SAFFRON REWARDS, INC., Plaintiff, v. ALEX ROSSIE, Defendant.
Case No. 22-cv-02695-DMR
UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF CALIFORNIA
July 25, 2022
Judge Donna M. Ryu
Re: Dkt. No. 14
Plaintiff Saffron Rewards (“Saffron“) alleges that its co-founder Defendant Alex Rossie breached his contractual and legal obligations to Saffron after Rossie left the company. [Docket No. 1 (“Compl.“).] Now pending is Saffron‘s motion to dismiss. [Docket No. 14 (“Mot.“); 18 (“Reply“).] Rossie opposes the motion. [Docket No. 17 (“Opp‘n“).] This matter is suitable for resolution without a hearing. Civ. L.R. 7-1(b). For the following reasons, the motion is granted in part and denied in part.
I. BACKGROUND
The following facts are in the complaint.1 Saffron was co-founded on November 10, 2021 by Rossie and non-party Saumil Nanavati to democratize co-branded reward cards for businesses of every size. Compl. 4, 23. Saffron is a Delaware corporation with its principal place of business in San Francisco, California. Id. ¶ 1. Rossie was a member of Saffron‘s board of directors who resides in Washington and who was responsible for various technical aspects of the
On November 10, 2021, Saffron and Rossie entered into a Technology Assignment Agreement (the “Agreement“) in which Rossie assigned all “Intellectual Property” rights to Saffron. Compl. 5, 28.3 Rossie agreed not to “use or disclose anything assigned to [Saffron] hereunder or any other technical or business information or plans of [Saffron].” Id. ¶ 27.
Thereafter until February 23, 2022, Rossie created numerous online business accounts through third-party vendors that Saffron requires to conduct its business, including software development, communications, website development, and finance (the “Company Accounts“). Id. ¶¶ 7, 25. The Company Accounts included Saffron‘s website domain, Google Workplace (email, storage, etc.), software development platform, banking accounts, and Amazon Web Services, among others. Id. ¶¶ 7, 26. The Company Accounts contain Saffron‘s confidential technical and business information including software code, product design and schematics, strategy materials, investor and customer lists, legal documents, and debit card accounts with company funds. Id. ¶¶ 7, 25.
On February 23, 2022, Rossie stopped providing services to Saffron and terminated his engagement with the company, although he remained on the board of directors until April 29, 2022. Compl. ¶¶ 6, 29. Over the following weeks, Rossie refused to comply with Saffron‘s requests made on February 23, 2022 and March 30, 2022 to return company property to Nanavati, including by withholding access to Saffron‘s Company Accounts. Id. ¶¶ 7, 30-31. Saffron alleges that Rossie‘s refusal to return all administrator rights to the Company Accounts violated his legal obligations, including under the Agreement. Id. ¶¶ 8, 30-31. On March 30, 2022, Rossie logged into Saffron‘s Google Workspaces and accessed information on the account without Saffron‘s permission or authorization. Id. ¶¶ 9, 32.
On April 7, 2022, Saffron‘s counsel sent a letter to Rossie demanding that he return all Saffron property, provide complete access to Company Accounts, and confirm that he had complied with his obligation under the Agreement that if he had removed any of Saffron‘s property, he restored it immediately with appropriate permissions and access, and that he deleted or destroyed any other Saffron documents. Compl. ¶¶ 10, 33. That same day, Rossie responded by falsely claiming that he had already returned access rights to the Company Accounts and that he no longer had access. Id. ¶¶ 11, 34.
Saffron subsequently filed this lawsuit on May 4, 2022, claiming that Rossie breached his legal obligations under the Agreement and his fiduciary duties as a member of Saffron‘s board by intentionally withholding from Saffron the administrator rights to the Company Accounts, which is Saffron‘s property and contain confidential information. Compl. ¶¶ 35-36. Saffron also claims that Rossie acted in bad faith for the purpose of harming Saffron and to obtain leverage to negotiate his exit package. Id. ¶ 37. Saffron claims that Rossie‘s conduct jeopardized its business by causing a direct loss of customers, disrupting funding discussions with investors, and impeding Saffron‘s ability to hire employees. Id. ¶ 38. Saffron alleges (1) breach of the Agreement; (2) breach of the fiduciary duty of loyalty; (3) breach of the implied covenant of good faith and fair dealing; (4) a violation of the federal Computer Fraud and Abuse Act (“CFAA“),
II. LEGAL STANDARD
A motion to dismiss under Rule 12(b)(6) tests the legal sufficiency of the claims alleged in the complaint. See Parks Sch. of Bus., Inc. v. Symington, 51 F.3d 1480, 1484 (9th Cir. 1995). When reviewing a motion to dismiss for failure to state a claim, the court must “accept as true all of the factual allegations contained in the complaint,” Erickson, 551 U.S. at 94, and may dismiss a claim “only where there is no cognizable legal theory” or there is an absence of “sufficient factual matter to state a facially plausible claim to relief,” Shroyer v. New Cingular Wireless Servs., Inc., 622 F.3d 1035, 1041 (9th Cir. 2010) (citing Ashcroft v. Iqbal, 556 U.S. 662, 677-78 (2009); Navarro v. Block, 250 F.3d 729, 732 (9th Cir. 2001)) (quotation marks omitted). A claim has facial plausibility when a plaintiff “pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Iqbal, 556 U.S. at 678 (citation omitted). In other words, the facts alleged must demonstrate “more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007).
Under
III. DISCUSSION4
The parties agree that Delaware law governs the breach of contract, breach of duty of
A. Breach of Contract
Under Delaware law, to state a claim for breach of contract the plaintiff must show “[1] the existence of the contract, whether express or implied; [2] the breach of an obligation imposed by that contract; and [3] the resultant damage to the plaintiff.” VLIW Tech., LLC v. Hewlett-Packard Co., 840 A.2d 606, 612 (Del. 2003).
The complaint alleges the parties entered into the Agreement, which was a binding and enforceable contract that assigned Intellectual Property rights to Saffron and prohibited Rossie
Rossie acknowledges that Saffron has pleaded the existence of a valid contract. See Mot. at 1, 6 & n.1; Opp‘n at 8; Reply at 4 n.4.6 As to breach, Rossie contends—albeit confusingly—that he did not breach the Agreement because “it is not clear from the Complaint at what point Mr. Rossie‘s contractual obligations arose.” Mot. at 6. Rossie challenges the relevance of Saffron‘s claims that he logged into the account the week of March 28, 2022 without permission, in light of his allegedly false April 7, 2022 representation that he had already returned access to the Company Accounts. See Compl. ¶¶ 31, 36. He argues that the court should ignore Saffron‘s allegations of falsity because what happened on March 28 “has no bearing on the state of things on April 7.” Mot. at 6. This raises a factual dispute, which is not appropriate for resolution through a motion to dismiss in which the court must presume the truth of the allegations. Saffron‘s allegations are sufficient to plausibly plead the element of breach.
Rossie also argues that Saffron‘s damages are too speculative. “It is axiomatic that a
The plaintiff “need not allege an exact monetary figure in order to sufficiently plead that it suffered damages from the breach of contract.” Weyerhaeuser Co. v. Domtar Corp., 61 F. Supp. 3d 445, 453 (D. Del. 2014) (“Weyerhaeuser sufficiently pled damages by alleging that it has incurred significant expenses in administering workers compensation claims made by Transferred Employees, and that Domtar has refused to reimburse Weyerhaeuser for these incurred expenses.“); see also VLIW Tech., 840 A.2d at 613 (allegations that “H–P has breached its obligations under the 1990 Agreement by sharing trade secrets and know-how related to the Trace compiler with STM” sufficient to withstand motion to dismiss). However, “[u]nder Delaware law, consequential damages in the form of good will, lost future profits, and lost customers are not awarded in breach of contract actions. The Delaware courts have consistently found these damages to be speculative in nature, and, therefore, have barred recovery for them.” Crowell Corp. v. Himont USA, Inc., No. CIV. A. 86C-11-125, 1994 WL 762663, at *3 (Del. Super. Ct. Dec. 8, 1994) (unpublished) (citations omitted); see also Luxul Tech. Inc. v. Nectarlux, LLC, 78 F. Supp. 3d 1156, 1175-76 (N.D. Cal. 2015) (under California law, “[t]o establish contractual damages, a plaintiff must establish ‘appreciable and actual damage. . . . Nominal damages, speculative harm, or threat of future harm do not suffice to show legally cognizable injury‘” (internal citations and quotations omitted).).
Saffron alleges that “Mr. Rossie‘s illegal conduct to date has not only caused and continues to cause harm to Saffron‘s business but is putting Saffron‘s business in jeopardy. Specifically,
Accordingly, the motion to dismiss the breach of contract claim is denied.
B. Duty of Loyalty
It is a “fundamental principle of Delaware law that the business and affairs of a corporation are managed by or under the direction of its board of directors.” Cede & Co. v. Technicolor, Inc., 634 A.2d 345, 360 (Del. 1993) (citing
Courts “presume[] that in making a business decision the directors of a corporation acted on an informed basis, in good faith, and in the honest belief that the action taken was in the best interests of the company.” In re Walt Disney Co. Derivative Litig., 906 A.2d 27, 52 (Del. 2006). “Those presumptions can be rebutted if the plaintiff shows that the directors breached their fiduciary duty of . . . loyalty or acted in bad faith.” Id. “The failure to act in good faith may result
Saffron alleges that Rossie was a member of its board of directors and was charged with technological support and operations, including creating and maintaining the Company Accounts. Compl. ¶¶ 4, 24-25, 47. After he ended his relationship with Saffron, he remained a director until April 29, 2022. Id. ¶¶ 29, 48. Saffron claims that as a director, Rossie “had a fiduciary duty to the company to return all company property to Saffron, including access and ownership rights to the Company Accounts.” Id. ¶ 48. He breached this duty “by refusing to provide Saffron with administrator rights to the Company Accounts and restoring ownership of the Company Accounts to Saffron,” which “prevented . . . Saffron from engaging in its normal business activities.” Id. ¶ 49; see also id. ¶ 36. Saffron also claims that Rossie acted “in bad faith for the purpose of harming Saffron and to keep Saffron‘s property” and that he acted with the knowledge that Saffron “relied on his services and role as a company director.” Id. ¶¶ 37-38.
Rossie argues that Saffron cannot claim a breach of the duty of loyalty because, per his response to Saffron‘s demand letter, he had already returned his accounts to Saffron by April 7, 2022. Mot. at 7. This contradicts the complaint, which alleges that Rossie “falsely claim[ed]” and “misrepresented” that he had returned account access rights by that date. see Compl. ¶¶ 11, 34. As discussed above, Rossie raises a factual dispute that is irrelevant at the pleadings stage.7
Next, Rossie contends that a board member has a right to access company information. Consequently, he argues Saffron cannot ground its duty of loyalty claim in the allegation that Rossie improperly logged into the Google Workspace because he was still a director at the time. Mot. at 8.8 Rossie‘s argument hinges on the scope of his roles and responsibilities as a director after he separated from Saffron, and whether he was still entitled to unfettered access to the Company Accounts at least during that time period. As previously stated, factual disputes cannot be considered in the present posture.
Accordingly, the motion to dismiss the breach of fiduciary duty claim is denied.
C. Implied Covenant
In order to plead a breach of an implied covenant of good faith and fair dealing, the plaintiff must allege the existence of “a specific implied contractual obligation, a breach of that obligation by the defendant, and resulting damage to the plaintiff.” Anderson v. Wachovia Mortg. Corp., 497 F. Supp. 2d 572, 581-82 (D. Del. 2007) (quoting Fitzgerald v. Cantor, Civ. A. No. 16297-NC, 1998 WL 842316, at *1 (Del. Ch. Nov. 10, 1998)). “The implied covenant requires a party in a contractual relationship to refrain from arbitrary or unreasonable conduct which has the effect of preventing the other party to the contract from receiving the fruits of the bargain.” Dunlap v. State Farm Fire & Cas. Co., 878 A.2d 434, 442 (Del. 2005) (internal quotations and footnotes omitted). “Thus, parties are liable for breaching the covenant when their conduct frustrates the ‘overarching purpose’ of the contract by taking advantage of their position to control implementation of the agreement‘s terms.” Id.
“[T]he implied covenant does not apply when the contract addresses the conduct at issue, but only when the contract is truly silent concerning the matter at hand.” Oxbow Carbon & Mins. Holdings, Inc. v. Crestview-Oxbow Acquisition, LLC, 202 A.3d 482, 507 (Del. 2019) (internal quotations and footnotes omitted); see also Reklam v. Bellator Sport Worldwide LLC, 2017 WL 5172397, at *5 (D. Del. Nov. 8, 2017) (in evaluating an implied covenant claim, the court decides “whether the language of the contract expressly covers a particular issue, in which case the implied covenant will not apply, or whether the contract is silent on the subject, revealing a gap that the implied covenant might fill.“). The court must “assess the parties’ reasonable expectations at the time of contracting and not rewrite the contract to appease a party who later wishes to rewrite a contract he now believes to have been a bad deal.” Nemec v. Shrader, 991 A.2d 1120, 1126 (Del. 2010).
Saffron alleges that the Agreement “contains an implied covenant of good faith and fair dealing under which Mr. Rossie agreed not to take any action that would deprive Saffron of its rights and benefits under the Agreement, and under which Mr. Rossie agreed to perform the conditions of the Agreement fairly, in good faith.” Compl. ¶ 52. Rossie “repeatedly unreasonably breached the covenant . . . and unfairly interfered with Saffron‘s rights to receive the benefits of the Agreement by refusing to provide Saffron with ownership and administrator rights to the Company Accounts, which are not only Saffron‘s property but contain Saffron‘s confidential information.” Id. ¶ 53; see also id. ¶¶ 31-32. As a result, Saffron suffered harm in the form of “compensatory and consequential damages.” Id. ¶ 54.
Rossie argues that the implied covenant claim fails because it is premised on the same conduct as alleged in the breach of contract claim. Neither party disputes that Rossie‘s alleged misconduct involved withholding access to the same accounts. See Compl. ¶¶ 30-31. As discussed above, the Agreement provides for an assignment of all Intellectual Property rights to Saffron. The Agreement does not, however, contain any express provision governing access to the Company Accounts, requiring the return of those accounts to Saffron after Rossie‘s separation from the company, or barring Rossie from generally depriving Saffron of its right and benefits under the Agreement. In other words, it is plausible that the Agreement contained an implied covenant obligating Rossie to forbear from conduct that effectively “prevent[ed Saffron] from receiving the fruits of the bargain.” Dunlap, 878 A.2d at 442. It is also plausible that the parties
Accordingly, the motion to dismiss the implied covenant claim is denied.
D. Computer Fraud and Abuse Act
The CFAA imposes liability for anyone who “intentionally accesses a computer without authorization or exceeds authorized access, and thereby obtains . . . information from any protected computer.”
Any person who suffers damage or loss by reason of a violation of this section may maintain a civil action against the violator to obtain compensatory damages and injunctive relief or other equitable relief. A civil action for a violation of this section may be brought only if the conduct involves 1 of the factors set forth in subclauses (I), (II), (III), (IV), or (V) of subsection (c)(4)(A)(i).
“Thus, a private plaintiff must prove that the defendant violated one of the provisions of § 1030(a)(1)-(7), and that the violation involved one of the factors listed in § 1030[(c)(4)(A)(i)].” LVRC Holdings LLC v. Brekka, 581 F.3d 1127, 1132 (9th Cir. 2009). Those factors are:
(I) loss to 1 or more persons during any 1-year period (and, for purposes of an investigation, prosecution, or other proceeding brought by the United States only, loss resulting from a related course of conduct affecting 1 or more other protected computers) aggregating at least $5,000 in value;
(II) the modification or impairment, or potential modification or impairment, of the medical examination, diagnosis, treatment, or care of 1 or more individuals;
(III) physical injury to any person;
(IV) a threat to public health or safety; or
(V) damage affecting a computer system used by or for an entity of the United States Government in furtherance of the administration of justice, national defense, or national security[.]
The CFAA defines “damage” as “any impairment to the integrity or availability of data, a program, a system, or information.”
Saffron alleges that Rossie “intentionally and without authorization[] accessed Saffron‘s computer systems” after the termination of his engagement with Saffron, including logging into the Google Workspaces account, despite “knowing that he was prohibited from accessing Saffron‘s computer systems.” Compl. ¶¶ 9, 32, 57-58. Rossie “obtained valuable information” that was “valued at over $5,000” “intentionally and without authorization,” causing a loss exceeding $5,000. Id. ¶¶ 57, 60.10
Saffron fails to adequately claim a cognizable “damage” or “loss” that conforms with the “limited parameters” of the CFAA. See Andrews, 932 F.3d at 1262-63. The complaint does not articulate any technological harm or interruption to Saffron‘s computer-related services, nor that Saffron conducted any damages assessments or data restorations in response to Rossie‘s withholding of the Company Accounts.
Saffron points to NovelPoster v. Javitch Canfield Grp., 140 F. Supp. 3d 954 (N.D. Cal. 2014), and Ross v. AT&T Mobility, LLC, No. 19-cv-06669-JST, 2020 WL 9848766 (N.D. Cal. May 14, 2020), but these cases are distinguishable. In NovelPoster, the complaint adequately pleaded a loss where the founders of an online retail company “spent substantial time and energy” to restore lost data and conduct a damage assessment after defendants changed the passwords to NovelPoster‘s accounts and took control of its business. Id. at 956-58, 962. Ross
Accordingly, the motion to dismiss the CFAA claim is granted with leave to amend.
E. Conversion
“A conversion claim arises where there is an ‘act of dominion wrongfully exerted over another‘s personal property in denial of or inconsistent with his rights therein.‘” Florey Inst. of Neuroscience & Mental Health v. Kleiner Perkins Caufield & Byers, 31 F. Supp. 3d 1034, 1041 (N.D. Cal. 2014) (quoting Weiss v. Marcus, 51 Cal. App. 3d 590, 599 (1975)); see also Gonzales v. Pers. Storage, Inc., 56 Cal. App. 4th 464, 476 (1997) (conversion “rests upon the unwarranted interference by defendant with the dominion over the property of the plaintiff from which the injury to the latter results.“).
“The elements of a conversion claim are: (1) the plaintiff‘s ownership or right to possession of the property; (2) the defendant‘s conversion by a wrongful act or disposition of
The complaint alleges that the Company Accounts contained “confidential technical and business information belonging to Saffron” and that through the Agreement Rossie assigned all rights to Intellectual Property to Saffron, thereby conferring ownership rights. Compl. ¶¶ 25-26, 63. After Rossie‘s separation, he continued to withhold administrator access to the Company Accounts despite repeated requests to return access to Saffron‘s confidential information. Id. ¶¶ 7, 30-34, 64, 66. Saffron claimed compensatory and consequential damages, in addition to punitive damages related to Rossie‘s specific intent to harm it. Id. ¶¶ 67-69.
Rossie‘s arguments are similar to those asserted against the other claims and are thus easily dispatched. See Mot. at 11-12. First, his contention that Saffron‘s claim is based entirely on his March 2022 logging onto the Google Workspaces Account is belied by allegations throughout the complaint that Rossie wrongfully withheld access to the Company Accounts after his separation. His next argument, that accessing the accounts was not wrongful because he was still a director, is an inappropriate factual dispute. Contrary to Rossie‘s assertion, the conversion claim does not restate any contractual obligations because the Agreement does not contain any express language governing access to the Company Accounts, as discussed above with respect to the implied covenant claim. Finally, Saffron‘s claim is not based on an alleged conversion of a specific sum of money but rather Rossi‘s unlawful retention of access to the Company Accounts. While some of the Company Accounts are bank accounts, Saffron‘s claim does not deal with any attempt by Rossie to exercise ownership rights over the money in those accounts.
IV. CONCLUSION
For the foregoing reasons, Rossie‘s motion to dismiss the complaint is granted in part and denied in part. Rossie shall file an amended complaint to address the deficiencies in this order by August 8, 2022.
The initial case management conference set for August 3, 2022 is vacated and continued to September 7, 2022. The parties’ joint case management statement is due by August 31, 2022.
IT IS SO ORDERED.
Dated: July 25, 2022
Donna M. Ryu
United States Magistrate Judge
Notes
Compl. ¶ 28.(a) all technology, know-how, information, intellectual property and other materials for or relevant to [Saffron‘s] business as currently conducted and presently proposed to be conduct, including without limitation, all business plans, technical plans, specifications, templates, demonstration versions, equipment, software, devices, methods, apparatus, and product designs (collectively, “Technology“), (b) all precursors, portions and work in progress with respect thereto and all inventions, works of authorship, mask works, technology, information, know-how, materials and tools relating thereto or to the development, production, use, support or maintenance thereof and (c) all copyrights, patent rights, trade secret rights, trademark rights, mask works rights, sui generis data base rights and other intellectual property rights and all business, contract rights and goodwill in, incorporated or embodied in, used to develop or produce or use, or related to any of the foregoing.
Saffron‘s breach of contract and implied covenant claims are based on the written Agreement, and Saffron quotes from or refers extensively to the Agreement. See, e.g., Compl. ¶¶ 5, 10, 27, 28, 31, 43, 66. Saffron does not object to incorporation by reference of the Agreement. See generally Opp‘n. The court finds that incorporation by reference of the Agreement is appropriate and grants Rossie‘s request.
Saffron‘s complaint does not specify the specific sub-sections of