Quintara Biosciences, Inc. v. Ruifeng Biztech Inc. et al.

Filing 28


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1 2 3 4 5 UNITED STATES DISTRICT COURT 6 7 NORTHERN DISTRICT OF CALIFORNIA 8 9 10 QUINTARA BIOSCIENCES, INC., Plaintiff, United States District Court Northern District of California 11 12 13 14 No. C 20-04808 WHA v. RUIFENG BIZTECH INC., et al., ORDER RE MOTION TO DISMISS Defendants. 15 16 INTRODUCTION 17 In this potpourri of disputes between former business partners, defendants move to 18 dismiss a subset of plaintiff’s claims. For the following reasons, the motion is GRANTED IN 19 PART AND DENIED IN PART. 20 21 STATEMENT A prior order detailed the extraordinary allegations here (Dkt. No. 19), but they bear 22 restating. Drs. Qun ‘Richard’ Shan and Xueling ‘Sue’ Zhao started their DNA-sequence 23 analysis company, plaintiff Quintara Biosciences, Inc., in their garage in 2005. Purchasing 24 startup equipment with a $230,000 home equity loan, they toiled long hours and many 25 sleepless nights, while raising children and working other full-time jobs, to eventually build 26 Quintara into a respected genetic-sequencing analysis business. 27 28 Despite success, however, Quintara developed cash flow problem in 2013. Then entered defendant Gangyou Wang, whom Shan and Zhao met through a mutual acquaintance. Wang 1 said he could solve Quintara’s problems with an interest-free $1,000,000 loan with conditions 2 structured to aid his green card application. Wang’s company, defendant Ruifeng Biztech Inc., 3 would appear to take over, at least in name, operation of Quintara. Ruifeng would operate the 4 lab and pay the employees. On his green card application, then, Wang could say that he had 5 brought a million dollar startup with at least ten employees to the United States. By the time 6 Wang obtained his green card, Quintara would have paid back the million dollar loan, and the 7 relationship would terminate. The parties finalized the deal with a handshake. 8 Following the initial loan, though, Wang convinced Shan and Zhao to enter a 9 collaboration agreement. Quintara and Ruifeng would start a joint venture; Ruifeng would 10 own 51%; Quintara would own 49%. The parties, however, never formed any new entity. United States District Court Northern District of California 11 Skip ahead to September 2017. Wang asked for another favor, that Ruifeng be added 12 onto the lease for Quintara’s California headquarters, 3563 Investment Blvd., Suite 2, 13 Hayward, California. Wang promised nothing would change in the parties’ actual practice; 14 Quintara would operate as usual, pay rent to Ruifeng, and Ruifeng would pass the rent along to 15 the landlord. Unbeknownst to Shan and Zhao however, Wang forged Shan’s name on a lease 16 termination agreement, leaving the premises in Ruifeng’s name alone. 17 In early 2019, Quintara had repaid the million dollar loan and Wang had obtained his 18 green card, so Shan and Zhao sought to terminate the relationship between Quintara and 19 Ruifeng. But Wang refused, claiming under the collaboration agreement that Ruifeng owned 20 51% of Quintara’s business assets. When Quintara nonetheless announced termination of the 21 relationship, Wang secretly (and successfully) solicited several Quintara employees to jump 22 ship to Ruifeng. Finally, on March 9, 2020, the wolf emerged from the sheep’s clothing. 23 Wang changed the locks on the 3563 Investment Blvd. premises and denied entry to Quintara 24 employees. He then started defendant RF Biotech LLC to operate Quintara’s business, out of 25 Quintara’s premises, with Quintara’s equipment, and with Quintara’s prior employees, 26 defendants Alex Wong, Alan Li, Rui Shao. 27 28 Five months later, Quintara sued for various business torts and sought both a temporary restraining order and preliminary injunction compelling defendants to turn over the 3563 2 1 Investment Blvd. premises, return Quintara’s equipment, and cease using any trade secrets 2 obtained. Given Quintara’s delay undermined any argument of immediate and irreparable 3 harm, a prior order denied preliminary injunctive relief (Dkt. No. 19). Defendants now seek to 4 dismiss Quintara’s fraud claim against Mr. Wang, trade secrets claim for exemplary damages 5 and fees, and claim for damages under California Business and Professions Code § 17200. 6 This order follows full briefing and is appropriate for disposition on the papers. ANALYSIS 7 8 9 A complaint must allege sufficient factual matter to state a facially plausible claim for relief. Simply, the allegations must permit the reasonable inference, without speculation, that defendants are, in fact, liable for the conduct alleged. We take as true all factual allegations 11 United States District Court Northern District of California 10 but legal conclusions merely styled as fact may be disregarded. Ashcroft v. Iqbal, 556 U.S. 12 662, 678 (2009); Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007). 13 1. 14 Defendants challenge Quintara’s fraud claim against Mr. Wang. “The elements of fraud FRAUD CLAIM. 15 are: (1) a misrepresentation (false representation, concealment, or nondisclosure); (2) 16 knowledge of falsity (or scienter); (3) intent to defraud, i.e., to induce reliance; (4) justifiable 17 reliance; and (5) resulting damage.” Robinson Helicopter Co., Inc. v. Dana Corp., 34 Cal. 4th 18 979, 990 (2004). 19 Taken in Quintara’s favor, the complaint alleges that Wang intentionally 20 mischaracterized (1) the initial loan structure, (2) the subsequent collaboration agreement, and 21 (3) the 2017 lease substitution as legitimate means of support for his permanent residence 22 application when each was, in fact, improper and (more importantly) part of Wang’s plan to 23 convert Quintara’s business and assets. Defendants challenge causation, contending that 24 Quintara was not fraudulently induced by any representations. This order agrees. 25 A plaintiff’s reliance on a defendant’s misrepresentation “must be justifiable” in light of 26 plaintiff’s “own intelligence and information.” Hobart v. Hobart Estate Co., 26 Cal.2d 412, 27 447 (1945). Now, “[n]egligence on the part of the plaintiff in failing to discover the falsity of a 28 statement is no defense when the misrepresentation was intentional.” But: 3 1 If the conduct of the plaintiff in the light of his own intelligence and information was manifestly unreasonable . . . he will be denied a recovery. He may not put faith in representations which are preposterous, or which are shown by facts within his observation to be so patently and obviously false that he must have closed his eyes to avoid discovery of the truth. 2 3 4 5 Seeger v. Odell, 18 Cal. 2d 409, 414–16 (1941) (Traynor, J.); in re Kirsch, 973 F.2d 1454, 6 1459 (9th Cir. 1992). “California courts do not . . . merely wink at this requirement, but rather 7 take it quite seriously.” Atari Corp. v. Ernst & Whinney, 981 F.2d 1025, 1031 (9th Cir. 1992). 8 Here, Quintara’s conduct can be taken only as willful blindness to its circumstances. To repeat the complaint: Quintara took an unwritten one million dollar loan with significant 10 strings attached from a new business partner in 2013, entered an illusory joint-ownership 11 United States District Court Northern District of California 9 collaboration agreement shortly thereafter, and in 2017 agreed to a lease name swap, which 12 Quintara’s own founders suspected to be illicit (Compl., Dkt. No. 1, at ¶¶ 14, 15, 19, 20, 22, 13 23). It is now 2020. A multi-million dollar technology company that proceeds through seven 14 years of expansion, business deals, corporate and employee tax filings, along with unwritten 15 million dollar loans, illusory collaboration agreements, and suspect real estate deals without 16 consulting counsel has deliberately buried its head in the sand. Quintara’s willful blindness to 17 the circumstances shining a spotlight on the alleged misconduct forecloses its justifiable 18 reliance on Wang’s misrepresentations, however intentional, and undermine its fraud claim. 19 2. 20 Defendants next challenge Quintara’s trade secret misappropriation claim for exemplary TRADE SECRET EXEMPLARY DAMAGES & ATTORNEY’S FEES. 21 damages and attorney’s fees. The Defend Trade Secrets Act, which created a federal trade 22 secret misappropriation claim in 2016, provides for exemplary damages and attorney’s fees if 23 “the trade secret was willfully and maliciously misappropriated.” 18 U.S.C. § 1836(b)(3)(C)– 24 (D); Genentech, Inc. v. JHL Biotech, Inc., No. C 18-06582 WHA, 2019 WL 1045911, at *8 25 (N.D. Cal. March 5, 2019). 26 Before an employer may recover exemplary damages and fees from an employee for 27 trade secret misappropriation, however, the employer must inform the employee via written 28 policy of the DTSA’s whistleblower protections for the disclosure of protected information to, 4 1 among others, government officials or for investigative purposes. 18 U.S.C. § 1833(b). 2 Defendants note, and Quintara does not contest, that Quintara’s non-disclosure agreement (as 3 alleged) did not include the relevant whistleblower protection notice. So, defendants argue, 4 Quintara may not recover exemplary damages or attorney’s fees. This order agrees in part. 5 To start, Quintara correctly responds, and defendants do not contest, that defendants 6 Wang, Ruifeng, and RF Biotech never worked for Quintara. So their alleged misappropriation 7 will support exemplary damages and fees, regardless of any whistleblower notice in Quintara’s 8 NDA. 9 As to defendants who were Quintara employees, Alex Wong, Alan Li, and Rui Shao, Quintara argues that the notice requirement does not apply. Indeed, though Subsection 11 United States District Court Northern District of California 10 1833(b)(3)(C) states that “employer may not be awarded exemplary damages or attorney fees” 12 if it “does not comply with the notice requirement,” the next subsection, 1833(b)(3)(D), cabins 13 this limitation to “to contracts and agreements that are entered into or updated after the date of 14 enactment of this subsection.” And, as Quintara argues in opposition, Wong, Li, and Shao 15 joined Quintara and signed the operative NDA well before May 11, 2016, when the DTSA 16 took effect. 17 But that’s not what the complaint alleges. Quintara itself admits that the complaint “does 18 not state when these policies were signed, nor if and when they were updated, aside from 19 stating that Wong began working for Quintara in 2007” (Dkt. No. 24). Allegations merely 20 consistent with rather than indicative of liability do not show entitlement to relief. Absent any 21 allegation when Wong, Li, and Shao signed Quintara’s NDA, the application of § 1833(b) 22 remains speculative and does not fairly put these defendants on notice of their potential 23 liability. See Twombly, 550 U.S. at 555–57. On these pleadings, Quintara may not recover 24 exemplary damages and attorney’s fees from defendants Wong, Li, and Shao. 25 3. 26 Last, defendants contend Quintara’s claim for damages under § 17200 fails. The 27 SECTION 17200. complaint alleges: 28 5 1 2 3 4 73. Defendants’ conduct[] [was a] fraudulent and unlawful business practice[] in violation of the unfair competition law of California, Cal. Bus. and Prof. Code §17200. 74. As a result of Defendants’ acts, Plaintiff has suffered harm and is entitled to recover damages, the exact amount to be determined at trial. 5 Cursory examination of § 17200 and the relevant following sections describing its enforcement 6 reveal that the section offers restitution and injunction, not damages. See also, Korea Supply 7 Co. v. Lockheed Martin Corp., 29 Cal.4th 1134, 1144 (2003). Quintara contends that the 8 distinction here is merely semantic. Not so. Rule 8 requires “a demand for the relief sought.” 9 Quintara seeks relief foreclosed by its claim. Its claim for damages under § 17200 fails. CONCLUSION 10 United States District Court Northern District of California 11 For the foregoing reasons, defendants’ motion is GRANTED IN PART. Quintara’s claims 12 for fraud against defendant Gangyou Wang, for damages under California Business and 13 Professions Code § 17200, and for exemplary damages and attorney’s fees under the Defend 14 Trade Secrets Act, 18 U.S.C. § 1836(b)(3)(C), (D), against defendants Alex Wong, Alan Li, 15 and Rui Shao are DISMISSED. The remainder of defendants’ motion is DENIED. Quintara’s 16 claim for exemplary damages and attorney’s fees under the DTSA against defendants Ruifeng 17 Biztech Inc., Gangyou Wang, and RF Biotech LLC may proceed. Unchallenged here, 18 Quintara’s claims for conversion, breach of the duty of loyalty, and misappropriation of trade 19 secrets may also proceed. 20 * * * 21 The October 22 hearing and case management conference is VACATED. A case 22 management order will follow. The parties may move to amend the case schedule by 23 OCTOBER 29 AT NOON in a motion not exceeding 10 PAGES. 24 Quintara may move for leave to amend its complaint by NOVEMBER 5 AT NOON. Any 25 such motion must include as an exhibit a redlined version of the proposed amendment that 26 clearly identifies all changes from the amended complaint. This order highlighted certain 27 deficiencies in the amended complaint, but it will not necessarily be enough to add sentences 28 6 1 parroting each missing item identified herein. If Quintara moves for leave to amend, it should 2 be sure to plead its best case. 3 IT IS SO ORDERED. 4 5 Dated: October 16, 2020. 6 7 WILLIAM ALSUP UNITED STATES DISTRICT JUDGE 8 9 10 United States District Court Northern District of California 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 7

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