Hon. Janis L. Sammartino, United States District Judge.
Presently before the Court is Defendant Denis Bouboulis' Motion for Advancement of Legal Expenses. ("Mot.," ECF No. 59.) Also before the Court is Plaintiff Allergia, Inc.'s Response in Opposition to, ("Opp'n," ECF No. 62), and Defendant's Reply in Support of, ("Reply," ECF No. 64), Defendant's Motion. Plaintiff also filed an untimely supplemental response in opposition. ("Supp. Opp'n," ECF No. 63.) The Court vacated the hearing on the Motion scheduled for August 25, 2016 pursuant to Civil Local Rule 7.1(d)(1). (ECF No. 65.) After considering the parties' arguments and the law, the Court
Beginning several years ago, Defendant worked with Plaintiff's predecessor-in-interest, CLRS Technology, Inc., to develop and invent medical devices and related methods for using phototherapeutics to alleviate the symptoms of allergic rhinitis. (Second Amended Complaint ("SAC") ¶ 9, ECF No. 53.) In exchange for these contributions, Defendant received 116,111 shares of CLRS common stock. (Id.)
On August 5, 2010, CLRS filed a provisional patent application with the United States Patent and Trademark Office (USPTO), Application Ser. No. 61/371,172 (the "'172 Application"), directed to an invention for alleviating the symptoms of allergic rhinitis. (Id. ¶ 10.) Defendant was one of three named inventors. (Id.)
Approximately two months later, CLRS spun out ownership of the '172 Application to Plaintiff in connection with a corporate transaction involving a third party, Solta. (Id. ¶ 11.) Accordingly, Plaintiff was incorporated on October 5, 2010 under the laws of California. (Id. ¶ 12.) All of the then-existing shareholders of CLRS — including Defendant — received shares of stock in Plaintiff based on their then-existing shares in CLRS. (Id.) Defendant was made Plaintiff's President. (See id. ¶ 16.)
When signing the Assignment and License Agreements, "Defendant was fully aware of the contents of the documents..., and was fully aware of the purpose and intent of those documents." (Id. ¶ 18.) "Defendant gave no indication to Plaintiff... that Defendant believed that CLRS and then [Plaintiff] did not own all of the '172 [Application] and related rights, and/or that Defendant believed that he had not assigned his rights therein to CLRS and then/thereby to [Plaintiff]." (Id. ¶ 19.) Indeed, "for at least many months ..., Defendant ... did not tell or indicate to [Plaintiff] ... that Defendant ... believed that he personally retained any ownership in the '172 [Application] and related rights," but rather he "remained silent on the issue." (Id. ¶ 24.)
On October 15, 2010, the initial incorporator of Plaintiff formally named Defendant as an initial director of Plaintiff. (Id. ¶ 20.) On that same date, the CLRS/Solta transaction was executed. (Id. ¶ 21.) The resulting Agreement and Plan of Merger (the Executive Summary) and Disclosure Schedule expressly referenced the Assignment and License Agreements. (Id. ¶¶ 21-22.)
A few months later, Defendant requested a telephone conference with the owners and directors of Plaintiff, during which he disclosed an outline of a strategic business plan for Plaintiff. (Id. ¶ 27.) Defendant proposed that he would undertake execution of the proposed plan and assume the duties of CEO of Plaintiff if he were granted a controlling stake in the capital stock of Plaintiff. (Id.) In response, the shareholders and directors of Plaintiff requested that Defendant prepare and present a budget for his proposal. (Id. ¶ 28.) Several months passed without Defendant making the requested presentation. (Id.) Instead, Defendant "secretly prepared a related and apparently competitive patent application... without the knowledge and/or authorization of [Plaintiff] or its other shareholders." (Id. ¶ 29.) Defendant continued as President and director of Plaintiff until approximately May 2011. (Id. ¶ 30.)
On August 4, 2011, Plaintiff filed a full utility application, Ser. No. 13/198,672 (the "'672 Application"). (Id. ¶ 34.) Although Plaintiff solicited Defendant's signature on related filings, Defendant refused to participate or assist in the prosecution of the '672 Application. (Id.)
On August 5, 2011, Defendant secretly filed Application Ser. No. US 13/204,282
Plaintiff subsequently has "continued to make reasonable efforts to get Defendant to sign certain formal `assignment' documents related to the '172 [Application]," but Defendant has refused. (Id. ¶ 39.) "[P]otential investors in Plaintiff's '172 patent-pending technologies and related opportunities have declined to invest based on Defendant['s] ... actions, including positions taken and communicated to those investors by Defendant ... regarding the parties' respective rights regarding Plaintiff's '172 patent-pending technologies and related opportunities." (Id. ¶ 40.)
On June 30, 2014, Plaintiff filed its initial complaint, asserting two causes of action: (1) declaratory judgment of patent application ownership and/or other patent and intellectual property rights, and (2) breach of fiduciary duty. (See ECF No. 1.) On August 17, 2015, the Court dismissed Plaintiff's first cause of action to the extent it attempted to correct ownership of the '282 Application and its second cause of action for breach of fiduciary duty. (See ECF No. 28.) Plaintiff filed its FAC on September 4, 2015 (see ECF No. 30), and on May 19, 2016 the Court dismissed Plaintiff's causes of action for breach of contract and fraud. (See ECF No. 51.)
On June 3, 2016, Plaintiff filed its SAC, alleging causes of action for (1) declaratory judgment of patent application ownership and/or other patent and intellectual property rights; (2) breaches of fiduciary duty and/or implied contract; and (3) fraud.
Defendant now moves this Court for advancement of legal expenses because Defendant argues that Plaintiff sued him in his capacity as a former officer or director of Plaintiff, and thus he is entitled to an advancement of fees pursuant to California Corporations Code section 317 and Plaintiff's Bylaws. The indemnification provision of Plaintiff's Bylaws states:
(Mot. Ex. B ("Bylaws") 8,
Plaintiff's Bylaws also provide an advancement provision, which states:
(Id.) Section 6.3 of the Bylaws further explains what a claimant must do if he is not indemnified in full within sixty days of his written claim for indemnification. (Id.)
California Corporations Code section 317 provides mechanisms for permissive and mandatory indemnification by the corporation, as well as provisions for advancement of expenses. Of issue here is the indemnification provision of subsection (c), which provides that
Cal. Corp. Code § 317(c).
Subsection (f) further allows a corporation to advance fees in such cases:
Id. at § 317(f).
Defendant broadly argues that he is entitled to advancement of his fees based on section 317(f) and Plaintiff's Bylaws. (See generally Mot., ECF No. 59-1.) Plaintiff responds that (1) Defendant is not entitled to advancement because he does not meet the requirements of indemnification pursuant to section 317(c), on which Plaintiff believes the advancement provision of section 317(f) is necessarily based, (Opp'n 11-13, ECF No. 62); (2) advancement would be unfair given Defendant's "extensive delay and litigation tactics," (id. at 13-14); (3) public policy should not permit advancement in this instance, (id. at 14-16); (4) Defendant's status as an officer or director of the company is irrelevant to "Plaintiff's main claims," (id. at 7-11); and (5) in the alternative, Plaintiff should be allowed to amend its complaint "to withdraw
Defendant argues that sections 317(c) and 317(f) are conceptually and procedurally separate provisions. (Mot. 13-16, ECF No. 59-1.) According to Defendant, section 317 indemnification is not available "until there has been either a determination of whether the corporate agent was acting in good faith or an adjudication on the merits." (Id.) On the other hand, Defendant argues that advancement is a summary proceeding "that occurs before any adjudication on the merits of the case against the corporate director or officer and before any determination of `good faith.'" (Id. (emphasis in original).) "In other words, the right to advancement does not depend on whether the corporate agent is ultimately found to be entitled to indemnification." (Id. at 14 (emphasis in original).)
Plaintiff responds that, to the contrary, the advancement provision of section 317(f) necessarily depends on section 317(c), and thus Defendant is not entitled to any advancement because "there is no basis upon which he will ever be able to show that his relevant actions ... met the requirements for indemnification under 317(c)." (Opp'n 13, ECF No. 62 (emphasis removed).)
Whether the advancement provision of section 317(f) is conceptually and procedurally separate from section 317(c) appears to be a matter of first impression in California. "When interpreting a statute, we look to the plain meaning of the statute's words, which are generally the most reliable indicator of the Legislature's intent." Nicholas Labs., LLC v. Chen, 199 Cal.App.4th 1240, 1249, 132 Cal.Rptr.3d 223 (2011) (citing Cassady v. Morgan, Lewis & Bockius LLP, 145 Cal.App.4th 220, 231, 51 Cal.Rptr.3d 527 (2006)).
Here, a plain reading of the statute supports Defendant's view that the provisions are conceptually and procedurally separate. The indemnification provisions require either an ultimate determination that the agent was acting in good faith or an adjudication on the merits. Subject to a few exceptions, section 317(c) broadly allows a corporation to indemnify a corporate director or officer in any action "by reason of the fact" that they were an agent of the corporation and an ultimate showing that they "acted in good faith, in a manner the person believed to be in the best interests of the corporation and its shareholders." Cal. Corp. Code § 317(c). In addition, indemnification is mandatory under section 317(d) if "a corporate agent has been successful on the merits in defense of any proceeding referred to in subdivision (b) or (c) or in defense of any claim, issue, or matter therein," without regard to the officer's good faith. Id. § 317(d). Thus, indemnification under section 317 requires either a determination of the agent's good faith or an adjudication of success on the merits.
The advancement provision, in contrast, does not require any such determination. While certainly related to the indemnification provisions, section 317(f) provides that any such funds "may be advanced by the corporation prior to the final disposition of the proceeding." Cal. Corp. Code § 317(f) (emphasis added). Because advancement is permissive (i.e., a corporation "may" advance these funds), all that is required to satisfy this subdivision is (1) corporate authorization for advancement (e.g., an advancement provision in the corporation's bylaws) and (2) "an undertaking by or on behalf of the agent to repay that amount if it shall be determined ultimately that the agent is not entitled to be indemnified
The Court's view of the statute comports with other jurisdictions that have considered the same issue. See, e.g., Kaung v. Cole Nat. Corp., 884 A.2d 500, 509 (Del. 2005)
The Court now turns to whether Defendant is entitled to advancement in this case. As just discussed, Defendant's claim for advancement depends on whether (a) Plaintiff provided Defendant with a right to advancement and (b) Defendant has provided an undertaking to repay the advancement in the event he is not entitled to indemnification. Because the Court concludes Defendant has no right to advancement, even though Plaintiff's Bylaws contain an advancement provision, the Court does not address whether Defendant has provided an undertaking to repay the advancement.
As noted above, Plaintiff's Bylaws expressly provide for indemnification and advancement.
The California Court of Appeal's decision in Plate v. Sun-Diamond Growers is instructive in this case. In Plate, defendants Branson and McElroy were officers of Sun-Diamond Growers, an administrative and sales organization for roughly sixty thousand growers, who initially worked with H&R Plate & Company, Inc. ("Plate"), an industrial commodity food broker who was the exclusive broker for Sun-Diamond products in Northern California. Id. at 1119, 275 Cal.Rptr. 667. After some time, these defendants decided to leave Sun-Diamond and start their own brokerage business, eventually convincing Sun-Diamond to drop Plate and hire them
Id. at 1126, 275 Cal.Rptr. 667.
Applying the logic of Plate, the Court concludes that Defendant was not sued "by reason of the fact" that he was an agent and/or officer of Plaintiff. Specifically, all of Plaintiff's claims against Defendant appear to implicate actions that predominantly benefit Defendant, but do not appear to be in furtherance of the corporate good or performed in connection with Defendant's corporate functions. Plaintiff's claim for declaratory judgment of patent application ownership is not an action against Defendant, but an action to generally determine ownership of patent rights. (See SAC ¶¶ 45-48.); see also Allergia, Inc. v. Bouboulis, No. 14-CV-1566 JLS, 2015 WL 11735654, at *5 (S.D. Cal. Aug. 17, 2015) (Sammartino, J.) ("Here, Plaintiff has shown that the parties disagree over the ownership rights of the patent applications, and that such dispute warrants immediate attention. A declaratory judgment by the Court, which would resolve the ownership dispute, is necessary for Plaintiff and Defendant to effectively proceed with their business ventures."). Thus, this claim is not against Defendant at all, much less "by reason of the fact" that he was an officer or agent of the corporation. Accordingly, the Court concludes that this cause of action does not implicate the section 317 advancement analysis or any right to advancement under Plaintiff's Bylaws.
Furthermore, Plaintiff's claims against Defendant for breach of fiduciary duty and implied contract center on (1) Defendant's failure to inform Plaintiff that he believed he still owned some or all rights in the '172 and '672 patent applications, (SAC ¶¶ 50-51, ECF No. 53), and (2) Defendant's filing of allegedly secret and competing patent applications and similarly not disclosing the same, (id. ¶ 52). Plaintiff's assertions of fraud against Defendant are based on these same allegations. (Id. ¶¶ 56-60.) The Court finds that these claims for relief largely — if not entirely — implicate Defendant's personal motives, not the corporate good. Specifically, Defendant's failure to inform Plaintiff that he believed he owned some or all rights in the patent applications
To be sure, the fact that Defendant signed certain documents transferring ownership of the '172 patent application to Plaintiff likely could not have been accomplished without his role as interim President. And Defendant is accused of using his position as an officer to obtain confidential information that may have been used in filing his secret patent applications. Such allegations might entitle Defendant to advancement in Delaware — and other — courts. Supra note 6. But based on the standard set forth in Plate, the Court declines to conclude that the core of the allegations against Defendant — that he did not disclose his belief that he still owned some or all rights in the '172 and '672 patent applications, and that he secretly filed competing patent applications while working for Plaintiff — were in furtherance of his corporate functions or the corporate good. Cf. Warner v. Sims Metal Mgmt., No. C 13-02190 WHA, 2013 WL 4777314, at *2 (N.D. Cal. Sept. 6, 2013) (in the indemnification context, finding that the plaintiff was not sued by reason of the fact he was an agent where "defendant allege[d] that plaintiff converted property and submitted fraudulent expense reimbursements, which are purely self-serving acts that do not further the corporate good"). Accordingly, the Court
For the foregoing reasons, the Court
In addition, the Delaware corporate code provision providing for advancement is nearly the same as California's. Compare Cal. Corp. Code § 317(f), with Del. Corp. Code § 145(e); cf. Oakland Raiders v. Nat'l Football League, 93 Cal.App.4th 572, 586 n.5, 113 Cal.Rptr.2d 255 (2001) ("The parties agree that we may properly rely on corporate law developed in the State of Delaware given that it is identical to California corporate law for all practical purposes.").
