Weather Underground, Incorporated v. Navigation Catalyst Systems, Incorporated et al

Filing 211

REPLY to Response re 178 MOTION for Summary Judgment filed by Epic Media Group, Incorporated. (Delgado, William)

IN THE UNITED STATES DISTRICT COURT
FOR THE EASTERN DISTRICT OF MICHIGAN

THE WEATHER UNDERGROUND, INC.,
a Michigan corporation,
Plaintiff,
Case No. 2:09-CV-10756
Hon. Marianne O. Battani

vs.
NAVIGATION CATALYST SYSTEMS, INC.,
a Delaware corporation; CONNEXUS CORP.,
a Delaware corporation; FIRSTLOOK, INC.,
a Delaware corporation; and EPIC MEDIA
GROUP, INC., a Delaware corporation,

Defendants.
______________________________________________________________________
Enrico Schaefer (P43506)
Brian A. Hall (P70865)
TRAVERSE LEGAL, PLC
810 Cottageview Drive, Unit G-20
Traverse City, MI 49686
231-932-0411
[e-mail]
[e-mail]
Lead Attorneys for Plaintiff

William A. Delgado
WILLENKEN WILSON LOH & LIEB LLP
707 Wilshire Boulevard, Suite 3850
Los Angeles, CA 90017
[phone]
[e-mail]
Lead Counsel for Defendants

Nicholas J. Stasevich (P41896)
Benjamin K. Steffans (P69712)
Anthony P. Patti (P43729)
BUTZEL LONG, P.C.
HOOPER HATHAWAY, PC
150 West Jefferson, Suite 100
126 South Main Street
Detroit, MI 48226
Ann Arbor, MI 48104
[phone]
734-662-4426
[e-mail]
[e-mail]
[e-mail]
Attorneys for Plaintiff
Local Counsel for Defendants
______________________________________________________________________
DEFENDANTS THE EPIC MEDIA GROUP, INC.’S REPLY MEMORANDUM IN
SUPPORT OF MOTION FOR SUMMARY JUDGMENT

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REPLY MEMORANDUM OF POINTS AND AUTHORITIES
I.

ARGUMENT
A.

Plaintiff Misunderstands and Misapplies the Law With Respect to the ParentSubsidiary Relationship.

As a general matter, Plaintiff‟s opposition to Epic Media‟s Motion for Summary
Judgment (“MSJ”) (and its basis for imposing liability on Epic Media) rests on the fact that Epic
Media “controls” Connexus, a refrain that is repeated throughout its brief. Notably, however, it
does not support this conclusory assumption with any admissible evidence. Moreover, it is an
irrelevant point. Every parent corporation “controls” its wholly-owned subsidiaries by virtue of
owning 100% of the shares in the subsidiary. But, mere control is not sufficient to impose
liability on a parent for the acts of its subsidiaries. Cf. Ruiz v. Sysco Corp. 2011 WL 3300098 *
4 (S.D. Cal. July 29, 2011) (to show “interrelation of operations” in a similar context, “plaintiff
must show…that the parent has exercised control to a degree that exceeds the control normally
exercised by a parent corporation.”). Plaintiff presents no evidence of beyond-normal control.
Similarly, Plaintiff attempts to make hay about the existence of intercompany cash
transfers between Epic Media and Connexus. But, cash transfers between parents and
subsidiaries are entirely appropriate and entirely common. After all, parent corporations do not
establish subsidiaries just so that transactional lawyers have something to do during the
weekdays. Wholly-owned subsidiaries exist to benefit the parent in some way. Trenswick Am.
Lit. Trust v. Ernst & Young, LLP, 906 A.2d 168 (2006) (“A wholly-owned subsidiary is to be
operated for the benefit of its parent.”). The real question is whether the formalities of the intercompany cash transfers were disregarded, resulting in a “comingling of funds,” or whether the

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transfers were recorded in a legitimate way. Here, contrary to Plaintiff‟s rhetoric that Epic
Media “raided” Connexus of its cash, the uncontroverted evidence establishes that inter-company
cash transfers are duly recorded as a “receivable” or “payable” and dealt with as a legitimate
obligation.1 Deposition Transcript of David Graff, taken June 24, 2011, at 84:20-88:4 (“Graff
Dep.”); see also Second Declaration of David Graff, dated August 30, 2011, at ¶¶ 4-6; Sonora
Diamond Corp. v. Sup. Ct., 83 Cal. App. 4th 523, 547 (2000) (“There is no evidence [parent]
„stripped‟ [subsidiary] of its assets. In this case, all financial transactions between [parent] and
[subsidiary] were separately recorded, maintained in the records of each, documented as
intercompany loans and similar arrangements, and dealt with as legitimate obligations. The fact
that no interest was charged was immaterial…”) (internal citations omitted).2
B.

Reverse Triangular Mergers Do Not Result in Liability.

In its opposition, Plaintiff implicitly concedes that the reverse triangular merger protects
Epic Media from liability. Realizing this, Plaintiff cites to the securities case of In re McKesson
for the principle that the reverse triangular merger can be treated as a “de facto” merger if has
been structured to disadvantage creditors or shareholders. Opp. at 7. Nevertheless, this case
does not involve a securities claim, and Plaintiff is neither a creditor nor a shareholder of any of
the defendants. Thus, as in McKesson, Plaintiff cannot show any facts to support the proposition
that a creditor or shareholder has been disadvantaged.

1

In its opposition, Plaintiff concedes the existence of a recorded receivable but simply argues it
should be disregarded which would be contrary to law. See Opp. at 5.
2

Plaintiff also erroneously argues that Epic Media intends to claim past net operating losses
(“NOL”) of Connexus to reduce Epic Media‟s own income. Opp. at p. 5. That is simply untrue
as David Graff explained at deposition. Graff Depo. at 73:14-74:15.

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C.

The “De Facto Merger” Doctrine Does Not Apply.

As Epic Media noted in its opening brief, the “de facto” merger doctrine does not apply
because the transaction between Epic Media and Connexus Corporation was not a sale of assets.3
Even if the doctrine applied, Plaintiff cannot show all four elements. Epic Media submitted
uncontroverted evidence that Connexus and Firstlook are still in business and still operational
which means that Plaintiff cannot meet, at least, the third element which requires the seller to
cease operations. Realizing that, Plaintiff provides a tortured and altogether unclear
interpretation of the doctrine as to why that third element should not apply. Nevertheless, the
only citation in support of this tortured interpretation (U.S. v. Gen. Battery Corp.) actually
supports Epic Media because in General Battery, the agreement between the seller and purchaser
explicitly provided for the complete liquidation and dissolution of the seller corporation. U.S. v.
Gen. Battery Corp., 423 F.3d 294, 307-08 (3d Cir. 2005). That is the exact opposite of this case
given that Connexus and Firstlook are still corporations in good standing, conduct business, pay
debts, and have employees.
D.

Agency Theory Does Not Result in Liability Either.

Plaintiff‟s agency theory is also altogether flawed. The title of Section C of the
Argument argues that “Epic has used the domains under the ACPA as agent or alter ego of
Connexus.” But, Plaintiff does not cite, and Defendants are not aware of, any case which stands
for the proposition that an agent can be liable for the actions of its principal. To the extent that
Plaintiff meant to argue that Connexus is an agent of Epic, it must show that Epic‟s control of
Connexus is so pervasive that it has reduced Connexus to a mere instrumentality:
3

As the Court can readily ascertain, the doctrine clearly anticipates a “sale” since each of the
four factors refer to either a “purchaser” corporation or a “seller” corporation.
3

The nature of the control exercised by the parent over the subsidiary necessary to
put the subsidiary in an agency relationship with the parent must be over and
above that to be expected as an incident of the parent‟s ownership of the
subsidiary and must reflect the parent‟s purposeful disregard of the subsidiary‟s
independent corporate existence. The parent’s general executive control over
the subsidiary is not enough; rather there must be a strong showing beyond
simply facts evidencing “the broad oversight typically indicated by [the] common
ownership and common directorship” present in a normal parent-subsidiary
relationship. As a practical matter, the parent must be shown to have moved
beyond the establishment of general policy and direction for the subsidiary and in
effect taken over performance of the subsidiary‟s day-to-day operations in
carrying out that policy.
Sonora Diamond, 83 Cal. App. 4th at 542 (citations omitted) (bold added). Plaintiff has not and
cannot make that significant showing.4
E.

Plaintiff Has Not Pleaded Any Facts to Support a Conspiracy Cause of Action.

Plaintiff boldly claims that its conspiracy claims are sufficiently pleaded. This begs the
question: where? It certainly is not in the FAC even though a conspiracy claim, like a fraud
claim, requires pleading with specificity. See Phoenix Life Ins. Co. v. LaSalle Bank N.A., 2009
WL 877684 *12 (E.D. Mich. Mar. 30, 2009). Moreover, there is not a single citation to
admissible evidence in Plaintiff‟s opposition that would support a conspiracy cause of action.
F.

Epic Media Merits Summary Judgment Not More Cost and Expense.

Realizing that it has no facts which can rebut Epic Media‟s MSJ, Plaintiff essentially asks
this Court to “punt” on the Motion until after trial and further discovery. First, that would violate
Local Rule 16.1(f) which requires a decision on all pending dispositive motions before the
pretrial order is lodged with the Court. More importantly, Plaintiff has not met the requisite
showing for additional discovery. To be sure, Plaintiff attacks certain witnesses for lacking
4

The failure to show that Epic Media has reduced Connexus Corporation to a “mere
instrumentality” also precludes a finding that Epic Media is an alter ego of Connexus as Epic
Media explained in its opening brief.
4

knowledge on some isolated questions, but Plaintiff fails to acknowledge the responses to its
written discovery it received (where such questions were answered) or Epic Media‟s document
production. See Second Declaration of William A. Delgado, dated August 30, 2011, at ¶¶ 2-6.
Indeed, Plaintiff makes absolutely no showing of what additional discovery it could
conduct that would change the outcome of this motion. Certain facts (e.g., that Epic Media
acquired Connexus through a reverse triangular merger) are immutable and dispositive. “Bare
allegations of the need for discovery are not enough under Rule 56(f). To fulfill the
requirements of Rule 56(f), [plaintiff] (through counsel) had to describe with some precision the
materials he hopes to obtain with further discovery, and exactly how he expects those materials
would help him in opposing summary judgment.” Everson v. Leis, 556 F.3d 484, 493 (6th Cir.
2009)5; Jocham v. Tuscola County, 239 F. Supp. 2d 714, 734 (E.D. Mich. 2003) (“Rule 56(f)
may be invoked only when the plaintiff has been unable to acquire needed discovery through due
diligence, not to permit further discovery when the plaintiff had failed to thoroughly examine her
opportunities in the time available to her.”).
RESPECTFULLY SUBMITTED this 30th day of August, 2011.
/s/William A. Delgado
William A. Delgado
WILLENKEN WILSON LOH & LIEB LLP
707 Wilshire Boulevard, Suite 3850
Los Angeles, CA 90017
[phone]
[e-mail]
Lead Counsel for Defendants

5

Effective December 1, 2010, Rule 56(f) is now Rule 56(d) but the requirements remain the
same. Here, Plaintiff did not even meet the procedural requirement of filing the requisite
affidavit that would be required to request additional discovery. Fed. R. Civ. P. 56(d); Cacevic v.
City of Hazel Park, 226 F.3d 483, 488 (6th Cir. 2000).
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CERTIFICATE OF SERVICE
I hereby certify that on August 30, 2011, I electronically filed the foregoing paper
with the Court using the ECF system which will send notification of such filing to the
following:
Enrico Schaefer (P43506)
Brian A. Hall (P70865)
TRAVERSE LEGAL, PLC
810 Cottageview Drive, Unit G-20
Traverse City, MI 49686
231-932-0411
[e-mail]
[e-mail]
Lead Attorneys for Plaintiff

Nicholas J. Stasevich (P41896)
Benjamin K. Steffans (P69712)
BUTZEL LONG, P.C.
150 West Jefferson, Suite 100
Detroit, MI 48226
[phone]
[e-mail]
[e-mail]
Local Counsel for Defendants

Anthony P. Patti (P43729)
HOOPER HATHAWAY, PC
126 South Main Street
Ann Arbor, MI 48104
734-662-4426
[e-mail]
Attorneys for Plaintiff

William A. Delgado
WILLENKEN WILSON LOH & LIEB LLP
707 Wilshire Boulevard, Suite 3850
Los Angeles, CA 90017
[phone]
[e-mail]
Lead Counsel for Defendants

/s/William A. Delgado
William A. Delgado
WILLENKEN WILSON LOH & LIEB LLP
707 Wilshire Boulevard, Suite 3850
Los Angeles, CA 90017
[phone]
[e-mail]
Lead Counsel for Defendants

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