouraged their peers from working with Share Edge or Full Bottle. (Id.)

On December 22, 2017, plaintiffs K&B and Share Edge (collectively, “Plaintiffs”) filed a complaint against defendants HMG, Sherwood, Full Bottle, Full Bottle ABC, and Berglund asserting causes of action for:

(1) Misappropriation of Trade Secrets [versus HMG and Berglund]
(2) Inducing Breach of Contract [versus HMG]
(3) Intentional Interference with Contract [versus HMG]
(4) Breach of Contract [versus Berglund]
(5) Breach of Contract [versus Full Bottle, Full Bottle ABC, and Sherwood]
(6) Intentional Misrepresentation [versus Berglund, Full Bottle, Full Bottle ABC, and Sherwood]

On February 20, 2018, defendant Sherwood filed a general denial. On February 26, 2018, defendant Sherwood filed an amended answer and general denial.

On March 7, 2018, defendant HMG filed the motion now before the court, a demurrer to the first through third causes of action in Plaintiffs’ complaint.

I. Defendant HMG’s demurrer to Plaintiffs’ complaint is SUSTAINED, in part, and OVERRULED, in part.

A. Defendant HMG’s demurrer to the first cause of action for misappropriation of trade secrets is OVERRULED.

“A cause of action for monetary relief under CUTSA may be said to consist of the following elements: (1) possession by the plaintiff of a trade secret; (2) the defendant’s misappropriation of the trade secret, meaning its wrongful acquisition, disclosure, or use; and (3) resulting or threatened injury to the plaintiff. The first of these elements is typically the most important, in the sense that until the content and nature of the claimed secret is ascertained, it will likely be impossible to intelligibly analyze the remaining issues.” (Silvaco Data Systems v. Intel Corp. (2010) 184 Cal.App.4th 210, 220 (Silvaco), internal citations omitted.)

i. Misappropriation.

Initially, defendant HMG argues Plaintiffs have not adequately alleged that defendant HMG “misappropriated” a trade secret. Civil Code section 3426.1, subdivision (b) defines misappropriation of trade secret as follows:

“Misappropriation” means:
(1) Acquisition of a trade secret of another by a person who knows or has reason to know that the trade secret was acquired by improper means; or
(2) Disclosure or use of a trade secret of another without express or implied consent by a person who:
(A) Used improper means to acquire knowledge of the trade secret; or
(B) At the time of disclosure or use, knew or had reason to know that his or her knowledge of the trade secret was:
(i) Derived from or through a person who had utilized improper means to acquire it;
(ii) Acquired under circumstances giving rise to a duty to maintain its secrecy or limit its use; or
(iii) Derived from or through a person who owed a duty to the person seeking relief to maintain its secrecy or limit its use; or
(C) Before a material change of his or her position, knew or had reason to know that it was a trade secret and that knowledge of it had been acquired by accident or mistake.

“A trade secret is misappropriated if a person (1) acquires a trade secret knowing or having reason to know that the trade secret has been acquired by ‘improper means,’ (2) discloses or uses a trade secret the person has acquired by ‘improper means’ or in violation of a nondisclosure obligation, (3) discloses or uses a trade secret the person knew or should have known was derived from another who had acquired it by improper means or who had a nondisclosure obligation or (4) discloses or uses a trade secret after learning that it is a trade secret but before a material change of position.” (Ajaxo Inc. v. E*Trade Group Inc. (2005) 135 Cal.App.4th 21, 66; see also CACI, No. 4401.)

At paragraph 55 of the complaint, Plaintiffs allege, in relevant part, “Defendants acquired and used the trade secrets through improper means. After an unsuccessful attempt to buy Full Bottle’s assets, HMG instead [hired] Berglund and contractually required him to share Full Bottle’s proprietary information with the intent to exploit them for economic gain.” Defendant HMG contends this allegation is contradicted by other allegations. HMG points the court to allegations that HMG entered into negotiations for the purchase of Full Bottle’s assets and in the course of those negotiations, Full Bottle “shared [trade secrets] with HMG” but only after HMG “had executed a non-disclosure agreement.” (Complaint, ¶¶28 – 29 and 52.) HMG contends that these allegations demonstrate that it properly acquired Full Bottle’s trade secrets in connection with performing due diligence.

Civil Code section 3426.1, subdivision (a) defines “improper means” to “include[] theft, bribery, misrepresentation, breach or inducement of a breach of a duty to maintain secrecy, or espionage through electronic or other means. Reverse engineering or independent derivation alone shall not be considered improper means.” (Emphasis added.)

Although it is alleged that Full Bottle shared its trade secrets with HMG during the due diligence process, those allegations do not foreclose a subsequent misappropriation which is what Plaintiffs allege here. Plaintiffs essentially argue that Berglund, as founder and CEO of Full Bottle, was under an obligation to maintain trade secrets which belonged to Full Bottle. Essentially, Plaintiffs allege that since HMG did not properly acquire Full Bottle’s trade secrets via purchase, HMG thereafter hired Berglund and induced him to breach his duty to maintain Full Bottle’s trade secrets by disclosing those trade secrets to HMG. This allegation is bolstered by allegations that HMG had previous access to Full Bottle’s trade secrets and knew of Berglund’s relationship/position with Full Bottle. Based on the allegations, it is this court’s opinion that Plaintiffs have adequately alleged HMG misappropriated trade secrets.

HMG argues next that Plaintiffs fail to state facts to support the allegation that HMG is “misusing the appropriated Trade Secret Property for their own benefit” or that HMG “used the trade secrets for their own commercial benefit.” (Complaint, ¶¶54 – 55.) As explained above, misappropriation occurs when there is acquisition by improper means. Misappropriation may also occur through disclosure or use, but the claim is sufficient based on allegations of improper acquisition alone. (See Financial Corp. of America v. Wilburn (1987) 189 Cal.App.3d 764, 778—“[A] defendant cannot demur generally to part of a cause of action;” see also PH II, Inc. v. Superior Court (1995) 33 Cal.App.4th 1680, 1682—“A demurrer does not lie to a portion of a cause of action;” Pointe San Diego Residential Community, L.P. v. Procopio, Cory, Hargreaves & Savitch, LLP (2011) 195 Cal.App.4th 265, 274—“ A demurrer challenges a cause of action and cannot be used to attack a portion of a cause of action.”)

ii. Misappropriation revisited.

HMG next challenges the validity of Plaintiffs’ misappropriation claim arguing that because the alleged misconduct all occurred prior to Plaintiffs’ purchase, Plaintiffs’ claim is “objectively specious.” HMG asserts Plaintiffs have no direct knowledge that HMG is inappropriately using its trade secrets. In essence, HMG suggests Plaintiffs lack the requisite evidence to prove their claim for misappropriation.

However, “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. Aiding and abetting.

At paragraph 18 of the complaint, Plaintiffs allege, in relevant part, “Each of the Defendants aided and abetted and is responsible for the occurrences herein alleged, and Share Edge’s injuries were proximately caused thereby.” HMG contends the allegations of aiding and abetting are insufficient to hold them liable. However, as discussed above, the allegations of the complaint are sufficient to state a claim for direct liability against HMG for misappropriation of trade secrets. Also, as discussed above, a defendant cannot demur to only a portion of a cause of action. Since HMG’s direct liability is adequately alleged, the court need not determine whether Plaintiffs have adequately alleged HMG’s additional liability under an aiding and abetting theory.

Accordingly, defendant HMG’s demurrer to the first cause of action in Plaintiffs’ complaint on the ground that the pleading does not state facts sufficient to constitute a cause of action [Code Civ. Proc., §430.10, subd. (e)] for misappropriation of trade secrets and on the ground that the pleading is uncertain [Code Civ. Proc., §430.10, subd. (f)] is OVERRULED.

B. Defendant HMG’s demurrer to the second and third causes of action for inducing breach of contract and intentional interference with contract, respectively, is SUSTAINED.

Defendant HMG contends the second cause of action for inducing breach of contract and third cause of action for intentional interference with contract is preempted by the California Uniform Trade Secrets Act (“CUTSA”). “CUTSA provides the exclusive civil remedy for conduct falling within its terms, so as to supersede other civil remedies ‘based upon misappropriation of a trade secret.’” (Silvaco Data Systems v. Intel Corp. (2010) 184 Cal. App. 4th 210, 236.) Further, Civil Code “section 3426.7, subdivision (b), preempts common law claims that are ‘based on the same nucleus of facts as the misappropriation of trade secrets claim for relief.’” (K.C. Multimedia, Inc. v. Bank of America Technology & Operations, Inc. (2009) 171 Cal. App. 4th 939, 958.) However, CUTSA does not preempt claims that are related to a trade secret misappropriation, but are “independent and based on facts distinct from the facts that support the misappropriation claim.” (Angelica Textile Services, Inc. v. Park (2013) 220 Cal.App.4th 495, 499, 506 (Angelica).)

Here, Plaintiffs allege Full Bottle’s trade secrets include, “lists of Full Bottle’s customers; lists of influencers who worked with Full Bottle, technology; and details of Full Bottle’s contracts with clients and negotiations with potential clients.” (Complaint, ¶51; emphasis added.)

In the second cause of action, Plaintiffs allege, in relevant part, “In discussions between HMG and Berglund, HMG became aware that users of the Full Bottle platform had entered into agreements with Full Bottle Group whereby these users would pay Full Bottle to use the platform for social media campaigns. … HMG intentionally interfered with these contracts by soliciting Berglund to assign the right to the receivables under these contracts to HMG… The interference constituted conversion of funds that Share Edge was entitled to… [HMG] gained access to receivables that were rightfully the property of Share Edge.” (Complaint, ¶¶62 – 64.)

In the third cause of action, Plaintiffs allege, in relevant part, “A contractual relationship existed between Full Bottle Group and users of the Full Bottle platform … which provided that these users would pay Full Bottle a fee for using the platform… HMG became aware of this contractual relationship when it attempted to purchase Full Bottle Group. Berglund specifically discussed what receivable were owed to Full Bottle by influencers, advertisers, and other users of the Full Bottle platform. … HMG … solicited Berglund to divert these funds from Full Bottle to HMG. … [HMG] convert[ed] receivables that rightfully belonged to Share Edge.” (Complaint, ¶¶68 – 73.)

Except to cite Angelica for the principle that CUTSA does not displace claims that are independent and based on facts distinct from the facts that support misappropriation, Plaintiffs do nothing in opposition to explain how the second and third causes of action are based on facts distinct and independent of the misappropriation. In this court’s opinion, the second and third causes of action appear to be based upon the same common nucleus of facts as Plaintiffs’ claim for misappropriation of trade secrets, i.e., HMG used trade secret information (details of Full Bottle’s contracts with clients; specifically, details about accounts receivable) for its own personal benefit. The acts alleged in the second and third cause of action depend upon using confidential and proprietary information. In other words, the second and third causes of action exist only through the alleged wrongful misappropriation of trade secret information.

Accordingly, defendant HMG’s demurrer to the second and third causes of action in Plaintiffs’ complaint on the ground that the pleading does not state facts sufficient to constitute a cause of action [Code Civ. Proc., §430.10, subd. (e)] for misappropriation of trade secrets, i.e., the causes of action are barred by CUTSA preemption, is SUSTAINED with 10 days’ leave to amend. Defendant HMG’s demurrer to the second and third causes of action in Plaintiffs’ complaint on the ground that the pleading is uncertain [Code Civ. Proc., §430.10, subd. (f)] is OVERRULED.