Opinion
02 Civ. 3310 (SWK)
December 4, 2002
Friedman Kaplan Seiler Adelman LLP, New York, New York, By: Edward A. Friedman, Philippe Adler, Lee D. Sossen, Attorneys for Plaintiffs.
Wilson Sonsini Goodrich Rosati, A Professional Corporation, Palo Alto, California, By: Steven M. Schatz, Peri B. Nielsen, Pillsbury Winthrop LLP, New York, New York, By: David G. Keyko, E. Leo Milonas, Keker Van Nest, LLP, San Francisco, California, By: Elliot R. Peters.
Clifford Chance Rogers Wells LLP, San Francisco, California, By: Sara B. Brody, James N. Kramer, Alice L. Jensen, Attorneys for Defendants.
OPINION AND ORDER
Plaintiffs bring this action for violations of federal securities laws, breach of contract, unjust enrichment, and common law fraud. Defendants Critical Path, Inc. ("Critical Path"), Douglas Hickey, David Thatcher, Mark Rubash, William Rinehart, Timothy Ganley, and Mari Tangredi move under 28 U.S.C. § 1404 (a) to transfer this action to the United States District Court for the Northern District of California. For the reasons set forth below, defendants' motion to transfer is granted.
BACKGROUND
Plaintiffs are former shareholders of PeerLogic, Inc. ("PeerLogic"), a company acquired by Critical Path in September 2000 pursuant to an Agreement and Plan of Reorganization (the "Agreement"). See Compl. at ¶¶ 1-2. PeerLogic was incorporated and headquartered in California.See Decl. of Michael J. Zukerman, dated June 28, 2002, at ¶ 6 ("Zukerman Decl.").
Plaintiffs MBCP PeerLogic LLC ("MBCP") and Jays Twelve LLC are both incorporated in Delaware and have their principal offices in New York.See Compl. at ¶¶ 16, 23. Plaintiffs Michael G. Jesselson and Erica Jesselson are residents of New York, see id. at ¶¶ 19, 22, while plaintiff David M. Seldin is a resident of Florida but frequently travels to New York for business. See id. at ¶ 21. There are also three trust plaintiffs: the Michael G. Jesselson 4/8/71 Trust, the Michael G. Jesselson 12/18/90 Trust, and the Benjamin J. Jesselson 8/21/74 Trust.See id. at ¶¶ 17-18, 20. The two trusts conducted for the benefit of Michael G. Jesselson were established under the laws of New Jersey, and the trust conducted for the benefit of Benjamin J. Jesselson was organized under the laws of New York. See Aff. of Michael C. Jesselson, dated July 11, 2002, at ¶ 4.
Defendant Critical Path is incorporated in California and is headquartered in San Francisco, California. See Zukerman Decl. at ¶ 2. In addition, defendants Hickey, Rubash, Rinehart, Ganley, Tangredi, and Thatcher each reside in California. See Decl. of Douglas Hickey, dated June 27, 2002, at ¶ 3 ("Hickey Decl."); Decl. of Mark Rubash, dated June 28, 2002, at ¶ 3 ("Rubash Decl."); Decl. of William Rinehart, dated June 27, 2002, at ¶ 3 ("Rinehart Decl."); Decl. of Timothy Ganley, dated June 26, 2002, at ¶ 3 ("Ganley Decl."); Decl. of Mari Tangredi, dated June 28, 2002, at ¶ 3 ("Tangredi Decl."); Decl. of David Thatcher, dated June 27, 2002, at ¶ 4 ("Thatcher Decl.").
Plaintiffs allege that defendants engaged in revenue recognition fraud with respect to Critical Path's financial results for the third quarter of 2000. See Compl. ¶ 56. The alleged fraud, which involved transactions with three other companies, allowed Critical Path to meet its projected financial results for the third quarter of 2000 by artificially inflating its revenue. See id. at ¶¶ 56-59. As a result of these alleged deceptive actions, plaintiffs claim that they were induced to believe that Critical Path's operating results and financial condition were greatly superior to what they actually were, which caused plaintiffs to receive, pursuant to the Agreement, shares of Critical Path at an artificially inflated price. See id. at ¶¶ 64-67.
On April 5, 2001, Critical Path issued a press release disclosing,inter alia, that Critical Path was restating its financial results for the third quarter of 2000, and revising its financial result for the year 2000. See id. at ¶ 81. Following the issuance of the press release, various Critical Path shareholders filed class action lawsuits in the Northern District of California against Critical Path and certain of its former officers and directors. See In re Critical Path, Inc. Sec. Litig., No. C-01-0551-WHA (N.D. Cal.); Adam v. Critical Path, Inc., No. C-01-03756-WHA (N.D. Cal.) (collectively, the "Class Actions").
There was also a civil action initiated by the United States Securities and Exchange Commission on February 5, 2002 in the Northern District of California against Thatcher and Ganley, and two criminal actions in the Northern District of California against Thatcher and Ganley. See Compl. at ¶¶ 69-70, 73. Thatcher and Ganley both plead guilty in their respective criminal actions, and in the civil action both signed a Consent and Undertaking, which permanently enjoins them from violating the securities laws. See id.
The Class Actions were eventually consolidated, and on June 18, 2002, Judge William H. Alsup of the Northern District of California granted final approval to the settlement and entered a final judgment. See Zukerman Decl. at ¶ 10. Plaintiffs were class members of the Class Actions but elected to opt out, deciding to instead bring this action.See id. On June 28, 2002, defendants filed the instant motion pursuant to 28 U.S.C. § 1404 (a) to transfer this action to the Northern District of California.
DISCUSSION
"For the convenience of parties and witnesses, in the interest of justice, a district court may transfer any civil action to any other district or division where it might have been brought." 28 U.S.C. § 1404 (a). It is well established that "motions for transfer lie within the broad discretion of the district court and are determined upon notions of convenience and fairness on a case-by-case basis." In re Cuyahoga Equip. Corp., 980 F.2d 110, 117 (2d Cir. 1992) (citing Stewart Org., Inc. v. Ricoh Corp., 487 U.S. 22, 29, 108 S.Ct. 2239, 2243 (1988)).
The threshold question in any transfer motion pursuant to § 1404(a) is "whether venue is proper in the proposed transferee forum." Adair v. Microfield Graphics, Inc., No. 00 Civ. 629, 2000 WL 1716340, *1 (S.D.N.Y. Nov. 16, 2000). In this action, plaintiffs assert a claim for violations of Section 10(b) of the Securities Exchange Act of 1934 (the "Exchange Act"), 15 U.S.C. § 78j (b), and claims for breach of contract, unjust enrichment, and common law fraud. Section 27 of the Exchange Act provides for venue in any district "wherein the defendant is found or is an inhabitant or transacts business." 15 U.S.C. § 78aa. Additionally, pursuant to 28 U.S.C. § 1391 (b), venue is proper in a district "where any defendant resides, if all defendants reside in the same State." For venue purposes, a corporation resides in "any judicial district in which it is subject to personal jurisdiction at the time the action is commenced." 28 U.S.C. § 1391 (c).
Here, defendants are all residents of California. See Zukerman Decl. at ¶ 2; Hickey Decl. at ¶ 3; Rubash Decl. at ¶ 3; Rinehart Decl. at ¶ 3; Ganley Decl. at ¶ 3; Tangredi Decl. at ¶ 3; Thatcher Decl. at ¶ 4. Critical Path's headquarters is in San Francisco, which is in the Northern District of California. See Zukerman Decl. at ¶ 2. Moreover, five of the individual defendants also reside in the Northern District of California; see Hickey Decl. at ¶ 3; Rubash Decl. at ¶ 3; Rinehart Decl. at ¶ 3; Ganley Decl. at ¶ 3; Tangredi Decl. at ¶ 3, while defendant Thatcher is also a resident of the State. See Thatcher Decl. at ¶ 4. Venue in the Northern District of California therefore is proper.
Once venue in the transferee forum is found, a district court may consider the following factors in resolving a motion to transfer: (1) the convenience of witnesses; (2) the location of relevant documents and relative ease of access to sources of proof; (3) the convenience of the parties; (4) the locus of the operative facts; (5) the availability of process to compel attendance of unwilling witnesses; (6) the relative means of the parties; (7) the forum's familiarity with the governing law; (8) the weight accorded the plaintiff's choice of forum; and (9) trial efficiency and the interest of justice, based on the totality of the circumstances. See Constitution Reins. Corp. v. Stonewall Ins. Co., 872 F. Supp. 1247, 1250 (S.D.N.Y. 1995). The burden is on the moving party to make a clear and convincing showing that "transfer will serve the interests of convenience and fairness." NBA Properties, Inc. v. Salvino, Inc., No. 99 Civ. 11799, 2000 WL 323257, *3 (S.D.N.Y. Mar. 17, 2000). "The core determination under § 1404(a) is the center of gravity of the litigation, a key test of which is the convenience of witnesses. Courts routinely transfer cases where the principal events occurred, and the principal witnesses are located in another district." Viacom Int'l v. Melvin Simon Prod. Inc., 774 F. Supp. 858, 868 (S.D.N.Y. 1991).
1. Convenience of Witnesses
"Convenience of both the party and non-party witnesses is probably the single-most important factor in the analysis of whether transfer should be granted." Frene N.V. v. Kmart Corp., No. 96 Civ. 9585, 1998 WL 427688, *3 (S.D.N.Y. July 28, 1998) (quotation omitted). With respect to this factor, plaintiffs correctly argue that a motion to transfer usually requires that "the movant must support the transfer application with an affidavit containing detailed factual statements relevant to the factors [to be considered by the court in its transfer decision], including the potential principal witnesses expected to be called and a general statement of the substance of their testimony." Orb Factory, Ltd. v. Design Science Toys, Ltd., 6 F. Supp.2d 203, 208 (S.D.N.Y. 1998); see also Citibank, N.A. v. Transcon. Prods. Servs., Inc., No. 98 Civ. 6889, 1999 WL 595658, *2 (S.D.N.Y. Aug. 6, 1999). Plaintiffs contend that defendants have not named a single witness, nor provided a general statement for any of their witnesses' testimony.
Instead, defendants make a general assertion that the majority of potential material witnesses who would testify reside or work in the Northern District of California. According to defendants, potential principal witnesses include current and former Critical Path employees, officers, and directors involved in either the restatement of the company's financial statements for year 2000 or the transactions put in issue by this action. See Zukerman Decl. at ¶ 8. These individuals work or worked in San Francisco. See id. Moreover, employees of PriceWaterhouseCoopers LLC ("PwC"), Critical Path's outside auditor, are also potential material witnesses. See id. ¶ 9. PwC's work for Critical Path has always been performed by personnel from its San Francisco and San Jose, California offices. See id.
Even though defendants have not provided a list that identifies potential witnesses expected to be called to testify, the events giving rise to this action demonstrate that the vast majority of material witnesses are in Northern California and would therefore find it more convenient to testify in California than in New York. See Citibank, 1999 WL 595658 at *2 (even though party seeking transfer did not identify potential principal witnesses, the allegations of the complaint indicated that a substantial number of witnesses are located in the proposed transferee court); Chrome Hearts, Inc. v. Montana St. Wear, Inc., No. 95 Civ. 10736, 1996 WL 306368, *2 (S.D.N.Y. June 7, 1996).
Plaintiffs identify only two potential witnesses. The first is Seldin, who is a resident of Florida but also works in New York. See Affidavit of John Sanders, dated July 10, 2002, at ¶¶ 5-6. The second is John Sanders, a non-party witness, who is General Counsel for MBCP and works in New York. See id. at ¶ 2. Both will testify as to telephone conversations they had with representatives of Critical Path with respect to the acquisition of PeerLogic by Critical Path pursuant to the Agreement. See id. at ¶ 6.
The majority of potential material witnesses who would provide substantial testimony are located in or near the Northern District of California. Accordingly, the Court finds that the convenience of witnesses weighs in favor of transfer.
2. Location of Relevant Documents and the Relative Ease of Access to Sources of Proof
The vast majority of relevant documents in this action are also located in San Francisco. Critical Path stores its documents in San Francisco,see Zukerman Decl. at ¶¶ 4, 6, and the audit records of PwC, Critical Path's outside auditor, are believed to be stored in the San Jose, California area. See id. at ¶ 9; see also In re Nematron Corp. Sec. Litig., 30 F. Supp.2d 397, 403 (S.D.N.Y. 1998) (finding that documents relating to an auditor's work for a client were assumed to be in the auditor's office that was close to the client's headquarters) Accordingly, the Court finds that this factor weighs in favor of transfer.
3. Convenience of the Parties
With respect to the convenience of the parties, it would not be substantially more convenient to litigate this case in California as opposed to New York since the majority of plaintiffs are located in New York while defendants are located in California. A transfer should not merely shift the burden of inconvenience from one party to the other.See Dwyer v. Gen. Motors Corp., 853 F. Supp. 690, 693 (S.D.N.Y. 1994). Accordingly, this factor does not weigh in favor of transfer.
4. The Locus of Operative Facts
"The location of the operative events is a primary factor in a transfer motion." Wellquest Int'l, Inc. v. Genesis Intermedia.com, Inc., No. 00 Civ. 6558, 2001 WL 1246592, *4 (S.D.N.Y. Oct. 18, 2001). As noted above, "[t]he core determination under § 1404(a) is the center of gravity of the litigation . . . and [c]ourts routinely transfer cases when the principal events occurred, and the principal witnesses are located, in another district." Schuur v. Walt Disney Co., No. 98 Civ. 2212, 1998 WL 190321, *3 (S.D.N.Y. Apr. 21, 1998) (quoting Viacom, 774 F. Supp. at 868).
Plaintiffs' claims involve the acquisition of PeerLogic, a company that was incorporated in California and was headquartered in San Francisco, by Critical Path, a company that is also incorporated in California and headquartered in San Francisco. See Compl. at ¶ 29; Zukerman Decl. at ¶ 2. The gravamen of plaintiffs' complaint is that defendants failed to disclose misrepresentations with respect to the transactions that allowed Critical Path to artificially inflate its revenue, which caused plaintiffs, as shareholders of PeerLogic, to receive shares of Critical Path at an artificially inflated price pursuant to the Agreement. See Compl. ¶¶ 56-59. The alleged misrepresentations that allowed Critical Path to artificially inflate its revenue were disseminated from Critical Path's headquarters in San Francisco. See Zukerman Decl. at ¶ 4. "Misrepresentations and omissions are deemed to `occur' in the district where they are transmitted or withheld, not where they are received." Purcell Graham, Inc. v. Nat'l Bank of Detroit, No. 93 Civ. 8786, 1994 WL 584550, *4 (S.D.N.Y. Oct. 24, 1994) (citations omitted). Additionally, negotiation and execution of the Agreement occurred in the San Francisco area. See Zukerman Decl. at ¶ 8.
Therefore, the Court finds that the locus of operative facts is in California. Accordingly, this factor weighs in favor of transfer.
5. Weight Accorded Plaintiffs' Choice of Forum
Defendants argue that plaintiffs' choice of forum should not be accorded much significance because their choice is not the locus of operative facts. "A plaintiff's choice of forum is generally entitled to considerable weight and should not be disturbed unless the balance of factors is strongly in favor of the defendant." Berman v. Informix Corp., 30 F. Supp.2d 653, 659 (S.D.N.Y. 1998).
Even though plaintiffs either reside or conduct business in New York, the weight accorded to their choice of forum is diminished because, as noted above, the operative facts have little connection to New York. See Ocean Walk Mall LLC v. Kornitzer, No. 01 Civ. 213, 2001 WL 640847, *1 (S.D.N.Y. June 11, 2001) (a plaintiff's choice of forum is given "substantially less deference when the operative facts upon which the litigation is brought bear little material connection to the chosen forum"); 800-Flowers, Inc. v. Intercont'l Florist, Inc., 860 F. Supp. 128, 135 (S.D.N.Y. 1994). Therefore, plaintiffs' choice of forum is not controlling.
6. The Interests of Justice and Trial Efficiency
The interests of justice and judicial efficiency, based on the totality of the circumstances, support a transfer to California. The material events that support plaintiffs' allegations occurred in California, and most of the witnesses and documents that can prove or disprove Plaintiffs' claims are in California. See TM Claims Serv. v. KLM Royal Dutch Airlines, 143 F. Supp.2d 402, 407 (S.D.N.Y. 2001). Additionally, since this action is in its infancy, a transfer to the Northern District of California would not cause an undue delay. See Invivo Research, Inc. v. Magnetic Resonance Equip. Corp., 119 F. Supp.2d 433, 439 (S.D.N.Y. 2000).
CONCLUSION
For the reasons stated above, defendants' motion to transfer venue to the Northern District of California pursuant to 28 U.S.C. § 1404 (a) is granted. The Clerk of the Court is hereby directed to transfer this case to the United States District Court for the Northern District of California.