Southern California Institute of Law v. TCS Education System et al

Filing 34

[DOCUMENT STRICKEN] - AMENDED DOCUMENT filed by Plaintiff Southern California Institute of Law. First Amended Complaint (Shohet, George) [Document STRICKEN by order of the Court 37 . Modified on 5/23/2011 (rne).] Modified on 5/23/2011 (shb).

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George A. Shohet SBN 112697
LAW OFFICES OF GEORGE A. SHOHET,
A PROFESSIONAL CORPORATION
245 Main Street, Suite 310
Venice, CA 90291-5216
Tel.: [phone]
Fax: [phone]

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Gretchen M. Nelson SBN 112566
KREINDLER & KREINDLER LLP
707 Wilshire Blvd, Suite 4100
Los Angeles, CA 90017
Tel.: [phone]
Fax: [phone]

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Attorneys for Plaintiff
Southern California Institute of Law

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UNITED STATES DISTRICT COURT

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CENTRAL DISTRICT OF CALIFORNIA

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SOUTHERN CALIFORNIA
INSTITUTE OF LAW, a California
corporation,

CASE NO.: CV10-8026 JAK (AJWx)
[Assigned to Hon. John A. Kronstadt]

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Plaintiff,
vs.
TCS EDUCATION SYSTEM, an
Illinois corporation; DAVID J.
FIGULI, an individual; and GLOBAL
EQUITIES, LLC d/b/a HIGHER
EDUCATION GROUP, a Colorado
limited liability company,

FIRST AMENDED COMPLAINT
FOR INJUNCTIVE RELIEF AND
DAMAGES
Action Filed: Oct. 25, 2010
JURY TRIAL DEMANDED

Defendants.

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FIRST AMENDED COMPLAINT FOR INJUNCTIVE RELIEF AND DAMAGES

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Plaintiff, by and through its attorneys, based on its experiences, the
investigation of counsel, and its information and belief, alleges as follows:
NATURE OF THE CASE

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This action arises out of the blatantly anticompetitive conduct of TCS

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Education System, a multi-million dollar corporation engaged in the rapid

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acquisition of schools and colleges in California and elsewhere. Plaintiff is a small,

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State-Bar accredited, evening law school with a twenty-five year history of serving

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working class adults in the tri-county area of San Luis Obispo, Santa Barbara and

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Ventura Counties. Lured by the prospect of increasing its outreach to an

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underserved population of future law students, the plaintiff provided defendants

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with unfettered access to its Dean, faculty and confidential files in an effort to

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complete an acquisition transaction with the defendants. Instead, the defendants

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misappropriated plaintiff's most guarded secrets and information in violation of a

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binding confidentiality agreement and secretly used the information to affiliate with

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the plaintiff's sole competitor in the region. Armed with the stolen information, the

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defendants recently announced their "deal" which is calculated to kill off

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competition in the region, destroy the plaintiff's business and increase the cost of

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tuition. Plaintiff seeks as its primary remedy injunctive relief prohibiting defendants

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from taking further steps to complete their unlawful scheme.
JURISDICTION AND VENUE

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2.

This Court has subject matter jurisdiction over plaintiff's state law

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claims under 28 U.S.C. § 1332(a) because the parties are diverse and the amount in

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controversy exceeds $75,000, exclusive of interest and costs. Venue is proper in

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this District under 28 U.S.C. § 1391 because defendants conduct business in this

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district and transacted with plaintiff in this District. In addition, wrongful conduct

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by defendants took place in this District, and that conduct was intended to and did

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cause injury to plaintiff.

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FIRST AMENDED COMPLAINT FOR INJUNCTIVE RELIEF AND DAMAGES

THE PARTIES

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Southern California Institute of Law (the "Law School") is a California

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corporation founded in 1986 with campuses in Santa Barbara and Ventura Counties.

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The Law School operates evening programs for the benefit of working adults who

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seek a rigorous academic environment that is affordable, flexible and offers small

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class sizes. Because of its dedicated administration and faculty, who receive very

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modest compensation, perhaps the lowest of any State Bar accredited school in

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California, the Law School maintains one of the lowest tuition rates among law

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schools in the state. Tuition rates are currently $350 per unit whereas many

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comparable law schools charge in the range of $800 or more per unit. Santa Barbara

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& Ventura Colleges of Law ("COL"), the only other law school in the tri-county

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area of San Luis Obispo, Santa Barbara and Ventura Counties, charges $450 per

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unit. In 1996, after a decade of tremendous effort, the Law School was accredited

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by the Committee of Bar Examiners for the State of California. To put this

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accomplishment into perspective, there has been only one other California law

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school that received State Bar accreditation in the past 25 years. That school was

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founded in 1927 and only received its accreditation this year. Currently, students

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may earn Juris Doctor ("J.D.") and Bachelor of Science in Laws degrees. The Law

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School is also accredited by the California Bureau of Private Postsecondary

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Education ("Bureau") and was approved by the Bureau to commence a paralegal

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program and Bachelor of Arts programs in Law Enforcement and Criminal Justice.

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In evening law schools, nearly all of the academic experience takes place in the

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classroom. Recognizing this fact, the Law School continuously re-evaluates and

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tests its teaching methodologies.

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There are approximately one hundred students between the two

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campuses, thirty-one distinguished faculty members and an administrative staff

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consisting of a Dean, Vice-Dean and Registrar. The Law School's seven-person

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FIRST AMENDED COMPLAINT FOR INJUNCTIVE RELIEF AND DAMAGES

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Board of Directors has four members with Ph.D.s, three with J.D.s, two with

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M.B.A.s and five members hold multiple post-graduate degrees. Dean Stanislaus

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Pulle has a Ph.D. from King's College, University of London and was a post-

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doctoral Visiting Scholar at Yale Law School. He has taught for over forty years,

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including serving on the faculty of San Fernando Valley College of Law, COL,

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where he also served as Academic Dean, and at the Law School where he still

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teaches Constitutional Law. Dean Pulle founded the Law School with Dr. Carroll

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Gambrell, Board Chair, a former Dean of the School of Engineering at Mercer

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University, and Desmond O'Neill, Vice Dean, who holds an M.A. from the

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University of California, Santa Barbara, a J.D. from Boalt Hall School of Law and

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was twice president of the Santa Barbara County Bar Association. Members of the

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Law School's faculty have been rated as "superior" to "excellent" by State Bar

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Accreditation Consultants. Its faculty is drawn from top drawer law schools

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accredited by the American Bar Association ("ABA") who themselves excelled

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while in law school and from valedictorian law graduates of California accredited

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law schools. Over the past twenty-five years, the Law School has fostered a

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community among current students, alumni, faculty and staff. Leaders in the field

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of law have taken note of the high quality academics provided, the educational

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opportunities created for the working class and the overall positive community

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impact the Law School makes. Past keynote speakers at the Law School's

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commencement ceremonies include California Supreme Court Justice Ming Chin,

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presiding Justices of various divisions of the California Court of Appeal, including

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Justice Norman L. Epstein and Justice Paul Turner, former State Attorney General

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Bill Lockyer , Kenneth A. Starr, former United States Solicitor General, past

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Pepperdine University Law School Dean and current President of Baylor University,

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the governing president of the International Criminal Court, presiding judges of the

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local Superior Courts in Santa Barbara and Ventura, a President of the State Bar of

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FIRST AMENDED COMPLAINT FOR INJUNCTIVE RELIEF AND DAMAGES

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California and members of the California legislature. The Law School is honored to

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have as its keynote speaker at the June 2011 graduation ceremony California

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Supreme Court Chief Justice designee Tani Cantil-Sakauye.

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Defendant TCS Education System ("TCS") is a private, not-for-profit,

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corporation organized under the laws of the State of Illinois with its corporate

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headquarters in Chicago. Rather than being a comprehensive university, TCS

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acquires or affiliates with specialized colleges with discrete professional disciplines.

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For non-profit schools and colleges, TCS creates affiliations because these

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institutions do not have an ownership structure like proprietary entities. Prior to its

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affiliation with COL, the TCS "system" included schools with disciplines in

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psychology, health and human services, and education; a foundation that provides

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support for the schools and colleges; an online services affiliate that assists the

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schools with developing and offering online coursework; and two preschool through

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eighth grade laboratory schools. According to its 2010 Annual Report, TCS

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affiliates had revenues of approximately $71.8 million and net assets in excess of

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$30 million. It has a corporate staff of approximately 175 people and hundreds

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more faculty and staff at its various schools and colleges. One of its institutions,

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The Chicago School of Professional Psychology, has 500 employees alone. There

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are over 4,000 students at TCS-affiliated campuses in Chicago, Washington, D.C.,

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Los Angeles, Irvine, Pasadena, Santa Barbara and elsewhere. Although TCS is a

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non-profit, it prides itself on its innovative business structure and financial success.

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In many respects it operates more like a "for profit" business with a focus on

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market-oriented activity and sees itself as well poised to fill the void created by the

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cutbacks and lower enrollment in public higher education. TCS's "business model"

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is "built on the premise that business success and social impact need not be mutually

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exclusive" and it seeks to "[o]perat[e] as an effective, financially-sound, and fast-

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growing business," with a goal of "deliver[ing] truly significant returns for donors,

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FIRST AMENDED COMPLAINT FOR INJUNCTIVE RELIEF AND DAMAGES

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investors, students, communities, and the world at large." The 2010 TCS Annual

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Report proclaims: "A rapidly changing and increasingly complex external

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environment—fueled by economic uncertainties, changing student demographics,

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and mounting competition—has created new challenges for traditional higher

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education. Institutions have met with varying success in confronting these

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obstacles, some closing their doors, reducing services, or trimming programs and

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faculty ranks. Meanwhile, TCS Education System has crafted a business model that

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is intrinsically adaptive and that responds to today’s realities, relying for growth and

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viability on a formula based on size, focus, diversification, and impact." TCS woos

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the colleges and schools it targets with the promise of business acumen, financial

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support and other tempting resources. Its dual "bottom-line" is "social impact" and

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"sophisticated business practices." TCS CEO Michael Horowitz recently elaborated

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on TCS's business strategy, stating in an interview:

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Smaller institutions cannot get the technology, or fundraising, or

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administrative infrastructure that’s required to be effective today. They

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may have to affiliate with a system like ours, or they are going to be

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acquired, bought by for-profits, or even go out of business....

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[B]ecause the model is small, focused institutions, we can share

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resources more effectively.

So even with respect to traditional

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fundraising, we have a foundation for grants, and philanthropy. We are

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sharing that among a number of colleges and schools because it is more

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efficient than duplicating that for each small college. So part of the

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model is to think creatively about resources and deploy them more

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effectively across institutions, so that we can direct more resources

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toward the core educational activity. Similarly, we’ve set up structures

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that in the future will allow investors to invest in projects that we

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couldn’t do on our own, but require capital to expand and make the

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FIRST AMENDED COMPLAINT FOR INJUNCTIVE RELIEF AND DAMAGES

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educational experience more excellent. That should allow us to take on

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new projects, and also not just to rely on tuition dollars. So between

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philanthropy, the potential for investor dollars, and tuition, we create a

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much more energetic and dynamic base for funding.

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(For the complete interview: www.tcsedsystem.org/?page=AnnualReport).
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Defendant David J. Figuli ("Figuli") is a Colorado-based attorney with

his principal place of residence in Evergreen, Colorado, which is a part of Jefferson
County. On his law firm’s Website, Figuli portrays himself as a leading lawyer in
the "American higher education industry." See www.figulilawgroup.com. He
claims to have worked with hundreds of colleges, universities, educational
associations, and education investment and management companies in his 33-year
career. He previously served as General Counsel for the South Dakota Board of
Regents and Chief Legal Counsel for the Montana University System. He also
served as general counsel to several major universities and as a trustee for three
colleges. He claims to be an expert in accreditation, licensing and regulatory
matters, including those relating to federal financial aid programs, and a recognized
writer and lecturer on higher education management and faculty employment
matters. In his biography, he states that he has conducted seminars and keynote
addresses for most of the major associations in American higher education including
the American Council on Education, the American Association of State Colleges
and Universities, the National Association of College and University Business
Officers and the National Association of Student Financial Aid Administrators.
Like TCS, Figuli sees himself as an innovator in the development of new business
models for higher education, including strategic alliances, sponsorship
arrangements, public/private and nonprofit/for profit ventures, international
partnerships, mergers and acquisitions and investment relations. He offers his
clients the following array of services, among others:

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FIRST AMENDED COMPLAINT FOR INJUNCTIVE RELIEF AND DAMAGES

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(i) transactional services that include assistance in negotiating and drafting

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conceptual documents, facilitating changes in corporate structure to achieve growth,

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raising capital, selling assets, divisions or equity, compliance with regulatory

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requirements, formation of systems, conversions of a legal entity from one type to

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another, and redistribution of assets among various entities;

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(ii) preparation and presenting applications for substantive change to

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institutional accrediting agencies and presenting changes of control to state licensing

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bodies and the U.S Department of Education ("DOE");

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(iii) conceptualizing, forming and executing affiliations between tax-exempt

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entities, public and -private entities and non-profit and for profit enterprises with the

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goal of ensuring that tax-exempt status is not compromised and the appropriate level

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of control is created to satisfy institutional accrediting agencies;

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(iv) providing legal and business advice to educational institutions and

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investors desirous of forming domestic and international ventures that combine core

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competencies, educational assets, investment capital, expertise and/or specialized

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services to achieve common goals with an emphasis on deal structuring, regulatory

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compliance and risk management; and

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(v) conducting due diligence investigations in a wide range of transaction

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settings, ranging from the simple to complex and involving for-profit and nonprofit

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institutions and organizations engaged in all aspects of the post-secondary sector.

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Such services include "comprehensive investigation of corporate structures,

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litigation, contractual relationships, Title IV compliance [i.e., federally funded

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student financial aid programs], accreditation compliance, employment practices,

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faculty related issues, intellectual property, and owned and leased property. We

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investigate all potentially relevant and material aspects of a transacting party’s

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business, compel all necessary disclosure, and recommend third-party investigations

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and reports as well as further action based upon our findings."

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FIRST AMENDED COMPLAINT FOR INJUNCTIVE RELIEF AND DAMAGES

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Defendant Global Equities, LLC ("Global Equities") is a Colorado

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limited liability company with its principal place of business in Evergreen,

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Colorado, which is part of Jefferson County. Global Equities is owned and

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controlled by Figuli and transacts business under the trade name "Higher Education

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Group". For convenience, Global Equities is referred to herein as "HEG." Figuli

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identifies himself as "CEO" of HEG. According to its Certificate of Assumed or

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Trade Name filed with Secretary of State for Colorado, HEG provides: "Consulting

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services to post-secondary educational institutions and associations; sale of products

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or services to the post-secondary educational market; training programs and

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materials for the post-secondary educational market". TCS retains Figuli and HEG

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to assist it in targeting potential acquisitions or affiliations with schools and colleges

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and structuring its deals.
FACTUAL BACKGROUND

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Prior to 1986, COL was the only law school in the tri-county region

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spanning San Luis Obispo, Santa Barbara, and Ventura Counties. At that time, the

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only other State Bar accredited schools were miles away in either Monterey or

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Malibu. Neither of these options made sense for working adults, many of whom

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were single parents. Like the Law School, COL offers a part-time evening

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curriculum leading to a J.D. and is State Bar accredited. Neither the Law School nor

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COL is ABA accredited. In addition, neither school has accreditation from the

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Western Association of Schools and Colleges ("WASC"). Without these

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accreditations, neither the Law School nor COL can offer students federally funded

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loans. The chief reasons why these other accreditations cannot be sought and

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obtained is the lack of financial and human resources that would allow the Law

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School or COL to meet basic eligibility criteria.

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For smaller institutions like the Law School and COL, obtaining ABA

accreditation is too arduous and expensive a process to even consider. Obtaining

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FIRST AMENDED COMPLAINT FOR INJUNCTIVE RELIEF AND DAMAGES

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WASC accreditation, while more feasible in theory, is still out of reach because the

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process consumes too many scarce resources. That is why no non-ABA accredited

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law school has WASC accreditation in Southern California.

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WASC's Accrediting Commission for Senior Colleges and Universities

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(the "Commission") is responsible for the evaluation of the quality and effectiveness

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of colleges and universities offering the baccalaureate degree and above in

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California, Hawaii, Guam and the Pacific Basin. Voluntary, non-governmental,

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institutional accreditation, as practiced by WASC and other regional commissions,

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is a unique characteristic of American education. Accreditation is granted at the

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completion of a peer review process, and assures the educational community, the

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general public, and other organizations that an accredited institution has met high

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standards of quality and effectiveness. While no institution in the United States is

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required to seek accreditation, it is highly coveted both in terms of institutional

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stature and the ability to qualify students for federally funded student loans under

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Title IV of the Higher Education Act. WASC is reviewed periodically by the DOE

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and the Commission is also periodically reviewed by the Council for Higher

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Education Accreditation.

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Achieving WASC accreditation requires an applicant to endure a

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three-phase process costing tens of thousands of dollars or more and spanning as

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much as four years. WASC requires that any institution that it considers meet

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twenty-three eligibility criteria to achieve preliminary consideration for

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accreditation. The applicant must satisfy requirements such as showing that it has

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core faculty whose primary responsibility is to the institution, an adequate funding

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base and financial resources to ensure sustainability, and annual audits by a certified

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public accounting firm with two years of audited financial statements readily

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available. The next phase of WASC accreditation requires the institution to pay

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fees to cover WASC's site inspections, including travel, hotel and meal expenses of

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FIRST AMENDED COMPLAINT FOR INJUNCTIVE RELIEF AND DAMAGES

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its visiting team members, any legal fees WASC incurs, and other expenses during

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this evaluative process. This second phase could cost a school the size of the Law

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School $20,000 or more. The last phase occurs when the institution is granted the

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status of being a candidate and seeks initial accreditation. This phase can take two

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or three years according to WASC's Procedures Manual and the cost could easily

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exceed another $20,000 for a school like the Law School. The applicant must

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demonstrate compliance with WASC's formal Standards of Accreditation

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("Standards"). The Standards cover all financial, organizational, and operational

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aspects of an institution and require the institution to show that it has or will meet

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numerous criteria and guidelines. Prior to initial accreditation, a multi-level review

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process ensues with the candidate institution preparing detailed written reports,

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receiving feedback from WASC committees and team members, responding to any

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evaluative concerns, undergoing several more site visits, and demonstrating that it

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meets both capacity and educational effectiveness standards. Like other aspiring

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institutions, the Law School contemplates a day when it might marshal sufficient

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resources to seek accreditation from WASC.

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12.

Over the past twenty-five years, the Law School and COL have

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competed for students and faculty. COL is much larger than the Law School and

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has approximately 250 students, thirty-seven faculty members and an administrative

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staff of nine. In spite of the fact that COL is larger and has more resources, the Law

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School established a strong presence in the tri-county region because of its

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willingness to keep tuition costs low while maintaining a strong faculty and

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academic program. This commitment has allowed many current and past students to

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afford to earn a law degree. The Law School has had a number of students who

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transferred in good academic standing from COL, citing the lower cost of tuition as

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a key factor. In the past three years, the few commercial banks like Wells Fargo and

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Bank of America that were willing to provide loans to students have ceased doing

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FIRST AMENDED COMPLAINT FOR INJUNCTIVE RELIEF AND DAMAGES

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so. As a result, the Law School's commitment to maintaining low tuition costs is

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more important than ever.

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13.

In mid-September 2009, Dean Pulle was approached by Figuli and

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George R. Haynes ("Haynes"), the former Vice President of Academic Affairs for

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the Santa Barbara Graduate Institute of Psychology (the "Institute"), regarding a

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potential acquisition by TCS. The Institute had just become affiliated with TCS on

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or about July 15, 2009, and Haynes, as a local educator and school administrator,

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made the introduction. The Institute was motivated in part to engage in the

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affiliation due to the prospect of achieving WASC accreditation and gaining access

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to federal student loans. Figuli and Haynes explained that TCS was interested in

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acquiring a California law school. Dean Pulle and his colleagues at the Law School

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were told by Figuli and Haynes that they and HEG were authorized to act on behalf

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of TCS as its agents and advisors. Figuli stated that he had extensive background in

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strategic acquisitions in the education sector and that, through defendant HEG, he

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had been assisting TCS with identifying suitable acquisition candidates and

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structuring transactions. Figuli represented to Dean Pulle that he had facilitated the

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recent TCS affiliation with the Institute.

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Dean Pulle shared with Figuli and Haynes that the Law School was

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approached in 2007 by a large university about a potential acquisition, but during

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the course of those discussions, the university experienced certain financial

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challenges and the discussions ended. Dean Pulle told Figuli and Haynes that he

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was encouraged by the prospect of an acquisition with TCS because it would allow

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the Law School to seek regional WASC accreditation, increase enrollment, establish

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new programs, extend educational opportunities to foreign students and leverage

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existing resources, such as using one or both of the school's campuses for daytime

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programs. From the outset, Figuli, Haynes and TCS knew that there were two State-

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FIRST AMENDED COMPLAINT FOR INJUNCTIVE RELIEF AND DAMAGES

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Bar accredited law schools in the tri-county area, but Figuli stated that TCS was

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very interested in pursuing an acquisition of the Law School.

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15.

Dean Pulle represented to Figuli and Haynes that an integral part of the

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school’s mission was to serve low and moderate income working adults and keep

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the total cost of the J.D. program in the range of $30,000.00 over the course of the

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typical four year term. Further, Dean Pulle emphasized the commitment by his

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Board and faculty to reduce law school earnings if necessary to ensure that the

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program would remain affordable and accessible. Dean Pulle made it clear to Figuli

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and Haynes that the Law School was not interested in an affiliation if that would

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change the school's core mission or values, which included a focus on rigorous

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academic standards. As proof of the success of its approach, Dean Pulle

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emphasized the Law School's increasing profile in the community as a high quality

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law degree program, its outstanding faculty and Board members and the many

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notable keynote speakers at its graduation ceremonies. Figuli agreed to the

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parameters set by the Law School.

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16.

On September 24, 2009, the Law School and TCS entered into a

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Confidentiality and Non-Disclosure Agreement ("NDA"). The NDA was drafted by

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Figuli and is a form he uses in connection with transactions involving TCS. Dean

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Pulle executed the NDA on behalf of the Law School. Jeff Keith ("Keith"), Senior

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Vice President of Finance and Administration and Chief Financial Officer for TCS,

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executed the NDA on behalf of TCS. Keith previously served as the vice president

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of finance and the chief financial officer for The Chicago School of Professional

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Psychology, which with more than 3,000 students is TCS's largest higher education

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affiliate. At TCS, Keith is responsible for finance and accounting, technology,

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human resources, real estate, online operations, mergers and acquisitions, legal

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affairs, and strategy. A copy of the NDA is attached hereto as Exhibit 1.

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FIRST AMENDED COMPLAINT FOR INJUNCTIVE RELIEF AND DAMAGES

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17.

The preamble to the NDA states that the Law School was to provide

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"access to proprietary, trade secret and confidential information..., which may

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include, without limiting the generality of the foregoing, strategies and strategic

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plans, business opportunities, business plans, financial reports, statements and

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projections, trade names and marks, documents, programs, techniques, know-how,

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and specifications...." The NDA referred to the collective of the confidential and

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proprietary information, both orally conveyed and in documentary form, as

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"Information". The Information was to remain the property of the Law School and

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used solely for the purpose of "facilitating a transaction" between TCS and the Law

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School which the NDA referred to as "the 'Relationship'". NDA, preamble and ¶1.

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TCS, its employees and agents were commanded "not to use, reproduce, or directly

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or indirectly disclose or allow access to the [I]nformation except as required to

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facilitate the Relationship." Id. (emphasis added). To alleviate any lingering

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concerns the Law School might have regarding the release of its Information to

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TCS, the NDA took the extraordinary step of mandating that:

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"[TCS] shall protect the confidentiality of the Information from the date of its

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receipt hereunder with at least the same diligence and care as would be

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required of [TCS] if it were a fiduciary of the [Law School], that is the

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utmost good faith and care for the interests of the [Law School]." Id. ¶2

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(emphasis added).

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TCS faithfully promised that it would not use the Information the Law

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School provided to "pursu[e] business opportunities or other arrangements or

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endeavors of any kind" in violation of the NDA. Id. ¶10. This non-competition

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covenant is proper because, inter alia, it is intended to prevent TCS from competing

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with the Law School after receiving the school's confidential Information. The

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NDA is governed by California law and "continue[s] until such time as any

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FIRST AMENDED COMPLAINT FOR INJUNCTIVE RELIEF AND DAMAGES

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Information received by [TCS] hereunder is returned to the [Law School] or

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destroyed." Id. ¶7.
19.

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Figuli and TCS led the Law School to believe that TCS would be its

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strong ally and enable the Law School to compete against the larger, and better

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funded, COL. The manner in which an alliance with TCS would enable the Law

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School to grow and successfully compete with COL was discussed in great detail

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during September, October and November 2009. At no point during any of these

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discussions did Figuli or TCS suggest that the price the Law School had proposed

9

was unreasonable or unacceptable. Instead, the discussions focused on marketing

10

strategies, addition of new degree programs, initiation of internet based instruction,

11

the use of TCS’s WASC-accreditation and the corresponding ability to offer

12

federally funded tuition loans to attract new students and other plans. In addition,

13

issues of governance, structures of control, methods of securing expanded

14

accreditation, and curriculum expansion were addressed.
20.

15

Confident that it was working toward an acquisition, in early October

16

2009, the Law School released its most guarded Information to Figuli, HEG and

17

TCS. Among the documents that Dean Pulle and the Law School's Board of

18

Directors prepared and released was a document entitled "Acquisition Profile and

19

Initial Strategy For Regional Accreditation" dated October 1, 2009 ("Acquisition

20

Profile"). The Acquisition Profile set forth intimate details about the Law School's

21

plans and strategy, competitive challenges, financial affairs, cash flows, debts,

22

faculty matters, contractual obligations, capital stock structure and its proposed

23

terms for the sale of the Law School, including what the Dean and the Law School's

24

Board of Directors perceived as a fair price for the shares of common stock held by

25

the Law School's shareholders. On October 8, 2010, pursuant to TCS's due

26

diligence requests, the Law School mailed the following documents to Figuli and

27

HEG:

28
________________________________________________________________
14
FIRST AMENDED COMPLAINT FOR INJUNCTIVE RELIEF AND DAMAGES

1

(a) The Law School's Articles of Incorporation, By-Laws, and accreditation

2

license from the California Bureau for Private Postsecondary and Vocational

3

Education;

4

(b) Stockholder ledgers;

5

(c) Minutes of the Law School's Board of Director meetings;

6

(d) President's Annual Report dated June 12, 2009 to the Law School's Board

7

of Directors with detailed enrollment data for three years;

8

(e) An analysis of the Law School's financial condition with reference to the

9

school’s rent payments, cash on hand, ownership interests, and structure of

10

administrative and faculty compensation (including actual dollar amounts);

11

(f) The Law School's Balance Sheet, including beginning and ending balances

12

for 2006, 2007 and 2008, and the taxes paid on the school's revenues;

13

(g) Budgets and Profit & Loss Statements for 2009;

14

(h) Independent CPA Compilation Reports for fiscal years 2005, 2006, 2007

15

and 2008;

16

(i) U.S. corporate tax returns for three years for 2005, 2006, 2007 and 2008;

17

(j) A report of cash balances as of September 30, 2009;

18

(k) A marketing plan, including a pricing and competition analysis;

19

(l) A detailed description of the Dean’s Compensation Package, including his

20

retirement plan;

21

(m) Wage and salary information for staff and faculty;

22

(n) Employee contracts, including sample faculty contracts;

23

(o) Personnel files, personal academic biographies on faculty and

24

administrative staff and an organizational chart;

25

(p) Faculty and Student Policy Manuals;

26

(q) The Law School's real estate leases;

27
28
________________________________________________________________
15
FIRST AMENDED COMPLAINT FOR INJUNCTIVE RELIEF AND DAMAGES

1

(r) State Bar Inspection Reports, including the Law School's responses to the

2

comments made by the inspectors and follow-up correspondence with the

3

State Bar;

4

(s) Comprehensive State Bar annual registration filings that covered academic

5

standing of all students, a report on drop-out rates, a budget for a library

6

acquisition, faculty grading charts, a self-study completed by the Law School;

7

and

8

(t) The Law School's General Bar Exam pass rates for the previous five years

9

with the Dean's analysis.

10

21.

Although the confidential nature of the foregoing documents is

11

apparent, the importance of Dean Pulle's imprimatur on the materials and his frank

12

discussion of everything he, the Board and faculty had considered -- past, present

13

and future -- cannot be overstated. For example, the documents related to the

14

school's most recent State Bar inspection report are perhaps a law school's most

15

sensitive and guarded Information. While somewhat less detailed, the Law School's

16

annual registration filing with the State Bar also covers many of the same topics.

17

These documents lay out, line by line, in elaborate detail, all the strengths and

18

weaknesses (both real and perceived) of the Law School's operation, and give

19

insight into an accrediting body’s opinion on all facets of the school from basic

20

curriculum to the governing Board's discharge of its solemn duties to the school's

21

various constituencies. The materials include the Law School's responses to those

22

inquiries, addressing all of the State Bar's compliments, criticisms and

23

recommendations.

24

22.

Dean Pulle candidly discussed with Figuli, Haynes and Keith, the Law

25

School's strengths, weaknesses and strategic plans with an emphasis on how its

26

partnership with TCS could be used to increase the Law School's competitive

27

advantage in the tri-county area. As the NDA demands, TCS and Figuli were

28
________________________________________________________________
16
FIRST AMENDED COMPLAINT FOR INJUNCTIVE RELIEF AND DAMAGES

1

charged with maintaining and using all of the foregoing Information with "at least"

2

the same care as the Law School's most trusted fiduciary. The purpose of opening

3

the Law School's books and granting unlimited access to TCS was to facilitate an

4

acquisition of the Law School as the NDA expressly states. The Law School had

5

no reason to supply the Information for the purpose of facilitating TCS's affiliation

6

with the Law School's sole competitor. Had defendants even hinted at that

7

possibility, the Law School would not have supplied the Information or candidly

8

discussed its plans and strategy with TCS's representatives.

9

23.

On November 17, 2009, Dean Pulle met with Figuli, Haynes and Keith

10

at the Law School's Ventura campus. As part of meeting, the group toured the Santa

11

Barbara campus, met with Vice Dean O’Neill and even a local Santa Barbara realtor

12

regarding the potential purchase of the campus building. During those discussions,

13

the parties addressed the reconfiguration of the Law School’s Board of Directors,

14

the establishment of Joint Advisory Boards, and the hiring of additional faculty and

15

new law deans, among other topics. The gist of those discussions indicated that an

16

acquisition of the Law School by TCS was imminent. Near the conclusion of the

17

meeting, Haynes asked Keith, “What next..?” Keith replied, “We make an offer.”

18

Dean Pulle then asked Keith when he thought TCS would make an offer. Keith and

19

Figuli responded that it would be sent to the Law School no later than mid-

20

December 2009. Dean Pulle reported the results of the meeting, including the

21

anticipated offer, to Vice Dean O’Neill and the Law School's Board of Directors.

22

24.

Later in the evening on November 17, 2009, Dean Pulle e-mailed Figuli

23

and Haynes suggesting that TCS and the Law School engage in a follow-up

24

discussion to address a few specific topics related to the acquisition, including such

25

issues as changing the Law School's name, the composition of the new board of

26

directors, the role of the current Board, and whether or not Figuli should serve on

27

the newly reconstituted board. On November 18, 2009, Figuli e-mailed Dean Pulle

28
________________________________________________________________
17
FIRST AMENDED COMPLAINT FOR INJUNCTIVE RELIEF AND DAMAGES

1

thanking him for his thoughts and confirmed these suggestions would be taken into

2

account.

3

25.

The Law School did not receive any communication from TCS or

4

Figuli in December 2009. On January 21, 2010, Dean Pulle sent an e-mail to Figuli,

5

with copies to Haynes and Keith, requesting a “status report” on the process toward

6

an acquisition. On January 22, 2010, Figuli e-mailed Dean Pulle, with copies to

7

Haynes and Keith, stating as follows:

8

"Stan, we appreciate you keeping us in mind.

9

We were truly impressed with the remarkable accomplishments that

10

you and your board have achieved in a very competitive environment.

11

We believe that the reality of the situation at SCIL is that the

12

achievements have been largely fueled by some rather extraordinary

13

sacrifices on your part. That has, in our opinion, and based on a very

14

limited review, created a financial model that would be difficult to

15

perpetuate.

16

If we were to recast the financial results of SCIL to reflect a sustainable

17

administrative and operational model, the results would not provide a

18

basis for the type of 'ask' that your board has made. Accordingly, it is

19

our perception that an arrangement that would be acceptable to us

20

would be very disappointing to your board.

21

As a result of that analysis, we think it would be best for TCS to take a

22

pass on the SCIL opportunity at this time.”

23

(italics omitted; emphasis added).

24

26.

TCS made no counter offer even though it received not only the price

25

proposed by the Law School on or about October 1, 2009, but a written indication

26

from Dean Pulle in that same communication and subsequently in the parties'

27

discussions, that his Board would consider a lower amount and negotiate. Prior to

28
________________________________________________________________
18
FIRST AMENDED COMPLAINT FOR INJUNCTIVE RELIEF AND DAMAGES

1

Figuli's January 22, 2010 e-mail, no one from TCS, including Figuli, Haynes or

2

Keith, suggested that the Law School's proposed price was unacceptable or

3

unreasonable. The last phrase in Figuli's e-mail that TCS would "pass on the SCIL

4

opportunity at this time" left open the possibility that it was still considering a

5

pending offer. Dean Pulle conveyed that impression to his Board and certain faculty

6

who had been involved in the negotiations. This inference is further bolstered by

7

the fact that paragraph 5 of the NDA obligates TCS upon termination of the

8

"Relationship" to “promptly destroy" the Information and "certify" its destruction to

9

the Law School. Paragraph 7 of the NDA, further provides that: “Unless otherwise

10

agreed, the Agreement shall continue until such time as any Information received by

11

TCS hereunder is returned to the [Law School] or destroyed." The Law School's

12

documentary Information was neither destroyed nor returned and no certification of

13

its destruction has been provided. The Law School had no idea of defendants'

14

intentions to misuse the Information and abuse the "Relationship" of trust and

15

confidence created by the NDA and the parties' course of dealing.
27.

16

In violation of the NDA and applicable law, the defendants made a

17

calculated decision to misuse the Law School's Information, conveyed both in

18

documents and orally by Dean Pulle and Vice Dean O'Neill, as a means for

19

acquiring the Law School's longtime rival, COL. TCS, through its affiliation with

20

COL, has now become the Law School's sole competitor with full knowledge of the

21

Law School's most intimate and confidential information and trade secrets. In

22

September 2010, Haynes spoke to Dean Pulle by telephone confirming that Figuli is

23

still in possession of the Law School's documentary Information. Haynes further

24

confirmed that Figuli actively participated in negotiating TCS's affiliation with

25

COL.

26
27

28.

It may reasonably be inferred that defendants approached COL during

the time they were engaged in discussions with the Law School or soon thereafter,

28
________________________________________________________________
19
FIRST AMENDED COMPLAINT FOR INJUNCTIVE RELIEF AND DAMAGES

1

but concealed their wrongful intent from the plaintiff. This inference is supported

2

by the large gap in time between the November 17, 2009 meeting and Figuli's

3

January 22, 2010 e-mail sent only hours after Dean Pulle inquired about why he had

4

not heard anything further from TCS. COL's Website confirms that TCS

5

approached COL regarding the possible affiliation. The defendants further admit in

6

documents on their Websites that COL and TCS obtained approval from the State

7

Bar's Committee of Bar Examiners for their affiliation in July 2010. It takes a

8

month or more to obtain such approval. When one considers the time needed to

9

conduct due diligence and negotiate their affiliation, it is reasonable to infer that

10

defendants' initial contact with COL occurred contemporaneously with or soon after

11

their discussions with the Law School.

12

29.

Having gained access to plaintiff's confidential Information, the NDA

13

restricted the defendants from using the Information other than to "facilitat[e] a

14

transaction" with the plaintiff and effectively barred defendants from becoming the

15

Law School's competitor because to do so would violate their contractual and

16

fiduciary-like obligations. See NDA ¶10 (TCS shall not "pursu[e] business

17

opportunities or other arrangements or endeavors of any kind" in violation of the

18

NDA). . The sine qua non of the Law School's release of its Information was TCS's

19

promise that it would use and safeguard the Information as if it were plaintiff's

20

fiduciary. The essence of fiduciary responsibility is candor, loyalty and

21

safeguarding trust. Otherwise, deception and self-interest are likely outcomes -- the

22

antithesis of fiduciary law. In the legendary words of the Honorable Benjamin N.

23

Cardozo: "Many forms of conduct permissible in a workaday world for those acting

24

at arm's length, are forbidden to those bound by fiduciary ties. A trustee is held to

25

something stricter than the morals of the market place. Not honesty alone, but the

26

punctilio of an honor the most sensitive, is then the standard of behavior." Meinhard

27

v. Salmon, 249 N.Y. 458, 464 (1928).

28
________________________________________________________________
20
FIRST AMENDED COMPLAINT FOR INJUNCTIVE RELIEF AND DAMAGES

1

30. The Law School first learned of defendants' wrongful conduct through

2

news reports on or about September 22, 2010. The press release, dated September

3

21, 2010, jointly published by TCS and COL and carried on their respective

4

Websites and by various news services, including Reuters and the Pacific Coast

5

Business Times, confirmed that TCS and COL entered into an affiliation agreement

6

effective October 1, 2010. Referring to COL as "the Central Coast’s preeminent law

7

school," the press release confirms that under its new leadership, COL, using TCS's

8

expertise in regulatory affairs, plans to seek WASC accreditation which will bring

9

access to federal student financial aid programs. In the September 21, 2010, press

10

release, COL Dean Heather Georgakis, is quoted as saying, “This affiliation will

11

strengthen the law school and its long-term growth potential by adding new

12

resources, generating economies of scale and creating new opportunities for law-

13

related education.” Among the "new opportunities" planned by TCS and COL are

14

adding online courses, additional law programs (as may be allowed by the State

15

Bar), multi-disciplinary and joint programs in other disciplines within the expertise

16

of TCS's affiliates, and access to advanced educational technology and academic

17

support. As part of the agreement, TCS will also provide administrative and

18

student support services, marketing assistance, accounting and human resources.

19

COL will continue to be governed by a board of trustees, but as COL's supporting

20

entity, TCS will join with the trustees to create a “fiduciary council” that will meet

21

annually to decide on major budget and strategic issues, including plans for COL's

22

expansion.

23

31.

In spite of defendants' betrayal and the harm inflicted on the Law

24

School, plaintiff is primarily seeking injunctive relief to prevent TCS from taking

25

further steps to pursue the affiliation with COL rather than monetary damages. The

26

plaintiff's greatest concern is preserving the opportunity for an underserved

27

population of current and future students to attend the Law School. Nearly twenty-

28
________________________________________________________________
21
FIRST AMENDED COMPLAINT FOR INJUNCTIVE RELIEF AND DAMAGES

1

five years of tireless efforts and sacrifice, as defendants themselves acknowledge,

2

have yielded a wonderful community resource with an outstanding faculty, grateful

3

and accomplished alumni, and a reputation of integrity and scholarship. All of this

4

is now placed in jeopardy by making it unlikely that the Law School will survive

5

due to the defendants' misuse of the confidential Information, unlawful competition

6

and other wrongdoing. Until now, the Law School has successfully competed with

7

rival COL by keeping its tuition low and offering what many view as the superior

8

legal education. With TCS's vast resources, including its marketing savvy, the Law

9

School has no chance of continuing to differentiate itself successfully. The

10

defendants and COL have already begun marketing the affiliation as major

11

advantage on their Websites and at Open Houses being held at COL's campuses

12

during October and November of 2010. On COL's Website under a heading

13

entitled, "Frequently Asked Questions About Affiliation Between the Colleges of

14

Law and TCS ES," COL states:

15

"What will TCS ES bring to the Law School and its students?

16

TCS ES will provide administrative support and services that are

17

otherwise cost-prohibitive to a stand-alone institution the size of the

18

Colleges. The Colleges will be able to update and streamline operations

19

in a variety of areas, including student services, academic support,

20

marketing, accounting and human resources.

21

from the kind of improvements in campus technology that will allow

22

them to mix onsite and online courses, learn in "smart" classrooms, use

23

robust online course support software, and interact more easily with the

24

Administration Office. TCS ES will also provide dedicated expertise in

25

regulatory affairs, regional accreditation, and Title IV Federal financial

26

aid. And, through this affiliation the Colleges of Law will be better

27

positioned to take our mission, expertise, and access to the study of law

Students will benefit

28
________________________________________________________________
22
FIRST AMENDED COMPLAINT FOR INJUNCTIVE RELIEF AND DAMAGES

1

to new students as we expand our horizons and chart a course of growth

2

and continued development."

3

32.

All of these advantages were ones that the Law School proposed and/or

4

discussed with Figuli, Haynes and Keith in confidence during the parties' meetings

5

and correspondence. The defendants and Haynes have taken the Information the

6

Law School provided, some of which constitutes trade secrets, and is using it to

7

compete against the Law School. COL's rivalry with the Law School is both long-

8

lived and often intense. At an Open House held on October 19, 2010, COL's

9

Assistant Dean Barbara Doyle emphatically discouraged prospective law students

10

from attending the Law School exclaiming, "Oh no, no, no, that's our competitor,

11

don't go there!" Assistant Dean Doyle's presentation focused on the "advantages" of

12

attending COL from the perspective of cost and the relative value of the anticipated

13

education, based in part on TCS's affiliation, and argued that COL compared

14

favorably to several other California law schools. Notably absent from her

15

presentation was any comparison to the Law School.

16

33.

On or about December 14, 2010, Haynes, who worked with Figuli in

17

conducting due diligence on the Law School, became a member of the COL Board

18

of Trustees. In the COL press release announcing Haynes' Board membership,

19

Haynes is identified as an "organizational consultant." As alleged above, Haynes

20

participated in the parties' meetings where the Law School's strategies and other

21

confidences were candidly discussed. During the meetings, Haynes was shown the

22

Law School’s Board Minutes, President’s Annual Report to the Board, the Law

23

School’s strategy for WASC accreditation, recent bank statements and cash

24

projections, compensation structure of the Dean, Registrar and faculty, CPA-

25

prepared projected earnings and the stock ledger, faculty files, financial obligations

26

of the school, recent profit and loss statements, State Bar accreditation and self-

27

evaluative reports, enrollment data, and other confidential Information.

28
________________________________________________________________
23
FIRST AMENDED COMPLAINT FOR INJUNCTIVE RELIEF AND DAMAGES

1

34.

Not only is TCS-COL wealthy and resource rich, they are armed with

2

the Law School's misappropriated Information and best strategic thinking of its

3

deans, faculty and Board placing the Law School at a distinct competitive

4

disadvantage. To the extent the Law School's confidences reveal strengths, TCS

5

and COL can now use the information to emulate the Law School's strengths. To

6

the extent the misappropriated Information reveals the Law School's weaknesses,

7

they can direct their efforts at exploiting those weaknesses.

8
9

35.

With its present resources, the Law School cannot offer the services

promised by COL to current and prospective students or match TCS's likely

10

administrative and technological innovations. TCS's affiliation with COL has

11

reduced the likelihood that the Law School might be perceived as an attractive

12

acquisition candidate to another large education organization. In addition, TCS is in

13

a position to poach on current and future students of the Law School through the

14

promise of federally funded tuition loans. This is even more of a threat in light of

15

the current tight credit market.

16

36.

By contrast, had TCS sought to compete fairly, even with its wealth

17

and resources, it would be a relatively weak competitor if it were to try and start a

18

law school on its own. The barriers to entry in California for new law schools are

19

considerable, including the likelihood of a decade or more of effort to achieve State

20

Bar accreditation. In addition to the lesser status accorded unaccredited schools,

21

first year students are required to take and pass the "Baby Bar" (formally, the "First

22

Year Law Students' Examination-FYLSX") before they can move ahead in school.

23

The pass rate on this exam is usually only 10 to 15 percent which can be devastating

24

financially to a new law school given the high attrition rate. This is the main reason

25

why TCS sought to acquire an existing school -- a key point Figuli and other TCS

26

representatives discussed with Dean Pulle.

27
28
________________________________________________________________
24
FIRST AMENDED COMPLAINT FOR INJUNCTIVE RELIEF AND DAMAGES

1

37.

The Law School has competed successfully with COL for many years

2

and welcomes increased opportunities for all students, particularly those who might

3

benefit from access to student loans and improvements in the educational process.

4

These are all good things in the abstract. But the law should not condone

5

wrongdoing even if the wrongdoing may create social good for some. To do

6

otherwise is Machiavellian. Without injunctive relief, the Law School will lose the

7

ability to compete, suffer a downturn in its enrollment and may go out of business.

8

Working class students and the Law School's dedicated faculty and administrative

9

staff will all fall victim to defendants' wrongdoing masquerading as "social impact"

10

and progress. Injunctive relief levels the playing field allowing TCS and COL to

11

continue to do business as they did before TCS misappropriated all of the plaintiff's

12

most closely guarded secrets to gain an unfair competitive advantage.

13

AGENCY ALLEGATIONS

14
15

38.

Each of the defendants was the agent of the other defendants in regard

16

to all events and actions described herein and acted within the course and scope of

17

such agency at all relevant times.
CONSPIRACY ALLEGATIONS

18
19
20
21

39.

Defendants, and each of them, agreed and knowingly and willfully

conspired to facilitate and enter into the COL affiliation.
40.

In order to further and effectuate this conspiracy, defendants, and each

22

of them, misused and misappropriated plaintiff's Information and trade secrets,

23

concealed and misrepresented material facts, engaged in unfair competition and

24

committed other unlawful acts. Defendants' wrongdoing is continuing as they move

25

forward with the COL affiliation.

26
27
28
________________________________________________________________
25
FIRST AMENDED COMPLAINT FOR INJUNCTIVE RELIEF AND DAMAGES

1

41.

Defendants' acts were done with the full knowledge and consent of

2

each of them and caused injury to the plaintiff, including, the imminent threat of

3

irreparable harm.

4

FIRST CLAIM FOR RELIEF

5

(Breach Of Contract Against TCS)

6

42.

Plaintiff hereby repeats, realleges and incorporates by reference the

7

allegations which are contained in paragraphs 1 through 41, above. This first claim

8

for relief is alleged against defendant TCS.

9

43.

The NDA is a valid and enforceable contract. The fiduciary obligations,

10

confidentiality covenants and other provisions contained therein were and are

11

reasonably necessary to protect plaintiff's legitimate interests in safeguarding its

12

trade secrets, confidential information, financial data, faculty and employee

13

relationships and competitive standing.

14

44.

Plaintiff fully performed all of its obligations under the NDA except for

15

those that have been discharged or excused by defendant's prior breaches or other

16

wrongful acts.

17

45.

TCS is breaching or threatens to breach the NDA in at least the

18

following ways:

19

(a) Keeping the Information, as defined in the NDA, in its possession;

20

(b) Misusing the Information, documentary and otherwise, to compare

21

the Law School to COL, facilitate its affiliation transaction with COL

22

and obtain an unfair competitive advantage over the plaintiff;

23

(c) Refusing to certify the destruction of the Information;

24

(d) Failing to protect the confidentiality of the Information in at least

25

the same manner as a fiduciary of the Law School would do;

26
27
28
________________________________________________________________
26
FIRST AMENDED COMPLAINT FOR INJUNCTIVE RELIEF AND DAMAGES

1

(e) Violating its covenant not to compete against the Law School by

2

using the Information it obtained pursuant to the NDA to pursue an

3

affiliation with COL.

4

46.

As a direct and proximate result of any one or all of these breaches,

5

plaintiff has been injured and faces irreparable harm. Plaintiff is threatened with

6

losing students, its competitive advantage, trade secrets and goodwill in amounts

7

which may be impossible to determine, unless TCS is enjoined and restrained by

8

order of this Court.

9

47.

Alternatively, plaintiff has suffered actual damages in an amount that

10

exceeds $75,000, which plaintiff will prove at the time of trial. In addition,

11

defendants have been unjustly enriched to the extent that they are profiting unfairly

12

from their use of plaintiff's confidential Information and trade secrets and their

13

violation of the non-competition covenant.

14

SECOND CLAIM FOR RELIEF

15

(Negligent Misrepresentation Against TCS)

16

48.

Plaintiff hereby repeats, realleges and incorporates by reference the

17

allegations which are contained in paragraphs 1 through 47, above. This second

18

claim for relief is alleged against TCS.

19

49.

By entering into the NDA, TCS represented to the plaintiff that it

20

would not pursue a transaction in violation of the agreement. In reliance on that

21

representation, the plaintiff granted TCS access to its confidential Information. The

22

parties then engaged in a series of discussions which focused on strategies for

23

competing against COL. The Law School shared its plans for achieving WASC

24

accreditation, increasing enrollment, marketing the Law School, expanding

25

curriculum and offering other educational opportunities and services. TCS created a

26

climate whereby the Law School reasonably believed that the resources of TCS and

27

the Law School would be combined to achieve these goals.

28
________________________________________________________________
27
FIRST AMENDED COMPLAINT FOR INJUNCTIVE RELIEF AND DAMAGES

1

50.

Once TCS gained access to the Law School's confidential Information,

2

TCS was under an affirmative duty to use and maintain the Information in a

3

fiduciary-like manner. The parties' discussions and TCS's contractual obligation

4

created an affirmative duty on TCS's part to disclose that it intended to negotiate

5

with COL toward an affiliation. In making the representation that it would not

6

pursue a transaction in violation of the NDA, TCS acted without reasonable grounds

7

for believing the representation to be true.

8

51.

Plaintiff was unaware of the material misrepresentation and justifiably

9

relied on TCS's promise that it would not pursue a transaction in violation of the

10

NDA. Had plaintiff known the true facts, it would not have agreed to provide its

11

confidential Information to the defendants. TCS's non-disclosure amounts to a

12

failure to act in good faith and in accordance with reasonable standards of

13

fair dealing. Because TCS did not disclose its intention to affiliate with COL, the

14

Law School was unable to safeguard its rights by seeking injunctive and declaratory

15

relief to prevent the affiliation.

16

52.

As a direct and proximate result of TCS's misrepresentation, plaintiff

17

suffered injury and substantial damage. Alternatively, plaintiff does not have an

18

adequate remedy at law to protect its interests and seeks injunctive relief.

19

THIRD CLAIM FOR RELIEF

20

(Misappropriation Of Trade Secrets Against All Defendants)

21

53.

Plaintiff hereby repeats, realleges and incorporates by reference the

22

allegations which are contained in paragraphs 1 through 52, above. This third claim

23

for relief is alleged against all defendants.

24

54.

At all relevant times, plaintiff was in possession of confidential and

25

trade secret information as defined by California Civil Code §3426.1(d). The

26

documents the Law School provided to TCS, Figuli, HEG and Haynes as set forth in

27

paragraphs 20 and 21, above, are carefully guarded by the Law School to avoid

28
________________________________________________________________
28
FIRST AMENDED COMPLAINT FOR INJUNCTIVE RELIEF AND DAMAGES

1

disclosure. In the regular course of business, the only persons who have unlimited

2

access to the information and documents supplied are the Law School's Board of

3

Directors, Dean Pulle, Vice Dean O'Neill, and the Law School's Registrar. CBE

4

inspectors, tax authorities, government regulators and the Law School's accountants

5

may also on occasion gain access to certain of the Information the Law School

6

provided. Even the Law School's faculty members are not privy to the Information

7

the Law School turned over, except certain discrete documents such as their own

8

employment contracts. Plaintiff's confidential and proprietary trade secret

9

information is not and was not generally known to TCS, COL or any other actual or

10

potential competitors before defendants wrongfully induced plaintiff to release the

11

information to them.

12

55.

Paragraph 20, above, identifies items such as the (i) Minutes of the Law

13

School's Board of Director meetings; (ii) President's Annual Report to the Law

14

School's Board of Directors; (iii) Comprehensive State Bar annual registration

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filings covering academic standing of all students, drop-out rates, library

16

acquisition budget, faculty grading charts, self-evaluation studies; (iv) marketing

17

plans, including a pricing and competition analysis; (v) State Bar Inspection

18

Reports, including the Law School's responses to and correspondence with

19

inspectors and the State Bar; and (vi) Dean Pulle's analysis of the Law School's

20

General Bar Exam pass rates for the previous five years.

21

56.

The forgoing documents candidly compare and contrast many facets of

22

the Law School's academics, operations, regulatory competency and competitive

23

strategies. For example, topics include: new curriculum that is popular with

24

prospective students; techniques for avoiding grade inflation; teaching methods that

25

work for English-as-a second-language students; strategies for identifying and

26

attracting quality faculty, including compensation levels and administrative support;

27

affordable and effective advertising expenditures; methods for reducing drop our

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FIRST AMENDED COMPLAINT FOR INJUNCTIVE RELIEF AND DAMAGES

1

rates; and cost-containment strategies. To the extent that the Law School received

2

criticism from regulators, its actual or planned responses are set forth in certain of

3

these documents. The ideas and strategies expressed in such responses reflect the

4

strategic thinking of the Law School's Board of Directors, Deans, and Registrar.

5

Keeping that Information confidential allows the Law School to work on any

6

perceived shortcomings and minimize the risk that COL will exploit any weakness

7

to its own advantage. The Law School discussed with Figuli, Haynes and Keith the

8

regulatory findings and responses, interdisciplinary programs, the use of increased

9

technology, and the potential for creating a day time law school program, among

10
11

other topics.
57.

Another category of documents set forth in paragraph 20, above, are

12

those reflecting the Law School's financial reports and analysis. These documents

13

provide details about the Law School's operational budget, cash flow and expense

14

projections, and compensation analysis for the Deans, Registrar and faculty. This

15

information is what the Law School's Board of Directors uses to determine what

16

academic, operational and marketing strategies it can afford and what must be

17

deferred. In addition, the salaries and benefits of the Deans and Registrar and the

18

compensation paid to part-time faculty are carefully structured in light of the Law

19

School's cash flows and reserves. The Law School's flexibility and creativity in

20

structuring the salaries and compensation is proprietary and a key reason the school

21

has been able to adapt to changing regulatory and economic conditions over the

22

years. Allowing a competitor like COL to gain access to this information,

23

particularly in conjunction with the other strategic documents set forth above,

24

reduces the Law School's ability to innovate and compete.

25

58.

Dean Pulle has approximately thirty-five years of experience with law

26

school education in the tri-county region and a detailed knowledge of the regulatory

27

landscape. Plaintiff knows of no other educator in the region that has that level of

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30
FIRST AMENDED COMPLAINT FOR INJUNCTIVE RELIEF AND DAMAGES

1

experience. The Law School's Board of Directors has spent years planning and

2

implementing strategies that have allowed the Law School to become successful and

3

gain stature. Many of the documents shared with Figuli, Haynes and Keith contain

4

the Board and Dean Pulle's best thinking on how to differentiate the Law School

5

from other State Bar accredited law schools, most particularly COL. In addition, as

6

alleged above, Figuli, Haynes and Keith received the benefit of detailed discussions

7

at the meetings the parties' conducted, including strategies for completing WASC

8

accreditation in an economic and reasonably prompt manner. This strategic

9

information is something the Law School developed for the purpose of facilitating

10

its acquisition or alignment with a larger institution. It is a trade secret and is set out

11

in part in the Acquisition Profile, identified in paragraph 20, above.

12

59.

The Information summarized in paragraphs 55 through 58, above,

13

constitutes trade secrets because plaintiff derives independent economic value from

14

maintaining the confidentiality of the Information, such Information is not generally

15

known nor readily ascertainable by proper means by other persons who can obtain

16

economic value from its disclosure or use, and because the information is the subject

17

of reasonable efforts to maintain its secrecy. In the current tough economy with

18

declining enrollment, the efforts of the Law School to position itself as an

19

academically superior institution that offers affordable education is critical to its

20

ability to differentiate itself from COL and other law schools. Its academic,

21

operational, financial and regulatory strategies are the means to this end and were

22

shared with the defendants based on the plaintiff's belief that the defendants would

23

honor their commitment to maintain the plaintiff's confidences and use the

24

Information for the purpose of TCS's acquisition of the Law School.

25

60.

Defendants have actually misappropriated and/or threaten to

26

misappropriate plaintiff's trade secrets without plaintiff's consent in violation of

27

California's Uniform Trade Secrets Act ("CUTSA"), California Civil Code §3426, et

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FIRST AMENDED COMPLAINT FOR INJUNCTIVE RELIEF AND DAMAGES

1

seq. By affiliating with COL, TCS is now in a competitive relationship to the

2

plaintiff. It is using and will continue to use plaintiff's trade secrets and other

3

confidential Information to advance COL's interests.

4

61.

Haynes, who recently joined the Board of Trustees of COL, was privy

5

to all of the discussions and Information the Law School revealed. He gained access

6

to Information that only the Law School's Deans, Registrar and Board of Directors

7

typically review and consider, assisted in bringing about the TCS-COL affiliation

8

and is now capable of using the plaintiff's Information to develop strategies to

9

compete against the Law School.

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62.

In addition to the press releases, open houses and Internet-based

11

announcements proclaiming the TCS-COL affiliation and the many advantages it

12

offers prospective students, the Law School is experiencing increased competition

13

from COL through marketing strategies that the Law School proposed to TCS,

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Figuli, and Haynes. For example, during the parties' meetings, Dean Pulle

15

expressed the Law School's plans for increased marketing in the Santa Barbara area,

16

including advertising on buses. COL recently embarked on an advertising campaign

17

that increased the intensity of marketing in the Santa Barbara area and is advertising

18

on buses. The Law School proposed the marketing campaign to carefully target the

19

fewer potential students in the Santa Barbara area. This strategy is now being used

20

against the Law School to reduce its enrollment.

21

63.

Due to their contractual and fiduciary-like obligations, defendants

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gained access to plaintiff's most valuable trade secrets and confidential Information.

23

Defendants continue to have knowledge of that information, notwithstanding the

24

fact that TCS is now affiliated with COL and is competing with the plaintiff.

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Through Haynes, defendants are using plaintiff's trade secrets and confidential

26

information in violation of the CUTSA and the NDA.

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FIRST AMENDED COMPLAINT FOR INJUNCTIVE RELIEF AND DAMAGES

1

64.

As a proximate result of defendants' actual and threatened

2

misappropriation of plaintiff's trade secrets and confidential Information, plaintiff

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has suffered, and will continue to suffer, actual damages in an amount to be proven

4

at the time of trial, but which are substantial and in excess of the minimum

5

jurisdictional amount of this Court. Defendants have further been unjustly enriched

6

due to their ability to use the misappropriated confidential Information and secrets

7

as means of planning a marketing strategy with the goal of luring current and

8

prospective students away from the plaintiff.

9

65.

As a proximate result of defendants' wrongful conduct and threatened

10

misappropriation, plaintiff has been injured, irreparably and otherwise, and is

11

threatened with the loss of its competitive advantage, goodwill and confidential

12

Information and trade secrets in amounts which may be impossible to determine,

13

unless defendants are enjoined and restrained by this Court. Unless restrained,

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defendants will continue to threaten to use, actually use, divulge, threaten to

15

disclose, acquire and/or otherwise misappropriate plaintiff's trade secrets and

16

confidential Information.

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66.

Defendants' actual and threatened misappropriation is willful and

18

malicious and their deliberate violation of the NDA's contractual obligations.

19

Therefore, plaintiff is entitled to an award of exemplary damages and attorneys' fees

20

and costs pursuant to California Civil Code §§3426.3(c) and 3426.4.

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FOURTH CLAIM FOR RELIEF

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(Tortious Interference With Contract)

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67.

Plaintiff hereby repeats, realleges and incorporates by reference the

24

allegations which are contained in paragraphs 1 through 66, above. This fourth

25

claim for relief is alleged against HEG and Figuli.

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27

68.

Figuli and HEG had actual knowledge of the existence of and the terms

and conditions of the NDA between plaintiff and TCS. As alleged above, Figuli

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33
FIRST AMENDED COMPLAINT FOR INJUNCTIVE RELIEF AND DAMAGES

1

drafted the NDA and was actively involved in the parties' discussions regarding the

2

acquisition of the Law School by TCS.

3

69.

During the period commencing in or about September 2009, and

4

continuing through the present, Figuli and HEG, intentionally induced and caused

5

TCS to breach the NDA. Defendants directed, controlled, manipulated and caused

6

TCS to repudiate its obligations regarding the NDA. The defendants did such acts

7

intentionally to harm the plaintiff and frustrate plaintiff's rights.

8

70.

Defendants’ wrongful and intentional interference, did, in fact, disrupt

9

the contractual relationship between the plaintiff and TCS, in that the plaintiff was

10

denied the opportunity to complete its negotiations with TCS and was kept in the

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dark about the COL affiliation until after it was consummated.

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71.

As a direct and proximate result of Figuli and HEG's intentional and

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wrongful interference with the NDA, plaintiff was damaged in a sum to be

14

determined at the time of trial, but in excess of the jurisdictional amount.

15

72.

The acts of Figuli and HEG were approved in advance and ratified by

16

them with full knowledge of the nature and effect of such actions. Such acts were

17

done for their own monetary gain and in conscious disregard of plaintiff's rights

18

with the intent to cause injury and harm to the plaintiff.

19

plaintiff is entitled to an award of punitive and exemplary damages against these

20

defendants.

By reason of these acts,

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FIFTH CLAIM FOR RELIEF

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(Violation Of The Unfair Competition Law Against All Defendants)

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73.

Plaintiff hereby repeats, realleges and incorporates by reference the

24

allegations which are contained in paragraphs 1 through 72, above. This fifth claim

25

for relief is alleged against defendants for their violation of the Unfair Competition

26

Law, California Business & Professions Code §§ 17200, et seq.

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34
FIRST AMENDED COMPLAINT FOR INJUNCTIVE RELIEF AND DAMAGES

74.

1

Defendants have engaged in and are still engaged in acts of unfair

2

competition, as defined in California Business & Professions Code §§ 17200, et

3

seq., including, but not limited to the breach of contract alleged above and violations

4

of California's Uniform Trade Secrets Act ("CUTSA"), California Civil Code

5

§3426, et seq.

6

PRAYER FOR RELIEF

7

WHEREFORE, plaintiff prays judgment against defendants, and each of

8

them, as follows:

9

1.

For a preliminary and permanent injunction enjoining defendants, their

10

officers, directors, managers, employees, agents, affiliates and all persons acting

11

under, in concert with, or for them:

12

(a) From taking any further steps to pursue or implement an affiliation with

13

COL, including prohibiting them from taking steps to obtain WASC accreditation,

14

providing financial, administrative, technological or other forms of support to COL,

15

ceasing any further marketing or publication of the affiliation, and removing the

16

September 21, 2010 joint TCS-COL press release and any further reference to the

17

affiliation from their Websites and in any publicly-available documents; and
(b) From using or disclosing, directly or indirectly, plaintiff's trade secrets

18
19

and confidential information.
2.

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21

and void and of no further effect;
3.

22
23

That the affiliation agreement between TCS and COL be declared null
That the defendants be adjudged to have violated CUTSA and the

Unfair Competition Law;
4.

For actual and compensatory damages in an amount to be proven at

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5.

For disgorgement of any unfair profits and/or unjust enrichment;

27

6.

For exemplary and/or punitive damages;

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25

trial;

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FIRST AMENDED COMPLAINT FOR INJUNCTIVE RELIEF AND DAMAGES

1

7.

For plaintiff’s costs of suit including their reasonable attorneys' fees;

2

8.

For prejudgment and post judgment interest; and

3

9.

For such other and further relief as the Court deems just and proper.

4
5

DATED: May 17, 2011

THE LAW OFFICES OF GEORGE A. SHOHET,
A PROFESSIONAL CORPORATION

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KREINDLER & KREINDLER LLP

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By:
George A. Shohet
Attorneys for Plaintiff

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FIRST AMENDED COMPLAINT FOR INJUNCTIVE RELIEF AND DAMAGES

JURY TRIAL DEMAND

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Plaintiffs hereby demand a trial by jury in this matter.

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DATED: May 17, 2011

THE LAW OFFICES OF GEORGE A. SHOHET,
A PROFESSIONAL CORPORATION

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KREINDLER & KREINDLER LLP

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By:
George A. Shohet
Attorneys for Plaintiff

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37
FIRST AMENDED COMPLAINT FOR INJUNCTIVE RELIEF AND DAMAGES

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CERTIFICATE OF SERVICE
The undersigned hereby certifies that all counsel of record who have

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consented to electronic service are being served with a copy of the foregoing

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document via Central District of California CM/ECF system on May 18, 2011

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____/s/ George A. Shohet_______________

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---------------------------------------------------------------------------------------------------------------------------CERTIFICATE OF SERVICE