Opinion
2:23-CV-06597-CAS (MAAx)
01-17-2024
SHARON HOFFMAN ET AL v. GOLI NUTRITION, INC. ET AL
Present: The Honorable CHRISTINA A. SNYDER
CIVIL MINUTES - GENERAL
Proceedings: (IN CHAMBERS) DEFENDANT MERICAL, LLC'S MOTION TO DISMISS (Dkt. 15, filed on OCTOBER 27, 2023)
DEFENDANT DLA PIPER LLP (US)'S MOTION TO DISMISS (Dkt. 18, filed on OCTOBER 30, 2023)
THE VMG DEFENDANTS' MOTION TO DISMISS (Dkt. 20, filed on OCTOBER 30, 2023)
DEFENDANTS GOLI NUTRITION INC. (CANADA), GOLI NUTRITION INC. (DELAWARE), DEEPAK AGARWAL, AND MICHAEL BITENSKY'S MOTION TO DISMISS (Dkt. 21, filed on OCTOBER 30, 2023)
I. INTRODUCTION
On August 11, 2023, plaintiffs Sharon and Odelya Hoffman (the “Hoffmans”), RGL Holdings LLC and RGL Management LLC (collectively “RGL”), and Vitamin Friends LLC (“Vitamin Friends”) filed a complaint against defendants Goli Nutrition, Inc. (Canada), Goli Nutrition, Inc. (Delaware) (collectively “Goli”), 12416913 Canada Inc., Deepak Agarwal, Michael Bitensky (Goli, Agarwal, Bitensky, and their affiliated entities are collectively the “Goli defendants”), VMG Partners, LLC, VMG Partners Mentors Circle IV L.P., VMG Partners IV, LP (collectively the “VMG defendants”), MeriCal Inc., and DLA Piper LLP (US). Dkt. 1 (“Compl.”).
The complaint alleges nine claims for relief: (1) Vitamin Friends brings claims pursuant to the Defend Trade Secrets Act against the Goli defendants, the VMG defendants, and MeriCal; (2) the Hoffmans bring claims for fraudulent misrepresentation against the Goli defendants and the VMG defendants; (3) the Hoffmans and RGL Holdings bring claims for breaches of fiduciary duties against Goli and the VMG defendants; (4) RGL Holdings, Vitamin Friends, and Sharon Hoffman bring claims for aiding and abetting against the VMG defendants; (5) the Hoffmans, Vitamin Friends, and RGL Management bring claims for violation of the Racketeer Influenced and Corrupt Organizations Act (RICO) against Goli, Agarwal, and Bitensky; (6) Sharon Hoffman brings claims for securities fraud against Goli, Agarwal, and Bitensky; (7) plaintiffs bring claims for legal malpractice against DLA Piper; (8) plaintiffs bring claims for breach of fiduciary duty against DLA Piper; and (9) RGL Management brings a claim for conversion against Goli. IT
On October 27, 2023, MeriCal filed a motion to dismiss the first cause of action. Dkt. 15. On October 30, 2023, DLA Piper filed a motion to dismiss plaintiffs' complaint pursuant to Federal Rules of Civil Procedure 12(b)(1) and 12(b)(6). Dkt. 18. That same day, the VMG defendants filed a motion for sanctions and a motion to dismiss plaintiffs' complaint pursuant to Federal Rules of Civil Procedure 12(b)(1) and 12(b)(6). Dkts. 19, 20. The Goh defendants also filed a motion to dismiss plaintiffs' complaint pursuant to Federal Rules of Civil Procedure 12(b)(1), 12(b)(6), 13(a), and 17(a). Dkt. 21. On October 31, 2023, DLA Piper filed a motion for sanctions. Dkt. 22.
On December 8, 2023, plaintiffs filed an opposition to MeriCal's motion to dismiss. Dkt. 54. That same day, plaintiffs filed an opposition to the VMG defendants' motion for sanctions and motion to dismiss. Dkt. 55. On December 9, 2023, plaintiffs filed an opposition to the Goli defendants' motion to dismiss. Dkt. 56. That same day, plaintiffs filed an opposition to DLA Piper's motion for sanctions and motion to dismiss. Dkt. 57.
On December 21, 2023, the VMG defendants filed a reply in support of their motion for sanctions and a reply in support of their motion to dismiss. Dkts. 62, 63. On December 22, 2023, MeriCal filed a reply in support of its motion to dismiss. Dkt. 64. That same day, the Goli defendants filed a reply in support of their motion to dismiss. Dkt. 65. DLA Piper also filed a reply in support of its motion to dismiss and a reply in support of its motion for sanctions. Dkts. 66, 67.
On January 1, 2024, plaintiffs filed an ex parte motion for leave to respond to a new factual issue raised in DLA Piper's reply. Dkt. 72. DLA Piper did not file an opposition.
On January 8, 2024, the Court held a hearing. Having carefully considered the parties' arguments and submissions, the Court finds and concludes as follows.
IL BACKGROUND
Plaintiffs allege the following facts in their complaint.
A. Parties
Plaintiffs Sharon Hoffman and Odelya Hoffman are residents of Las Vegas, Nevada. Compl. ¶ 14.
Plaintiff Vitamin Friends LLC is a California Limited Liability Company. Id. ¶ 15. Its sole member is Sharon Hoffman. Id.
Plaintiff RGL Management LLC is a California Limited Liability Company that owns a lease on a gummy manufacturing factory in Gardena, California (the “Gardena facility”), the equipment in the Gardena facility, and a lease on a manufacturing facility in Norco, California (the “Norco facility”). Id. ¶¶ 2, 3, 17. Its sole member is Sharon Hoffman. Id. at 17.
Plaintiff RGL Holdings LLC is a Nevada Limited Liability Company that holds Sharon Hoffman's 75% interest in non-party Better Nutritionals and 100% interest in RGL Management LLC. Id. ¶ 16. Its sole member is Sharon Hoffman. IT
Defendant Goli Nutrition, Inc. (Canada) is a Canadian corporation with its principal place of business in Quebec, Canada. Id. ¶ 18. It is a retail seller and marketer of specially manufactured nutritional supplements, including gummies. Id. From 2018 to 2021, Better Nutritionals was the sole manufacturer of Goli's gummy products. Id.
Defendant Goli Nutrition, Inc. (Delaware) is a Delaware corporation with its principal place of business in West Hollywood, California. Id. ¶ 19. Plaintiffs allege that Goli Nutrition, Inc. (Delaware) is the alter ego of Goli Nutrition, Inc. (Canada) and was formed to enter into equipment purchases and a real estate lease for Better Nutritional's Norco facility.
Defendant 12416913 Canada Inc. (“6913”) is a Canadian corporation with its principal place of business in Quebec, Canada. Id. ¶ 20.
Defendant Deepak Agarwal and Michael Bitensky both reside in Montreal, Canada, co-founded Goli, and served as Goli's Co-Chief Executive Officer/Co-President at all times relevant to this action. Id. ¶¶ 21-22.
Defendant VMG Partners is a private equity investment firm headquartered in San Francisco, California. Id. ¶ 23. It owns investment funds that have invested in Goli. Id. Two members of VMG's management team sit on Goli's board of directors, and a third member of Goli's board was appointed by VMG as an independent director. Id. ¶ 25.
Defendant MeriCal is a manufacturer of private label dietary supplements with a manufacturing facility in Orange, California. Id. ¶ 27. It began producing Goli gummy products in October 2022. IT
Defendant DLA Piper is the United States affiliate of an international law firm headquartered in Chicago, Illinois. Id. ¶ 28. At all relevant times, DLA Piper served as counsel for Better Nutritionals and Sharon Hoffman as well as for defendants Goli, Agarwal, and Bitensky. Id. DLA Piper ceased representing Sharon Hoffman and Better Nutritionals in August 2022. Dkt. 14 at 1.
Plaintiffs filed an errata correcting their complaint with an allegation that “[d]efendant DLA Piper ceased representing Sharon Hoffman and Better Nutritionals in August 15, 2022.” Dkt. 14 at 1. They attached a copy of DLA Piper's disengagement letter, dated August 15, 2022, which notes that DLA Piper has terminated its “representation of Better Nutritionals, LLC with respect to the Alarcon v. Better Nutritionals employee lawsuit.” Dkt. 14-1.
B. Early History of Vitamin Friends and Better Nutritionals
In 2012, the Hoffmans founded Vitamin Friends as a brand of gummy vitamins for children. Compl. ¶ 31. The company manufactured a variety of allegedly pioneering products, including a pectin gummy product and a child vitamin with iron. Id. ¶ 32.
The Hoffmans subsequently developed the Gardena facility where they “developed [Vitamin Friends'] trade secret manufacturing process and formulations.” Id. ¶ 33. The Gardena facility was allegedly the first in the United States to implement the use of starchless gummies and used an innovative organization of equipment on its production lines. Id. ¶ 34. Various national and international distributors approached the Hoffmans regarding their Gardena facility, including Abbot Labs, Nestle, and Pfizer. Id.
In 2015, the Hoffmans incorporated Better Nutritionals as a manufacturer for Vitamin Friends and as a contract manufacturer of nutritional gummy products for third parties. Id. ¶ 37. In 2017, Better Nutritionals sold $300,000 in gummies. Id. ¶ 35. In 2018, they sold $4 million; in 2019, they sold $23 million. Id. By late 2018, Better Nutritionals' Gardena facility had the capacity to manufacture approximately 400,000 bottles of gummy products each month. Id. ¶ 39.
In 2017, Agarwal and Bitensky founded Goli as a retail seller of specially manufactured nutritional supplements such as gummies. Id. ¶ 42. In particular, Goli hoped to market the world's first apple cider vinegar (“ACV”) gummy. Id.
C. Business Relationship between Better Nutritionals and Goli
In 2018, Agarwal approached Better Nutritionals on behalf of Goh and asked if Better Nutritionals could produce an ACV Gummy. Id. ¶ 40. Sharon recognized that existing ACV gummies on the market had an unpleasant smell and taste and created a better-tasting formulation. Id. ¶ 41.
In response, Goli agreed in late 2018 that Better Nutritionals would be Goli's exclusive manufacturer for gummies, and that Goli would buy all gummies that Better Nutritionals could produce. Id. The two companies agreed to payment terms whereby Goli would pay a fixed fee per bottle along with 50% of the total cost of each order upfront, with the remaining 50% due upon completion of the order. Id. ¶ 45. The two parties entered into a series of transactions pursuant to these payment terms. Id. ¶ 47.
In May 2019, Agarwal assured Sharon that Goli would continue buying every bottle of Goli gummies that Better Nutritionals could produce and “boasted that Better Nutritionals could not produce bottles fast enough to meet Goli's needs.” Id. ¶ 48. Shortly thereafter, the two companies shifted to a demand-based ordering process whereby Goli would submit “sales forecasts” and “blanket purchase orders” at regular intervals which Better Nutritionals would “immediately act upon by reserving production capacity, ordering ingredients, beginning production, and planning for future production.” Id. ¶ 49.
Between 2018 and mid-2021, the two companies entered into additional transactions for consistently increasing purchase orders. Id. ¶¶ 51, 54. During this period, Goli obtained national exposure and demand skyrocketed. Id. ¶ 54. In 2019, Goli projected demand for millions of bottles per month, and Better Nutritionals correspondingly upgraded its Gardena facility to bring capacity to 1.2 million bottles per month. Id. ¶ 55. However, in August 2019, Goli submitted a purchase order for 2.9 million bottles per month and asked Better Nutritionals to expand its manufacturing capacity five-fold. Id. ¶ 56.
In 2019, Hoffman agreed to submit Better Nutritionals ACV formulation to the United States Patent and Trademark Office (USPTO) for a compositional patent. Id. ¶ 52. Agarwal's close relative Ismael, a partner at DLA Piper, was in charge of the patent application. Id. In consideration of Goli's promise of “exclusivity” to Better Nutritionals, Sharon agreed to have Goli's principals, and their wives or girlfriends, named as inventors on the patent application and agreed to assign the patent to Goli. IT However, Goli ultimately failed to prosecute the patent application as promised. IT
D. Alleged Conspiracy
In early 2020, Goli and the VMG defendants allegedly “engineered a multipronged plan to ensure that Better Nutritionals would become almost entirely dependent upon Goli.” Compl. ¶ 57. The alleged plan involved “a series of complex contracts with Better Nutritionals and third parties” where “both Goli and Better Nutritionals were represented by [d]efendant DLA Piper despite the obvious conflicts of interest presented by the dual representation.” Id. DLA Piper allegedly breached its fiduciary duties to Better Nutritionals and Sharon Hoffman by “prepar[ing] agreements that dramatically favored the interests of Goli and disregarded the interests of Better Nutritionals and Sharon Hoffman.” Id. ¶¶ 57, 65.
Goli also allegedly convinced Sharon Hoffman to get Better Nutritionals to open the Norco facility-a 420,000 square foot facility in Norco, California. Id. ¶ 58. An expansion of this magnitude entailed substantial financial risk. Id. On the lease for the Norco facility, Agarwal convinced Better Nutritionals to identify Goli as the “tenant” and Better Nutritionals as the “guarantor.” Id. ¶ 59. On Better Nutritionals' contract for manufacturing-related IT services and equipment, Goli was identified as the “customer” and Better Nutritionals was identified as the “guarantor.” Id. These agreements ensured that Goli would “obtain[] title to the equipment [in the Norco facility] and control over Better Nutritionals['] occupancy, even though Better Nutritionals made all payments for rent, paid the security deposit. . . and paid tens of millions for the [] equipment and Id. services.” Id. While Agarwal initially promised that the lease and title to the equipment would be transferred to Better Nutritionals on demand, he allegedly reneged on this promise. Id. ¶ 60.
In the same year, Goli allegedly engineered a fraudulent stock swap transaction (the “Stock Swap”) where 6913 obtained a 25% interest in Better Nutritionals (that 6913 assigned to Goli) in exchange for a 3% interest in Goli. Id. ¶ 62. The Goli defendants allegedly “fraudulently claimed” that the swapped interests were equal in value, despite knowing that “at that time the 25% interest in Better Nutritionals Goli received was substantially more valuable than [the] 3% interest in Goli given to Sharon Hoffman.” Id. The Stock Swap agreements also allegedly contained “extraordinarily onerous restrictions on Better Nutritionals and Sharon Hoffman, including in particular, . . . restrictions on the ability of Better Nutritionals to manufacture for customers other than Goli. . . and restrictions on the ability of Sharon Hoffman to sell his 75% equity to a willing buyer.” Id. ¶ 63.
The Goli defendants allegedly owe a fiduciary duty to both Better Nutritionals and Sharon as a result of their minority interest in Better Nutritionals and the provisions in contractual agreements authorizing Agarwal and Bitensky to act as Sharon's agent and representative in connection with his role as a shareholder of Goli. Id ¶ 64.
In the fall of 2020. Goli engaged Centerview Partners to explore a sale of Goli. Id ¶ 66.
In 2021, Better Nutritionals hired 600 employees to staff the Norco facility to keep up with Goli's sales forecasts and paid over $200 million to obtain materials and support for Goli products. Id ¶¶ 67-68. Better Nutritionals' projected production capacity for Goli products was set to increase from 4,759,772 bottles per month in April 2021 to 12,762,753 bottles by December 2021, with the goal of reaching 28 million bottles per month by the third quarter of 2022. Id. ¶ 70.
On July 16, 2021, Goli submitted a purchase order for 75 million bottles in exchange for $281 million and, in the same month, gave a verbal purchase order for another 300 million bottles for $1.125 billion over a three-year period. Id ¶¶ 71-72. While doing so, Goli and the VMG defendants were allegedly aware that “Goli would not use and would never pay for all of the products ordered.” Id. ¶ 71. Somewhere around this time, Agarwal reached a deal with VMG whereby VMG would invest in Goli. Id ¶ 72. VMG “never complained to or questioned Goli about the fact that Goli's projections were unreasonable, and agreed with Goli that the false projections would put pressure on Better Nutritionals to ultimately sell its business to a firm aligned with Goli.” Id.
On August 10, 2021, Goli announced that it was cutting its sales forecasts for August and December by 56%. Id. ¶ 74. It also dropped its 2022 estimates from 15 million bottles per month to 6-7 million bottles per month. Id. Additionally, it announced that it would not be honoring the full July purchase order and instead had a surplus in its warehouses of 12-14 million bottles. Id. ¶ 75. Plaintiffs allege that Goli “knew before May 2021 that it was unable to sell any of the additional bottles that Better Nutritionals was producing in May, June and July.” Id. ¶ 76. They allege that Agarwal fraudulently stated that he had only learned of the drop in consumer demand in June of 2021, when in fact “Goli was aware of a drop in consumer demand long before that.” Id.
After the August 2021 meeting, Goli continued to insist that Better Nutritionals keep a 40% “buffer” capacity over the purchase amount Goli forecasted and insisted that “Better Nutritionals [] not onboard Goli competitors or use the Goli mold/bottle.” Id. ¶ 78. This restriction severely limited the customers Better Nutritionals could work for and exposed Better Nutritionals to substantial penalty payments. Id.
In October 2021, VMG Partners closed on a $100 million investment for a 4.5% equity stake in Goli. Id. ¶¶ 83, 85. As a 3% owner of Goli, Sharon told Agarwal that he should have been notified and offered the right to participate in the VMG purchase of equity. Id. ¶ 86. He alleges that Goli declined to include him in the sale of equity to hide information that Goli had provided to VMG. Id. Agarwal represented that VMG would be having an Initial Public Offering in a few months which would increase the value of Sharon's stock in Goli. Id. ¶ 87. Plaintiffs contend this representation was knowingly false. Id. Instead, Agarwal planned to force Better Nutritionals into a sale to a buyer who was committed to expanding Goli's business. Id. ¶ 88. Shortly thereafter, Goli presented Better Nutritionals with a sales forecast for the first half of 2022 of only 600,000 bottles per month, a 94% decline. Id. ¶ 89.
In October 2021, Goli projected Id. would buy 250,000 bottles of gummies from MeriCal, a producer of gummy products and a competitor of Better Nutritionals. Id. ¶ 100. In November 2021, Goh projected it would purchase 500,000 bottles from MeriCal. IT
In November 2021, Yundi Liang, an employee of Better Nutritionals with significant familiarity with Better Nutritionals' confidential suppliers and trade secret processes, left Better Nutritionals and began working at MeriCal. Id. ¶ 90. Around this time. Better Nutritionals also hired a former MeriCal employee as a production employee, meaning she would have access to Better Nutritionals' batch records, cooking sheets, recipes, and confidential information about suppliers. Id. ¶ 92. This employee worked at Better Nutritionals for two weeks, then left to allegedly return to work for MeriCal and/or pass on information to MeriCal. Id.
Better Nutritionals was informed by one of its vendors, Herbstreith & Fox, that MeriCal had asked them about the exact formulation of pectin (the main raw material Better Nutritionals uses in its gummy products) that Better Nutritionals purchased from Herbstreith & Fox. Id. ¶ 91. Furthermore, MeriCal referenced the item number specifically, even though the item number was not published and was known only by Herbstreith & Fox and Better Nutritionals. Id.
Around this time. Better Nutritionals also learned that Goli and MeriCal had called Better Nutritionals' flavor supplier. Custom Flavors, and sought the exact flavor that Better Nutritionals used to manufacture Goli gummies. Id. ¶ 93. Plaintiffs allege that MeriCal obtained confidential, non-public information about Better Nutritionals' suppliers and manufacturing processes, potentially from employees who were bound by confidentiality agreements. Id.
In March 2022, the Hoffmans met with Goli directors appointed by VMG and explained that Goli's repeated misrepresentations about its need for product and continued refusal to honor payments due were placing enormous pressure on Better Nutritionals. Id. ¶¶ 94-95. Goli and Better Nutritionals subsequently entered into a new agreement (the “March 2022 Agreement”) that eliminated the overly broad definition of “competing products” contained in the Stock Swap agreements and instead defined restricted “competing products” as only ACV gummies and ashwagandha gummies. Id. ¶ 96. Id. also provided strong assurances that forecasts would, in the future, be binding and honored. Id. ¶ 97. Goli allegedly failed to live up to these terms. Id.
In July 2022, Agarwal and Bitensky informed Sharon and Better Nutritionals that the terms of Goli's deal with VMG required Goli to work with other gummy manufacturers to produce Goli-branded products. Id. ¶ 99. This term conflicted with Goli's commitment that Better Nutritionals would be Goli's exclusive distributor, and this was the first time that Better Nutritionals allegedly learned of this contract term which was supposedly agreed to nearly a year earlier. Id.
Allegedly as a result of defendants' actions, Better Nutritionals was unable to meet its recently increased financial obligations. Id. ¶ 7. Goli sought to force Better Nutritionals to accept an offer from a third-party buyer valuing the company at under $90 million. Id. ¶ 108. Instead, Better Nutritionals sued Goh for $180 million for orders that it placed throughout 2022 and also sued DLA Piper for malpractice and breaches of fiduciary duty. Id. ¶ 110.
Better Nutritionals ultimately filed for bankruptcy, first filing for Chapter 11 reorganization and later for Chapter 7 liquidation. Id. ¶ 7. Its claims now belong to the Trustee, who has dismissed them without prejudice and is considering the claims he wishes to pursue. Id. ¶ 110.
III. LEGAL STANDARD
A motion pursuant to Federal Rule of Civil Procedure 12(b)(6) tests the legal sufficiency of the claims asserted in a complaint. Under this Rule, a district court properly dismisses a claim if “there is a Tack of a cognizable legal theory or the absence of sufficient facts alleged under a cognizable legal theory.'” Conservation Force v. Salazar, 646 F.3d 1240, 1242 (9th Cir. 2011) (quoting Balisteri v. Pacifica Police Dep't, 901 F.2d 696, 699 (9th Cir. 1988)). “While a complaint attacked by a Rule 12(b)(6) motion to dismiss does not need detailed factual allegations, a plaintiff s obligation to provide the ‘grounds' of his ‘entitlement to relief requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do.” Bell Atlantic Corp, v. Twombly, 550 U.S. 544, 555 (2007). “[F]actual allegations must be enough to raise a right to relief above the speculative level.” IT
In considering a motion pursuant to Rule 12(b)(6), a court must accept as true all material allegations in the complaint, as well as all reasonable inferences to be drawn from them. Pareto v. FDIC. 139 F.3d 696, 699 (9th Cir. 1998). The complaint must be read in the light most favorable to the nonmoving party. Sprewell v. Golden State Warriors, 266 F.3d 979, 988 (9th Cir. 2001). However, “a court considering a motion to dismiss can choose to begin by identifying pleadings that, because they are no more than conclusions, are not entitled to the assumption of truth. While legal conclusions can provide the framework of a complaint, they must be supported by factual allegations.” Ashcroft v. Iqbal, 556 U.S. 662, 679 (2009); see Moss v. United States Secret Service, 572 F.3d 962, 969 (9th Cir. 2009) (“[F]or a complaint to survive a motion to dismiss, the non-conclusory ‘factual content,' and reasonable inferences from that content, must be plausibly suggestive of a claim entitling the plaintiff to relief”). Ultimately, “[determining whether a complaint states a plausible claim for relief will... be a context-specific task that requires the reviewing court to draw on its judicial experience and common sense.” Iqbal, 556 U.S. at 679.
Unless a court converts a Rule 12(b)(6) motion into a motion for summary judgment, a court cannot consider material outside of the complaint (e.g., facts presented in briefs, affidavits, or discovery materials). In re American Cont'l Corp./Lincoln Sav. & Loan Sec. Litig., 102 F.3d 1524, 1537 (9th Cir. 1996), rev'd on other grounds sub nom Lexecon, Inc, v. Milberg Weiss Bershad Hynes & Lerach, 523U.S.26(1998). A court may, however, consider exhibits submitted with or alleged in the complaint and matters that may be judicially noticed pursuant to Federal Rule of Evidence 201. In re Silicon Graphics Inc. Sec. Litig., 183 F.3d 970, 986 (9th Cir. 1999); see Lee v. City of Los Angeles, 250 F.3d 668, 689 (9th Cir. 2001).
As a general rule, leave to amend a complaint which has been dismissed should be freely granted. Fed.R.Civ.P. 15(a). However, leave to amend may be denied when “the court determines that the allegation of other facts consistent with the challenged pleading could not possibly cure the deficiency.” Schreiber Distnb. Co. v. Serv-Well Furniture Co., 806 F.2d 1393, 1401 (9th Cir. 1986).
TV. DISCUSSION
A. Standing and Real Party in Interest
The crux of defendants' standing argument is that plaintiffs cannot sue based on alleged injuries to non-party Better Nutritionals.
The Goli defendants argue that plaintiffs “have no standing to bring the fraudulent misrepresentation, breach of fiduciary duty, or RICO claims,” as they are all “premised on injuries purportedly suffered by Better Nutritionals.” Dkt. 21 at 17. They note that limited liability companies (LLCs) are distinct legal entities, separate from their stockholders or members. Id. at 18. Asa result, “their owners and members cannot be directly injured when the company is improperly deprived of. . . assets.” Id. Similarly, DLA Piper argues that only the Better Nutritionals corporate entity may bring claims for harm that it has suffered, and the VMG defendants argue that plaintiffs' “status as mere investors in Better Nutritionals does not confer standing to assert claims against VMG.” Dkt. 18-1 at 18; dkt. 20 at 9. Although plaintiffs allege that they suffered “direct[] injuries] by virtue of the[] loss of their equity in Better Nutritionals and resultant loss of business opportunities and harm to their reputations,” the Goli defendants argue that “none of these claimed injuries have [their] origin in circumstances independent of the plaintiff s status as a shareholder or are otherwise not incidental to an injury to Better Nutritionals.” Dkt. 21 at 18 (citing Hilliard v. Harbour, 12 Cal.App. 5th 1006, 1013 (2017)) (internal citations and modifications omitted).
Moreover, the Goli defendants and the VMG defendants argue that, because Better Nutritionals filed for bankruptcy, the Trustee is the real party in interest with standing to assert these claims. Dkt. 21 at 18; dkt. 20 at 8-9. Thus, the VMG defendants argue that plaintiffs filed this action “to end-run the bankruptcy trustee's authority and steal claims that rightfully belong to the Better Nutritionals' bankruptcy estate.” Dkt. 20 at 9.
Additionally, the Goli defendants contend that RGL Management and Vitamin Friends are entities independent from Better Nutritionals and thus may not pursue claims based on harm to Better Nutritionals. Dkt. 21 at 19. They also assert that RGL management lacks standing to assert its conversion claim, both because it is not the proper party and because its claim is not yet ripe. Dkt. 21 at 17-18. Specifically, “any conduct by Goh as to the Trustee is [allegedly] not actionable by RGL Management” and is only actionable by the Trustee. Id. at 18-19. Regardless, the auction has not yet occurred, so no conversion has occurred. Id. at 18.
DLA Piper further argues that plaintiffs lack standing because they do not allege that DLA Piper harmed any plaintiff. Dkt. 18-1 at 16. For example, while plaintiffs allege that DLA Piper caused “Better Nutritionals and Sharon Hoffman [to be] prohibited from engaging in business with other customers,” DLA Piper argues that plaintiffs do not explain how Sharon Hoffman was “prohibited” or how he personally tried to engage in such business. IT; see also Compl. ¶¶ 145, 149. Regarding restrictions on Sharon Hoffman's ability to sell his equity, DLA Piper argues that plaintiffs do not explain what exactly these restrictions were or how they “actually harmed him.” Dkt. 18-1 at 17. Finally, DLA Piper asserts that plaintiffs do not support their conclusory allegation that “Sharon Hoffman has been damaged,” such that the allegation is “irrelevant to the standing analysis.” Id. at 17-18; see also Compl. ¶¶ 146, 150.
Moreover, since this contractual provision was “eliminated” in 2022, DLA Piper asserts that the statute of limitations would have run five months before the complaint was filed. Dkt. 18-1 at 17.
In opposition, plaintiffs argue that, under California law, “a stockholder may sue as an individual where he is directly and individually injured although the corporation may also have a cause of action for the same wrong.” Dkt. 55 at 6 (citing Sutter v GenPetroleum Corp., 28 Cal.2d 525, 530-531 (1946)). Here, plaintiffs argue they have “clearly allege[d] injuries distinct from the injuries to Better Nutritionals.” Dkt. 56 at 9; dkt. 57 at 7. They cite “lost business opportunities, reputational injury, years of almost unimaginable personal anxiety, depression and stress, in addition to direct financial loss.” Dkt. 56 at 10. According to plaintiffs, defendants' torts “were aimed not just at Better Nutritionals, but at Sharon Hoffman personally.” Id. Finally, with respect to DLA
Piper's claims, plaintiffs argue that pursuant to Rule 8, plaintiffs may allege damage in conclusory terms. Dkt. 57 at 15.
In reply, the VMG defendants argue that “[p]laintiffs have not alleged any facts from which the Court may find standing and, in making the same allegations they previously made on behalf of Better Nutritionals, have effectively conceded that they are not the real parties in interest pursuant to Rule 17.” Dkt. 63 at 2. They explain that courts may dismiss cases at the pleading stage on standing grounds, particularly when Id. is clear that a party's claim for relief is not direct but derivative of an entity's claim. Id.
Similarly, the Goh defendants argue in reply that plaintiffs lack standing because “the only injuries alleged ... are incidental to those suffered by Better Nutritionals and originate from [plaintiffs' ownership interests in this entity.” Dkt. 65 at 8. They contend that Sharon's claim that the Goli defendants impaired his “production capacity” is contradicted by other allegations in the complaint, where plaintiffs “aver that Better Nutritionals, not Sharon personally, occupied the entirety of the facility where the products were made.” Id. at 10. They distinguish the cases upon which plaintiffs rely, arguing that each case makes it clear that “in order for an individual action to lie, the harm alleged to the individual must not be incidental to the harm to the corporation.” Id. at 11. The Goli defendants also reiterate that RGL Management's claim for conversion fails because “[s]uch claim may only be brought by the Trustee . . . [because] the Trustee has ownership or control over the sale of the assets of Better Nutritionals' bankruptcy estate.” Id. at 12.
DLA Piper argues in reply that the complaint is “filled with allegations of harm suffered by non-party Better Nutritionals . . . [but] has no factual allegations of harm to any [p]laintiff personally.” Dkt. 66 at 13. Id. underscores that plaintiffs “cannot avoid dismissal by conclusorily alleging harm untethered to well-pleaded factual allegations.” Id. at 14. Further, DLA Piper contends that an alleged injury of “unimaginable personal anxiety, depression and stress” is a conclusory assertion; moreover, “mental distress is not even recoverable on [p]laintiffs' claims against DLA.” Id. at 15.
The Court finds that plaintiffs lack standing to bring their claims, with the exception of Vitamin Friends' claims for trade secret infringement and Sharon Hoffman's claims for securities fraud. The Court addresses the standing of each plaintiff in turn.
At the hearing, the Court noted that it would consider defendant DLA Piper's statute of limitations arguments while ruling on the instant motions. Because the Court has dismissed all claims against DLA Piper for lack of standing, it does not reach the statute of limitations issue at this juncture.
1. Sharon Hoffman & Odelya Hoffman
The Hoffmans bring claims against the Goli defendants for fraudulent misrepresentation, breach of fiduciary duty, and violation of RICO; Sharon Hoffman brings additional claims for securities fraud. Similarly, the Hoffmans bring claims against the VMG defendants for fraudulent misrepresentation and breach of fiduciary duty; Sharon Hoffman brings an additional claim for aiding and abetting. The Hoffmans also bring claims against DLA Piper for legal malpractice and breach of fiduciary duty. They allege that defendants have “caused the[m] numerous lost business opportunities, reputational injury, years of almost unimaginable personal anxiety, depression and stress, in addition to direct financial loss.” Compl. ¶ 8. They additionally allege that defendants' wrongful acts resulted in Better Nutritionals' bankruptcy which injured the Hoffmans by “subject[ing] [them] to suits against them personally.” Id. ¶ 13. Finally, they allege that Goli made “defamatory and disparaging statements” during the bankruptcy proceedings which “caused reputational injury to the Hoffmans.” Id.
None of the plaintiffs have brought a claim for defamation. Accordingly, this alleged injury does not provide the Hoffmans with standing to assert the claims described in the complaint.
As an initial matter, it does not appear that Odelya Hoffman has suffered an injury that provides a basis for standing in this case. Plaintiffs do not allege that any of the defendants owed Odelya Hoffman a fiduciary duty, nor do they allege that Odelya Hoffman owned shares in any of the companies relevant to this case. They also do not allege that any of the defendants made any fraudulent misrepresentations to Odelya Hoffman herself. Similarly, they do not allege that Odelya Hoffman was injured in any way by DLA Piper. Accordingly, the Court dismisses Odelya Hoffman's claims for lack of standing.
The Court also finds that Sharon Hoffman's claims are not independent of his status as a shareholder in Better Nutritionals, with the exception of his claims for securities fraud. But for his shareholder status, Sharon Hoffman would not have been injured by defendants' conduct. His alleged financial injuries, such as “loss of. . .equity in Better Nutritionals, loss of money . . . advanced to Better Nutritionals[,] and loss of income from Better Nutritionals” arise directly from his shareholder status in the company. See Compl. ¶ 123. His alleged nontangible losses, such as “loss of business opportunities, loss of. . . first mover advantage,” “humiliation, anxiety[,] and depression” are merely incidental to the alleged harm to Better Nutritionals. See id. Even if the emotional damages were not considered incidental, they are not a basis for recovery under any of the claims that Sharon Hoffman has pled. However, Sharon Hoffman's claims for securities fraud are allegedly based on a Stock Swap where he personally exchanged a 25% interest in Better Nutritionals for an allegedly less valuable 3% interest in Goli. This is sufficient to provide him with standing to assert securities fraud claims.Additionally, Sharon Hoffman was allegedly personally represented by DLA Piper in connection with negotiations involving Goli and Better Nutritionals. Compl. ¶ 57. However, while this relationship may have provided some basis for standing to assert claims for legal malpractice and breach of fiduciary duty against DLA Piper, the Court finds that Sharon Hoffman has not pled with sufficient particularity the actual harm that he suffered as a result of DLA Piper's conduct. He merely claims that, “[b]ut for DLA Piper's malpractice,” “Better Nutritionals would not have been in” a poor business position, and makes conclusory claims that he “has[] been damaged as a result of [DLA Piper's malpractice]” and “as a result of DLA Piper's breach of fiduciary duty.” See Compl. ¶¶ 145, 146, 149, 150 (emphasis added). Accordingly, the Court dismisses all of Sharon Hoffman's claims for lack of standing except for his claims for securities fraud. The Court grants Sharon Hoffman leave to amend his complaint to plead, with additional specificity, harms that he personally suffered as a result of his representation by DLA Piper. The Court notes that, as explained above, such harms must be independent of Sharon Hoffman's status as a shareholder of Better Nutritionals.
The Court separately dismisses Sharon Hoffman's securities fraud claims on other grounds described below.
2. Vitamin Friends
Vitamin Friends brings a claim against the Goli defendants for violation of RICO and a claim against the VMG defendants for aiding and abetting. It also brings claims against DLA Piper for legal malpractice and breach of fiduciary duty. Additionally, Vitamin Friends brings claims for trade secret infringement against the Goh defendants, the VMG defendants, and MeriCal.
The Court finds that Vitamin Friends lacks standing to assert its claims for violation of RICO, legal malpractice, and breach of fiduciary duty. Vitamin Friends has not alleged, with any specificity, any harm that it suffered as a result of the alleged RICO conspiracy between the defendants. Nor is Vitamin Friends mentioned anywhere in the portion of the complaint describing the claims for legal malpractice and breach of fiduciary duty against DLA Piper. However, Vitamin Friends is allegedly “the owner of the trade secret formulations of Vitamin Friends products” and claims that its trade secrets were misappropriated. See Compl. ¶¶ 113, 115. This is sufficient to provide it with standing to assert claims for trade secret misappropriation.
The Court separately addresses Vitamin Friends' claims for trade secret misappropriation below and dismisses the claims on other grounds.
Accordingly, the Court dismisses Vitamin Friends' claims for violation of RICO, legal malpractice, and breach of fiduciary duty for lack of standing.
3. RGL Holdings & RGL Management
RGL Holdings brings claims for fraudulent misrepresentation and breach of fiduciary duty against the Goli defendants. It also brings claims for breach of fiduciary duty and aiding and abetting against the VMG defendants. RGL Management brings claims for violation of RICO and conversion against the Goli defendants. Both entities bring claims for legal malpractice and breach of fiduciary duty against DLA Piper.
The Court finds that RGL Holdings' claims are not independent of its status as a shareholder in Better Nutritionals. RGL Holdings' only relation to this case appears to be its ownership of Sharon Hoffman's 75% interest in Better Nutritionals and 100% of Sharon Hoffman's interest in RGL Management. See Compl. ¶¶ 6, 17. It does not allege that it has suffered any independent injury unrelated to its ownership of Sharon Hoffman's interest in Better Nutritionals. It is not mentioned anywhere in the portion of the complaint describing the claims for legal malpractice and breach of fiduciary duty against DLA Piper. Accordingly, the Court dismisses RGL Holdings' claims for lack of standing.
The Court is unaware of any authority suggesting that a corporate shareholder is treated differently than an individual shareholder for purposes of standing. Accordingly, RGL Holdings must have suffered an independent injury to have standing to assert its claims.
The Court also finds that RGL Management lacks standing to bring claims in this action. RGL Management's only relation to this case appears to be its ownership of the lease on the Gardena facility as well as the equipment at the Gardena facility and the Norco facility. See Compl. ¶ 17. RGL Management has not alleged, with any specificity, any harm that it suffered as a result of the alleged conspiracy between the defendants. Nor has it alleged that it was represented at any time by DLA Piper. It additionally appears that the Better Nutritional's Chapter 7 Trustee, as the party with ownership or control over the sale of assets of Better Nutritional's bankruptcy estate, is the only party with standing to assert a conversion claim against Goli for alleged interference. Accordingly, the Court dismisses RGL Management's claims for lack of standing.
4. Conclusion
Accordingly, the Court dismisses plaintiffs' claims for lack of standing, with the exception of Vitamin Friends' claims for trade secret infringement and Sharon Hoffman's claims for securities fraud.
B. Barred by Failure to Raise Compulsory Counterclaims
The Goli defendants and the VMG defendants argue that Sharon Hoffman is barred from prosecuting this case pursuant to Federal Rule of Civil Procedure 13 because Goli filed a separate suit in the Central District on March 24, 2023, Goli Nutrition Inc, v. Sharon Hoffman. No. 5:23-cv-00514-GW-KKx (C.D. Cal.), regarding the same subject matter: the business relationship between Sharon and Goli, in connection with Better Nutritionals, and the manufacture of ACV gummies. Dkt. 20 at 19-20; dkt. 21 at 30. According to the Goli defendants and the VMG defendants, Sharon Hoffman filed an answer in that action on August 10, 2023, but failed to assert the claims in this action as counterclaims, despite the fact that they arise out of the “same transaction or occurrence” and are thus compulsory. Dkt. 20 at 19-20; dkt. 21 at 30.
In opposition, plaintiffs argue that “[t]he claims in this case are not compulsory counterclaims in the pending Goli v. Hoffman litigation, and dismissal of this action would be inappropriate even if they were.” Dkt. 55 at 21. Plaintiffs cite Mattel, Inc v. MGA Ent., Inc.. 705 F.3d 1108, 1110 (9th Cir. 2013), to argue that the claims in this case do not sufficiently “arise out of the same transactions and occurrences” as those asserted in the Goli action. Dkt. 55 at 27-28; see also Mattel, Inc. 705 F.3d at 1110 (“What matters is not the legal theory but the facts. ‘[E]ven the most liberal construction of [‘transaction'] cannot operate to make a counterclaim that arises out of an entirely different or independent transaction or occurrence compulsory under Rule 13(a).'” (citation omitted)). According to plaintiffs, “[t]he claims in the Goli Action arise out of Goli's alleged rights as a minority investor in Better Nutritionals to receive distributions pari passu, and to complain about alleged inappropriate expenses,” and Goli alleges “that Sharon did not agree to sell his interest in Better Nutritionals to a potential acquirer.” Dkt. 55 at 27-28.
In reply, the VMG defendants assert that plaintiffs fail to respond to this argument in their opposition and that their claims must be dismissed pursuant to Rule 13 because “the gravamen of Goli's complaint concerns the same gummy manufacturing dispute that is the center of Mr. Hoffman's claims against [d]efendants here.” Dkt. 63 at 7-8.
The Goh defendants argue in reply that “the Stock Swap, the reduction of Goli's forecasts and its impact on the relationship and business dealings between Better Nutritionals and Goli, and the equipment at the Norco facility,” are “precisely the same” transactions and factual occurrences from which the claims in both Goh and this action arise, even if the claims may rely on different legal theories. Dkt. 65 at 20. For example, while Goli alleges in their complaint that the Stock Swap transaction was valid, Sharon alleges in this action that he is “entitled to void the purchase.” Id.; see also Compl. ¶ 143. As such, the Goli defendants argue that Mattel, Inc, does not apply here. Dkt. 65 at 20. Because all of Sharon Hoffman's claims must be asserted in Goh as compulsory counterclaims, the Goli defendants argue that Sharon Hoffman should be dismissed from this action. Id. at 20-21.
Counterclaims are governed by Rule 13 of the Federal Rules of Civil Procedure, which categorizes counterclaims as either compulsory or permissive. See Fed.R.Civ.P. 13. A compulsory counterclaim is one that “arises out of the transaction or occurrence that is the subject matter of the opposing party's claims.” Fed.R.Civ.P. 13(a)(1)(A). The Ninth Circuit applies the “logical relationship test” to determine whether a counterclaim is compulsory. Pochiro v. Prudential Ins. Co.. 827 F.2d 1246, 1249 (9th Cir. 1987). Applying the logical relationship test, the court must examine “whether the essential facts of the various claims are so logically connected that considerations of judicial economy and fairness dictate that all the issues be resolved in one lawsuit.” Id.
Even if the Court did not dismiss Sharon Hoffman's claims for lack of standing, the Court may independently dismiss them because they should have been brought as compulsory counterclaims in the Goh v. Hoffman litigation. As explained above, Sharon Hoffman brings claims against the Goli defendants for fraudulent misrepresentation, breach of fiduciary duty, violation of RICO, and securities fraud. Similarly, he brings claims against the VMG defendants for fraudulent misrepresentation, breach of fiduciary duty, and aiding and abetting. Finally, he brings claims against DLA Piper for legal malpractice and breach of fiduciary duty.
Upon review of the complaint in the Goh litigation, it appears that several of plaintiffs' claims in this action arise out of the same transactions and occurrences as those alleged by Goli. Specifically, the allegations set forth in both complaints arise from the same factual underpinnings: the business relationship between Goli and Sharon Hoffman with regards to the ACV gummy, representations and subsequent reliance by the parties, a new manufacturing facility and equipment, and the potential sale and eventual nonsale of Better Nutritionals. See dkt. 1; see also Goli Nutrition Inc, v. Sharon Hoffman, No. 5:23-cv-00514-GW-KKx (C.D. Cal.), dkt. 1. Moreover, while Sharon Hoffman has standing to bring his securities fraud claim in this action, his claim arises from the exact Stock Swap transaction that is at issue in the Goli action. See Goh Nutrition Inc, v. Sharon Hoffman. No. 5:23-cv-00514-GW-KKx (C.D. Cal.), dkt. 1 ¶¶ 31-46. Therefore, Sharon Hoffman forfeited his right to bring his securities fraud claims by failing to bring them as compulsory counterclaims.
At the hearing on January 8, 2024, counsel for plaintiff identified two of the Court's prior cases-York v. International Academy of Film & Television, LLC and Casas v. Brightwater Inf 1, Inc.-in which the Court concluded that the claims at issue were not compulsory counterclaims. In York, the defendant initiated an action in Florida state court against the plaintiff after the plaintiff had filed suit in this Court. See York v. Infl Acad, of Film & Television, LLC. No. 214CV09422CASFFM, 2016 WL 3360953, *2 n.2 (C.D. Cal. June 13, 2016). After reviewing the complaint in the Florida action, the Court found that the Florida action was “not in the nature of a compulsory counterclaim” because, even though it involved the same parties, “it concerned] a substantively distinct claim for breach of contract.” Id. In Casas, the Court dismissed the defendant's counterclaims for lack of subject matter jurisdiction, even declining to exercise supplemental jurisdiction over them as permissive counterclaims, finding that “[t]he only tenuous connection between the two claims [was] the existence of an employment relationship between plaintiffs and defendants.” See Casas v. Brightwater Inf 1, Inc., 2011 U.S. Dist. LEXIS 15287, *10-*l 1. Thus, in both cases, the Court found that the claims asserted by the parties did “not arise out of the same transaction or occurrence.” Id. at *10.
Here, however, it appears to the Court that Sharon Hoffman's claims for fraudulent misrepresentations, for breach of fiduciary duties, for violation of RICO, and for securities fraud, “rest on the same ‘aggregate core of facts'” as Goli's claims in the Goh litigation. Mattel, Inc, 705 F.3d at 1110. As the Ninth Circuit explained in Mattel. Inc, the Court must focus on the “facts” upon which the parties' claims are based rather than the parties' legal theories to determine whether the claims should have been brought as compulsory counterclaims. Id. Upon reviewing the facts alleged in both complaints, the Court finds that Sharon Hoffman's claims, with the exception of those asserted against DLA Piper, should have been brought as compulsory counterclaims in the Goli litigation and accordingly dismisses them from this action. See 6 Charles A. Wright & Arthur R. Miller, Federal Practice & Procedure § 1410 (3d ed. 2010) (“[W]henever any logical relationship between the claims and counterclaims can be found, the courts seem willing to apply Rule 13(a).”).
C. Plaintiffs' First Claim for Relief-Defend Trade Secrets Act (“DTSA”)
MeriCal, the Goli defendants, and the VMG defendants argue that Vitamin Friends fails to state a claim under the DTSA because it failed to plead with any specificity the existence or misappropriation of any trade secrets. Dkt. 15 at 14; dkt. 20 at 12-13; dkt. 21 at 20-21. According to the Goli defendants, Vitamin Friends merely asserts a trade secret in “formulations of Vitamin Friends products” without identifying what those “formulations” consist of, the connection between such formulations and Goli's formulations, or whether they have any overlap. Dkt. 21 at 20. Similarly, MeriCal argues that Vitamin Friends makes conclusory allegations, does not identify the trade secrets “with sufficient particularity to separate it from matters of general knowledge,” and vaguely references “proprietary formulations.” Dkt. 15 at 16-17; Vendavo, Inc, v. Price f(x) AG, No. 17-CV-06930-RS, 2018 WL 1456697, at *4 (N.D. Cal. Mar. 23, 2018). The VMG defendants assert that the vague allegations regarding misappropriation, without reference to specific acts or a timeline, fail to give them proper notice of the claim. Dkt. 20 at 13.
Moreover, according to MeriCal, the Goli defendants, and the VMG defendants, contracts between Better Nutritionals and Goli (which are incorporated by reference in this action) reveal that Vitamin Friends disclaimed ownership of its alleged trade secrets. Dkt. 15 at 14; dkt. 20 at 12 n.9; dkt. 21 at 13. MeriCal contends that “[b]oth the 2018 payment terms agreement and the 2022 agreement signed by [p]laintiff Sharon Hoffman on behalf of Better Nutritionals and Goli affirm that Goli, not Better Nutritionals (or the Hoffmans or Vitamin Friends), is the owner of the formulation of products manufactured by Better Nutritionals for Goli.” Dkt. 15 at 15. The Goli defendants contend that “information relating to the formulations used to manufacture the ACV gummies no longer constitutes a trade secret” because such information has been disclosed in patents issued by the USPTO. Dkt. 21 at 21. The VMG defendants similarly assert that Goli's three patents on the ACV gummies formula refute the claim that Vitamin Friends has any trade secret. Dkt. 20 at 11. Moreover, MeriCal asserts that none of the Vitamin Friends gummy products are the same flavor or have the same function as any Goli supplements. Dkt. 15 at 16. According to MeriCal, “[n]otably absent from the Complaint is any factual allegation that (1) Vitamin Friends makes an apple cider product (they do not), (2)
The VMG defendants also argue that plaintiffs' allegations in their complaint contradict their prior allegations, namely that Better Nutritionals, rather than Vitamin Friends, owned the trade secrets. Dkt. 20 at 10-11. Thus, the VMG defendants contend that “[t]his artful pleading to circumvent the bankruptcy trustee should not be credited, and the trade secret allegations should be dismissed.” Id. at 11.
MeriCal is even producing any children's product for Goli (it is not), let alone (3) how what MeriCal is supposedly doing misappropriates Plaintiffs' formulation (it does not).” Id. at 16-17.
While MeriCal is not certain whether plaintiffs allege misappropriation of the manufacturing process, it argues that its manufacturing process is “wholly distinct” from that of Vitamin Friends. Dkt. 15 at 17-18. Additionally, Vitamin Friends' manufacturing process is allegedly disclosed in detail in three patents, which extinguishes its trade secret status. Id. Moreover, MeriCal contends that the complaint “does not allege any facts regarding the supposed misappropriation of the process by MeriCal, let alone sufficiently detailed facts to support the argument that the allegation falls outside the publicly disclosed process.” Id. at 18-19.
Finally, the Goh defendants argue that Vitamin Friends has failed to make any specific allegations concerning the Goli defendants' alleged misappropriation of trade secrets, a required element of the claim. Dkt. 21 at 21. Similarly, according to the VMG defendants, “[p]laintiffs allege that other defendants, such as Goli or MeriCal, somehow misappropriated [p]laintiff Vitamin Friends' undefined purported manufacturing process, but nowhere do [p]laintiffs allege who, what, when, or where VMG supposedly obtained, reviewed, or stole those same ideas.” Dkt. 20 at 12. Further, the VMG defendants argue that “VMG's status as a minority shareholder in Goli” cannot create liability. Id.
In opposition, Vitamin Friends argues that it has sufficiently alleged that, while Better Nutritionals is a statutory “owner” of the trade secret formulations as a licensee, Vitamin Friends is the “owner” of the trade secrets. Dkt. 54 at 7; see also Compl. ¶ 113. Vitamin Friends contends that the two contracts and the three patents in question do not disclose its products which are “vitamins for children”; rather, the patents disclose only the formulations for ACV gummies. Dkt. 54 at 6-7; dkt. 55 at 12. Further, Vitamin Friends argues that district courts and the Ninth Circuit have allowed plaintiffs to proceed with general allegations regarding trade secrets, as greater particularity may be obtained through the discovery process. Id. at 8-9; dkt. 57 at 14; see also Genentech. Inc, v. JHL Biotech, Inc., No. C 18-06582 WHA, 2019 WL 1045911, at *11 n. 12 (N.D. Cal. Mar. 5, 2019) (“This order rejects [the] contention that [plaintiff s] claimed “formulation” trade secrets are too vague at the pleading stage . . . .”). Vitamin Friends argues that the circumstances of this case permit pleading upon “information and belief' and that they have satisfied notice pleading by alleging that MeriCal engaged in “espionage.” Dkt. 54 at 10. Additionally, it argues that MeriCal does not deny producing children's vitamins for Goli, and disputes MeriCal's contention “that not one of the Vitamin Friends gummy products are the same flavor or function as any of the supplements sold by Goli.” Id. at 9. Vitamin Friends contends that VMG “participat[ed] in misappropriation of the Vitamin Friends trade secrets,” was “a co-conspirator with Goli,” and is liable for “Goli's and Merical's misappropriation under the laws of agency.” Id. at 13. It also argues that Goli misappropriated the trade secrets by engaging in “espionage” alongside MeriCal and deriving protected information from former Better Nutritionals employees that were bound by non-disclosure agreements. Dkt. 57 at 16. Finally, Vitamin Friends asserts that it is in fact claiming misappropriation of its manufacturing process but is willing to amend the pleading to make further allegations if the Court deems it appropriate. Dkt. 54 at 10.
In reply, MeriCal asserts that, while Vitamin Friends may not be a party to the contracts between Better Nutritionals and Goli, the agreements nonetheless state that Goli owns the formulation. Dkt. 64 at 6. Further, MeriCal argues that, even though the patents at issue apply only to ACV gummies, ACV gummies are the products at issue in Vitamin Friends' DTSA claim. Id. at 6-7. As such, MeriCal asserts that plaintiffs have failed to plead a viable claim, since the patents disclose both the process and the formulation, and thus “must offer some cognizable explanation of what. . . remained secret from what was disclosed.” Id. at 6-7.
The VMG defendants argue in reply that plaintiffs' contention that Better Nutritionals is a licensee contradicts their own complaint, which alleges that “Vitamin Friends never transferred or abandoned any rights of ownership to its formulations to either Better Nutritionals or to Goli.” Dkt. 63 at 3-4; see also Compl. ¶ 113. According to the VMG defendants, “[i]f [p]laintiffs argue that they are not claiming a trade secret concerning the gummies Better Nutritionals manufactured for Goli, but rather are alleging some trade secret associated with Vitamin Friends that is unrelated to those Goli gummies, then they have not specified anywhere in the Complaint what the trade secret is.” Dkt. 63 at 4. The VMG defendants further argue that plaintiffs have failed to allege that VMG had access to the purported “trade secrets” or even was aware that Vitamin Friends existed before plaintiffs filed the complaint. Id. at 5. Finally, the VMG defendants assert that they cannot be held vicariously liable for any other party's trade secret misappropriation because “there is no cause of action for conspiracy to commit trade secret misappropriation under the DTSA.” Id. at 5-6.
In reply, the Goli defendants argue that “a [p]laintiff claiming misappropriation of a trade secret must ‘clearly refer to tangible trade secret material' instead of referring to a ‘system which potentially qualifies for trade secret protection.'” Dkt. 65 at 13 (quoting InteliClear. LLC v. ETC Glob. Holdings. Inc., 978 F.3d 653 (9th Cir. 2020)). Moreover, they argue that it is irrelevant whether Vitamin Friends also manufactures non-ACV gummies because plaintiffs are “required to allege the trade secret, and the misappropriation thereof, with sufficient particularity to put the Goli [defendants on notice of their claims.” Id. at 13-14. The Goli defendants again assert that Vitamin Friends has failed to plead its trade secret misappropriation claim with sufficient particularity. Id. at 14.
The Court finds that Vitamin Friends has failed to adequately plead trade secret misappropriation in violation of the DTSA. While general allegations regarding trade secret misappropriation claims may be permissible, the complaint does not identify Vitamin Friends' alleged trade secret beyond “Vitamin Friend's . . . manufacturing process and formulations.” Compl. ¶ 33. The lack of particularity makes it impossible to assess whether the alleged trade secret was disclosed in patent applications and/or disclaimed in contracts between Goli and Better Nutritionals. Accordingly, the Court dismisses Vitamin Friends' claims for trade secret misappropriation without prejudice and grants Vitamin Friends leave to amend its complaint to describe its claimed trade secret with greater particularity.
D. Other Arguments in Motions to Dismiss
In their motions to dismiss, defendants all argue that plaintiffs' claims should be dismissed for failure to state a claim pursuant to Federal Rule of Civil Procedure 12(b)(6). As the Court has dismissed Vitamin Friends' DTSA claims for failure to state a claim and plaintiffs' remaining claims either for lack of standing pursuant to Federal Rule of Civil Procedure 12(b)(1) or as compulsory counterclaims that should have been brought in the pending Goli v. Hoffman litigation pursuant to Federal Rule of Civil Procedure 13, the Court does not reach these arguments.
E. Motions for Sanctions
The Court denies the VMG defendants and DLA Piper's request for sanctions at this time, but reserves judgment on sanctions for decision at the conclusion of the case.
V. CONCLUSION
In accordance with the foregoing, the Court GRANTS defendants' motions to dismiss. The Court dismisses all of plaintiffs' claims for lack of standing, with the exception of Vitamin Friends' claims for trade secret infringement and Sharon Hoffman's claims for securities fraud. The Court separately dismisses Vitamin Friends' claims for trade secret infringement for failure to state a claim and Sharon Hoffman's claims for securities fraud, which should have been brought as compulsory counterclaims in the pending Goli v. Hoffman litigation. No. 5:23-cv-00514-GW-KKx (C.D. Cal.). The Court grants plaintiffs leave to amend their claims that were dismissed for lack of standing, as well as Vitamin Friends' DTSA claims, by February 14, 2024.
However, the Court finds that, even if Sharon Hoffman had standing to assert claims for fraudulent misrepresentations, breach of fiduciary duties, securities fraud, and violation of RICO, such claims should have been brought as compulsory counterclaims in the pending Goli litigation, No. 5:23-cv-00514-GW-KKx (C.D. Cal.). Accordingly, the Court does not permit plaintiffs to reassert any of Sharon Hoffman's claims in their amended complaint.
IT IS SO ORDERED.