Pinnacle Ventures LLC et al v. Bertelsmann Education Services

Filing 111

ORDER DEFERRING RULING ON 87 PINNACLE'S ANTI-SLAPP MOTION; AND GRANTING 87 PINNACLE'S MOTION TO DISMISS WITH LEAVE TO AMEND. Signed by Judge Beth Labson Freeman on 2/11/2020. (This is the redacted public version of the sealed order filed at 102 ). (blflc1S, COURT STAFF) (Filed on 3/6/2020)

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UNITED STATES DISTRICT COURT

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NORTHERN DISTRICT OF CALIFORNIA

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SAN JOSE DIVISION

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PINNACLE VENTURES LLC; PINNACLE
VENTURES DEBT FUND III, L.P.; and
PINNACLE IV, L.P.,
Plaintiffs,

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United States District Court
Northern District of California

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v.
BERTELSMANN EDUCATION
SERVICES LLC,

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Defendant.
____________________________________

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Case No. 18-cv-03412-BLF
ORDER DEFERRING RULING ON
PINNACLE’S ANTI-SLAPP MOTION;
AND GRANTING PINNACLE’S
MOTION TO DISMISS WITH LEAVE
TO AMEND
[Re: ECF 87]
[REDACTED PUBLIC VERSION]

AND RELATED COUNTERCLAIMS.

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This action arises from competing assertions of wrongdoing by investors in third party

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HotChalk, Inc. (“HotChalk”), a privately held corporation that provides education technology and

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services. Pinnacle Ventures LLC, Pinnacle Ventures Debt Fund III, L.P., and Pinnacle IV, L.P.

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(collectively, “Pinnacle”) provided debt financing to HotChalk in 2014 and 2015. Bertelsmann

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Education Services LLC (“BES”) provided additional financing in 2015 and 2018. Pinnacle

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claims that BES used fraudulent and unlawful means to lower the value of Pinnacle’s investment,

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and BES claims that Pinnacle used extortionate threats to extract benefits from HotChalk to which

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it was not entitled. The operative pleadings are Pinnacle’s first amended complaint (“FAC”) and

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BES’s answer and counterclaims.

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Before the Court are Pinnacle’s Special Motion to Strike BES’s counterclaims under

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California Code of Civil Procedure § 425.16 (“anti-SLAPP motion”) and Pinnacle’s Motion to

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Dismiss the counterclaims under Federal Rule of Civil Procedure 12(b)(6). For the reasons

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discussed below, a ruling on the anti-SLAPP motion is DEFERRED and the motion to dismiss is

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GRANTED WITH LEAVE TO AMEND.

REDACTED VERSION OF DOCUMENT SOUGHT TO BE SEALED

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I.

BACKGROUND
Pinnacle and HotChalk entered into loan agreements in 2014 and 2015 that extended debt

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financing of approximately $

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ECF 83-4. As part of the transactions, Pinnacle obtained warrants giving it the right to purchase

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HotChalk shares. FAC ¶¶ 24, 26; Answer ¶ 2.

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to HotChalk. FAC ¶¶ 23, 25, 27, ECF 59-4; Answer ¶ 2,

In a 2015 transaction (“2015 Transaction”), BES made a substantial equity investment in
HotChalk and purchased a large number of shares from existing HotChalk shareholders, after

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which BES owned approximately

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wanted to participate in the 2015 Transaction, but BES’s offer to purchase applied only to shares

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owned as of October 20, 2015. Pinnacle claims that it was not informed of the record date in time

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United States District Court
Northern District of California

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to exercise its warrants. FAC ¶¶ 34-36. BES claims that Pinnacle had time to exercise its

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warrants and participate in the 2015 Transaction. Answer ¶ 36.

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of HotChalk’s shares. FAC ¶ 29; Answer ¶¶ 3-6. Pinnacle

In a 2018 transaction (“Series AA Financing”), BES made a further equity investment in

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HotChalk, after which BES owned more than

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9, 49. In connection with the Series AA Financing, the shares of non-participating stockholders

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and warrant holders were split on a

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% of HotChalk’s shares. FAC ¶ 49; Answer ¶¶

basis, meaning that one share of HotChalk became

of a share. FAC ¶ 50; Answer ¶¶ 11, 50. Pinnacle did not participate in the Series AA

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Financing, and its warrants therefore were converted on a

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Pinnacle’s stake in HotChalk. FAC ¶ 50; Answer ¶¶ 11, 50.

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basis, substantially diluting

The parties take very different views of the events described above. Pinnacle claims that

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“Pinnacle’s investment in HotChalk has been stolen and Pinnacle’s rights trampled by a

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controlling stockholder looking out only for its own interests.” FAC ¶ 14. Pinnacle’s operative

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FAC asserts claims against BES for: (1) fraud; (2) negligent misrepresentation; (3) intentional

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interference with prospective economic advantage; (4) negligent interference with prospective

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economic advantage; (5) unfair business practices in violation of California Business &

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Professions Code § 17200 et seq.; and (6) unjust enrichment. FAC, ECF 60.

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BES claims that it has always supported HotChalk, and that Pinnacle “commenced a series
of unwarranted and improper demands

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order to secure additional benefits for itself.” Counterclaims ¶ 99. Specifically, BES alleges that

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when it met with Pinnacle in January 2018 to discuss HotChalk’s financial situation, “Pinnacle

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responded by threatening to sue HotChalk’s board of directors for breach of fiduciary duty.”

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Counterclaims ¶ 103. Pinnacle allegedly knew that the threat of litigation “would be devastating

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to HotChalk’s ability to finalize its contract with

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any such litigation would have to be disclosed.” Counterclaims ¶¶ 96, 104. Pinnacle allegedly

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used the threat of litigation to demand benefits to which it was not entitled, including early

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repayment of HotChalk’s entire loan amount. Counterclaims ¶¶ 103-05. BES claims that it was

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forced to lend HotChalk nearly $

,” HotChalk’s biggest customer, “since

in additional financing to pay off Pinnacle.

Counterclaims ¶¶ 105, 108-09. BES filed an answer and counterclaims on September 19, 2019,

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United States District Court
Northern District of California

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asserting claims against Pinnacle for: (1) unjust enrichment; (2) intentional interference with

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prospective economic advantage; (3) negligent interference with prospective economic advantage;

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and (4) unlawful and unfair business practices in violation of California Business & Professions

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Code §§ 17200 et seq.

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II.

ANTI-SLAPP MOTION

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A.

Legal Standard

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“Under California’s anti-SLAPP statute, a defendant may bring a special motion to strike a

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cause of action arising from constitutionally protected speech or petitioning activity.” Barry v.

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State Bar of California, 2 Cal. 5th 318, 320 (2017). “Unless the plaintiff establishes a probability

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of prevailing on the claim, the court must grant the motion and ordinarily must also award the

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defendant its attorney’s fees and costs.” Id.

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“The analysis of an anti-SLAPP motion proceeds in two steps.” Barry, 2 Cal. 5th at 321.

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“At the first step, the moving defendant bears the burden of identifying all allegations of protected

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activity, and the claims for relief supported by them.” Baral v. Schnitt, 1 Cal. 5th 376, 396 (2016).

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“When relief is sought based on allegations of both protected and unprotected activity, the

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unprotected activity is disregarded at this stage.” Id. Only “[i]f the court determines that relief is

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sought based on allegations arising from activity protected by the statute” is the second step

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reached. Id.
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At step two, “the burden shifts to the plaintiff to demonstrate that each challenged claim

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based on protected activity is legally sufficient and factually substantiated.” Baral, 1 Cal. 5th at

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396. Where, as here, the anti-SLAPP motion challenges only the legal sufficiency of the claims,

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the district court applies the Rule 12(b)(6) standard to consider whether a claim is stated. See

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Planned Parenthood Fed’n of Am., Inc. v. Ctr. for Med. Progress, 890 F.3d 828, 834 (9th Cir.

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2018), amended, 897 F.3d 1224 (9th Cir. 2018). If the challenged claims are not adequately stated

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in the initial pleading, the district court may defer consideration of the anti-SLAPP motion

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pending the filing of an amended pleading. See Verizon Delaware, Inc. v. Covad Commc’ns Co.,

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377 F.3d 1081, 1091-92 (9th Cir. 2004) (holding that district court did not err in deferring

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consideration of Covad’s anti-SLAPP motion pending receipt of Verizon’s first amended

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United States District Court
Northern District of California

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complaint, and affirming denial of anti-SLAPP motion to strike first amended complaint).

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B.

Discussion

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Pinnacle has filed an anti-SLAPP motion directed to BES’s counterclaims. At the first step

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of the analysis, the Court finds that Pinnacle has made a threshold showing that the counterclaims

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are based in part on allegations of protected activity, specifically, Pinnacle’s alleged threat to sue

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HotChalk’s board of directors. See Counterclaims ¶¶ 103, 104, 115, 120. Communications in

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connection with anticipated litigation are protected activity under the anti-SLAPP statute. See

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Neville v. Chudacoff, 160 Cal.App.4th 1255, 1263 (2008). “[M]any anti-SLAPP cases involving

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prelitigation communications concern demand letters or other statements to adverse parties or

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potential adverse parties.” Id. Moreover, the anti-SLAPP statute “has been held to protect

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statements to persons who are not parties or potential parties to litigation, provided such

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statements are made in connection with pending or anticipated litigation.” Id. (internal quotation

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marks omitted). Informal “pre-litigation demands and threats to sue, even if made using rude

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language, are protected activity within the meaning of the anti-SLAPP statute.” Fiji Water Co.,

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LLC v. Fiji Mineral Water USA, LLC, No. SACV 09-01148-CJC (MLGx), 2010 WL 11518555, at

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*2 (C.D. Cal. Nov. 10, 2010). In Fiji Water, the protected activity requirement was met by verbal

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threats to a distributor at a convention to the effect that the distributer would be “financially

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crippled” by litigation if he did not stop distributing an allegedly infringing product. See id.
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BES relies on Park v. Bd. of Trustees of California State Univ. in arguing that the anti-

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SLAPP motion should be denied because Pinnacle’s litigation threat is not itself the wrong

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complained of, but merely evidence of Pinnacle’s efforts to exploit HotChalk’s precarious

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financial position to extract benefits to which it was not entitled. In Park, the California Supreme

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Court held that: “[A] claim is not subject to a motion to strike simply because it contests an action

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or decision that was arrived at following speech or petitioning activity, or that was thereafter

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communicated by means of speech or petitioning activity. Rather, a claim may be struck only if

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the speech or petitioning activity itself is the wrong complained of, and not just evidence of

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liability or a step leading to some different act for which liability is asserted.” Park v. Bd. of

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United States District Court
Northern District of California

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Trustees of California State Univ., 2 Cal. 5th 1057, 1060 (2017).
BES’s reliance on Park is misplaced. The allegations regarding Pinnacle’s litigation threat

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are not merely evidence of Pinnacle’s alleged wrongful conduct but rather are incorporated into

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and central to each of BES’s counterclaims. The threat of litigation that would have to be

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disclosed to

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an additional $

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additional loan, and the use of those loan monies to pay off Pinnacle, form the basis for BES’s

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first counterclaim for unjust enrichment. See Counterclaims ¶ 111 (“Because of Pinnacle’s

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improper conduct, BES was forced to confer an undue benefit on Pinnacle (i.e., the early payment

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of its loan, including pre-payment penalties).”). “Pinnacle’s improper threats against HotChalk’s

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Board” are specifically alleged to be “independently wrongful, intentional acts” underpinning

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BES’s second counterclaim for intentional interference with prospective economic advantage and

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third counterclaim for negligent interference with prospective economic advantage. See

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Counterclaims ¶¶ 115, 120. Pinnacle’s “unlawful and unfair business practices,” including the

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threat of litigation, form the basis for BES’s fourth counterclaim under California Business and

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Professions Code § 17200. See Counterclaims ¶¶ 104, 122-24.

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is the means by which Pinnacle allegedly compelled BES to lend HotChalk
to pay off Pinnacle’s loan. See Counterclaims ¶¶ 104, 108-09. BES’s

At most, BES’s argument that its counterclaims are based on conduct other than Pinnacle’s

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threat of litigation establishes that its counterclaims are “mixed.” When evaluating “mixed”

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claims, the Court must disregard allegations based on unprotected activity and proceed to step two
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of the analysis with respect to allegations based on protected activity. See Baral, 1 Cal. 5th at 396.

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At step two, the burden shifts to BES to demonstrate that each of its counterclaims based on

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protected activity “is legally sufficient and factually substantiated.” Id. Pinnacle’s motion

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challenges the legal sufficiency of BES’s counterclaims. Accordingly, the Court applies the Rule

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12(b)(6) standard in its step two determination whether BES has demonstrated that its

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counterclaims are legally sufficient. See Planned Parenthood, 890 F.3d at 833-34.

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For the reasons discussed below in connection with Pinnacle’s motion to dismiss pursuant

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to Rule 12(b)(6), BES has failed to state a claim upon which relief may be granted. Accordingly,

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BES has not met its burden at step two of the anti-SLAPP analysis. Before making a final
determination on Pinnacle’s anti-SLAPP motion, however, the Court will grant BES leave to

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United States District Court
Northern District of California

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amend its counterclaims to either eliminate its allegations of protected activity or allege claims

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based on protected activity with more specificity. See Verizon, 377 F.3d at 1091. At the hearing,

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Pinnacle’s counsel argued that the Court should not defer ruling on the anti-SLAPP motion, citing

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Planned Parenthood and Todd v. Lovecruft, No. 19-CV-01751-DMR, 2020 WL 60199 (N.D. Cal.

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Jan. 6, 2020), in support of its position that the Court should grant the anti-SLAPP motion and

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then grant BES leave to amend if warranted. The Court has reviewed Planned Parenthood and

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Todd. Neither decision calls into question the Court’s discretion to defer ruling on an anti-SLAPP

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motion under Verizon, and the Court finds it appropriate to exercise its discretion in this case.

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III.

MOTION TO DISMISS

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A.

Legal Standard

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“A motion to dismiss under Federal Rule of Civil Procedure 12(b)(6) for failure to state a

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claim upon which relief can be granted tests the legal sufficiency of a claim.” Conservation Force

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v. Salazar, 646 F.3d 1240, 1241-42 (9th Cir. 2011) (internal quotation marks and citation omitted).

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While a complaint need not contain detailed factual allegations, it “must contain sufficient factual

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matter, accepted as true, to ‘state a claim to relief that is plausible on its face.’” Ashcroft v. Iqbal,

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556 U.S. 662, 678 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)).

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B.

Discussion

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As discussed above, BES’s allegations regarding Pinnacle’s threat of litigation are central
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to all of the counterclaims. However, as argued by Pinnacle, those allegations appear to fall

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squarely within California’s Litigation Privilege, California Civil Code § 47(b). “The litigation

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privilege grants absolute immunity from tort liability for communications made in relation to

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judicial proceedings.” Mindys Cosmetics, Inc. v. Dakar, 611 F.3d 590, 599 (9th Cir. 2010)

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(internal quotation marks and citation omitted). “[C]ommunications with ‘some relation’ to an

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anticipated lawsuit” fall within the privilege. Rubin v. Green, 4 Cal. 4th 1187, 1194 (1993). As

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presently framed, all of BES’s counterclaims are subject to dismissal as barred by § 47(b).

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The counterclaims also are subject to dismissal for failure to plead the required elements.
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First Counterclaim for Unjust Enrichment

“The elements of an unjust enrichment claim are the receipt of a benefit and the unjust

United States District Court
Northern District of California

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retention of the benefit at the expense of another.” Peterson v. Cellco P’ship, 164 Cal. App. 4th

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1583, 1593 (2008) (internal quotation marks, citation, and alteration omitted). BES alleges that

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Pinnacle received a benefit to which it was not entitled, namely, the early repayment of its loan,

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including prepayment penalties. See Counterclaims ¶¶ 111-12. However, it is clear from the

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pleading that HotChalk repaid Pinnacle’s loan. BES has not alleged facts showing that

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HotChalk’s repayment of an existing debt was at the expense of BES. While BES chose to lend

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HotChalk the funds that HotChalk subsequently used to pay off its loan to Pinnacle, BES is

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entitled to repayment of its loan from HotChalk. BES has cited no cases, and the Court has

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discovered none, that would entitle BES to pursue a claim of unjust enrichment on these facts.

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Pinnacle’s motion to dismiss is GRANTED WITH LEAVE TO AMEND as to the first

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counterclaim for unjust enrichment.
ii.

Second Counterclaim for Intentional Interference with Prospective

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Economic Advantage and Third Counterclaim for Negligent

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Interference with Prospective Economic Advantage

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“The elements of interference with prospective economic advantage (though differing on

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the mental state required for intentional or negligent interference) are: (1) a relationship between

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the plaintiff and some third party with the probability of future economic benefit to the plaintiff;

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(2) the defendant’s knowledge of the relationship; (3) a wrongful act, apart from the interference
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itself, by the defendant designed to disrupt the relationship; (4) actual disruption of the

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relationship; and (5) economic harm to the plaintiff.” Kacher Firestopping, Inc. v. Local No. 5,

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Int’l Ass’n of Heat & Frost Insulators & Asbestos Workers, No. SACV 08-00610-CJC(ANx),

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2008 WL 11337452, at *4 (C.D. Cal. June 30, 2008) (internal quotation marks and citation

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omitted).

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BES identifies the following as independently wrongful acts: “Pinnacle’s unreasonable

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refusal to consent to the increase in HotChalk’s bridge loans, Pinnacle’s improper threats against

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HotChalk’s Board, and Pinnacle’s threats to scuttle HotChalk’s ability to close its agreement with

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.” Counterclaims ¶¶ 115, 120. BES has not alleged any facts showing that Pinnacle
was legally obligated to consent to an increase in HotChalk’s bridge loans. Pinnacle’s threat of

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United States District Court
Northern District of California

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suit against the HotChalk board is protected by California’s Litigation Privilege, as discussed

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above, and Pinnacle’s threats to scuttle the

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Accordingly, BES’s allegations are inadequate to show an independently wrongful act on the part

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of Pinnacle. Moreover, BES has not alleged facts showing a disruption in its relationship with

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HotChalk. Based on the face of the counterclaims, it appears that BES controls HotChalk and

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provides it with financial support.

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deal are grounded in the threat of litigation.

Pinnacle’s motion to dismiss is GRANTED WITH LEAVE TO AMEND as to the second

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counterclaim for intentional interference with prospective economic advantage and the third

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counterclaim for negligent interference with prospective economic advantage.

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iii.

Fourth Counterclaim under Cal. Bus. & Prof. Code § 17200

California’s Unfair Competition Law (“UCL”) prohibits “any unlawful, unfair or

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fraudulent business act or practice.” Cal. Bus. & Prof. Code § 17200. BES alleges that

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“Pinnacle’s unlawful and unfair practices, including Pinnacle’s improper demands for additional

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consideration, constitute a violation of California Business and Professions Code §§ 17200 et

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seq.” Counterclaims ¶ 123. BES has not pled facts showing a violation of law by Pinnacle. With

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respect to BES’s allegation that Pinnacle’s demands for additional consideration were “unfair”

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within the meaning of the UCL, BES has not alleged facts showing why Pinnacle’s demand for

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repayment of its loan to HotChalk was unfair. Moreover, BES has not allege facts showing that it
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has standing to assert a UCL claim based on Pinnacle’s repayment demand. To establish standing

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under the UCL, a plaintiff must establish that it suffered direct injury and lost money or property

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as a result of the alleged unfair competition. See Cal. Bus. & Prof. Code § 17204; Kwikset Corp.

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v. Superior Court, 51 Cal. 4th 310, 325 (2011). It appears on the face of the counterclaims that

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HotChalk repaid a debt it owed to Pinnacle. While BES chose to lend HotChalk the funds that

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HotChalk subsequently used to pay off Pinnacle, BES is entitled to repayment of its loan to

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HotChalk and therefore BES has not established that it lost any money or property.
Pinnacle’s motion to dismiss is GRANTED WITH LEAVE TO AMEND as to the fourth

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United States District Court
Northern District of California

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counterclaim under California’s UCL.
IV.

ORDER
(1)

A ruling on Pinnacle’s anti-SLAPP motion is DEFERRED pending amendment of

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the counterclaims to provide BES with the opportunity to either eliminate its allegations of

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protected activity or allege counterclaims based on protected activity with adequate specificity.

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The anti-SLAPP motion is TERMINATED WITHOUT PREJUDICE to renewal, if appropriate,

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after the filing of BES’s amended counterclaims (if any).

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(2)

Pinnacle’s motion to dismiss is GRANTED WITH LEAVE TO AMEND as to all

counterclaims;
(3)

Any amended counterclaims shall be filed on or before March 3, 2020. Leave to

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amend is limited to the deficiencies identified in this order. BES may not add new counterclaims

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or parties without obtaining prior leave of the Court.

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(4)

This order terminates ECF 87.

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Dated: February 11, 2020
______________________________________
BETH LABSON FREEMAN
United States District Judge

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