Hassan v. Quantum3D, Inc.

• Docket Number: H050403
• Decision Date: 22 November 2023
• Parties: KAZI HASSAN et al., Plaintiffs and Appellants, v. QUANTUM3D, INC., Defendant and Respondent.
• Court: California Court of Appeals Court of Appeals

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KAZI HASSAN et al., Plaintiffs and Appellants,
v.
QUANTUM3D, INC., Defendant and Respondent.

H050403

California Court of Appeals, Sixth District

November 22, 2023

NOT TO BE PUBLISHED

(Santa Clara County Super. Ct. No. 19CV360269)

BAMATTRE-MANOUKIAN, J.

I. INTRODUCTION

Plaintiffs and appellants Kazi Hassan and Sisigma, Inc. (Sisigma) brought an action against defendant and respondent Quantum3D, Inc. (Quantum) and defendant Murat Kose alleging that they breached an oral agreement whereby plaintiffs would provide various services to Quantum in order to turn the company around in exchange for compensation that allegedly included 30 percent of Quantum's gross revenues. The trial court sustained defendants' demurrers to the causes of action in the second amended complaint without leave to amend on the grounds of the sham pleading doctrine, which provides that where a complaint is amended to omit harmful allegations that render a cause of action defective, the trial court may disregard the new and contrary allegations in the amended complaint. (See Hendy v. Losse (1991) 54 Cal.3d 723, 742-743 (Hendy).)

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On appeal, Hassan and Sisigma argue that the trial court erred because the sham pleading doctrine does not apply to bar their claims. For the reasons stated below, we conclude that the trial court properly sustained the demurrers without leave to amend as to all causes of action remaining in the second amended complaint with the exception of the fifth cause of action labeled unjust enrichment. We will therefore direct the trial court (1) to vacate the order sustaining the demurrers to the first through fifth and seventh through ninth causes of action of the second amended complaint without leave to amend; and (2) to enter a new order sustaining the demurrer without leave to amend as to the first through fourth causes and the seventh through ninth causes of action and overruling the demurrer as to the fifth cause of action.

II. BACKGROUND

A. Original Complaint

In the original complaint, plaintiff Hassan described himself as "an accomplished engineer and entrepreneur with 25 years[ of] experience in the technology industry." Hassan is the founder and principal of plaintiff Sisigma, a California corporation.

Plaintiffs alleged as follows regarding defendants Quantum and Kose.^[1] Quantum is a Delaware corporation that is "a wholly-owned subsidiary of Havelsan, which is owned by the Turkish Armed Forces Foundation." Plaintiffs asserted that Kose and Quantum were agents of each other and acted within the scope of their agency.

Hassan was initially contacted by Kose on August 13, 2017, when Kose telephoned Hassan stating he was "working with a Turkish-owned Silicon Valley software company" and wanted to connect with technology leaders. Hassan and Kose then met at Quantum's headquarters on August 15, 2017. During the meeting, Kose informed Hassan that Quantum was losing money and he had been engaged to turn the company around. Kose stated that the "Turkish government did not know what to do

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with QUANTUM and that he had not yet been formally hired by QUANTUM." Kose also told Hassan that Sisigma's KnotSuite application could be marketed and sold in Turkey. Hassan was introduced by Kose to Dr. Abdullah Cavusoglu, the chairman of Havelsan's board of directors, and several Quantum company officers.

A day later, on August 16, 2017, Kose and Cavusoglu went to Hassan's home for a dinner meeting. During the meeting, they asked Hassan to help turn Quantum around because Kose lacked experience in running a company. At that time, Kose was not employed by Quantum and "was acting in his individual capacity." Kose and Cavusoglu also said "they did not yet have control over QUANTUM, so they could not officially engage [Hassan and Sisigma]. KOSE and Cavusoglu asked HASSAN to instruct, guide and train KOSE from behind the scene, promising compensation and revenue sharing once they gained control the company." Kose and Cavusoglu "reiterated they could not formalize anything with [Hassan and Sisigma] until they first gained control of QUANTUM."

Kose and Cavusoglu also "promised that, once they assumed control of QUANTUM, HASSAN would receive a director position within Havelsan and a business relationship between QUANTUM, Havelsan and SISIGMA would be formalized." Kose and Cavusoglu "represented to HASSAN that, upon KOSE's assumption of leadership at QUANTUM, which they estimated would occur within six months, three promises would be formalized: (1) HASSAN would be appointed to Havelsan's board of directors;

(2) QUANTUM would become a partner and customer of SISIGMA and they would engage new customers in Turkey, with 70% revenue going to QUANTUM and 30% revenue going to SISIGMA; and (3) [Hassan and Sisigma] would be recognized for their work from the outset. Details of the partnership agreement would be refined as the parties continued working together."

Thereafter, Hassan performed work for Quantum that included restructuring the management team, executing a technology transfer project, training Kose, fixing a toxic

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culture, dissuading Quantum from implementing a wasteful internal product plan, revitalizing Quantum's existing product, developing a new product strategy, formulating a plan to solve Quantum's customer acquisition problem, instructing Kose on which projects to pursue or abandon, and devising initiatives to increase customers for existing products.

In October 2017 Kose and Hassan had a meeting in which they agreed to form a new corporation named KnotReal, in which Quantum would have 70 percent of the company's shares and Sisigma would have 30 percent, and Havelsan would invest $15 million. Hassan developed partnership agreements in collaboration with Kose, which he emailed to Kose and Cavasoglu in November 2017. However, Kose responded by feigning ignorance of the terms of their agreement. On November 25, 2017, Kose informed Hassan that he had been appointed CEO of Quantum and asked Hassan for his help with an upcoming trade show. Hassan continued to assist Kose in reliance on Kose's previous promises.

In December 2017 Hassan asked Kose for an update, and Kose responded that he was trying" 'to finalize [a] tech transfer.'" Hassan then discovered that Quantum was using and marketing the ideas of Hassan and Sisigma in violation of their agreements. After Hassan told Kose that he was not allowed to use his ideas, Kose ceased all communications with Hassan while retaining the benefits of his work.

Based on these allegations, the original complaint included a cause of action for breach of oral contract, which stated: "As of August 2017, KOSE was not yet employed by QUANTUM. Accordingly, KOSE was acting in his individual capacity. After KOSE's employment formally commenced with QUANTUM, particularly after he was elevated to CEO on or about November 25, 2017, QUANTUM was the beneficiary of [Hassan's] industry, and because its CEO knew it was receiving services from [Hassan and Sisigma], QUANTUM effectively ratified and/or affirmed the oral agreement. After becoming CEO of QUANTUM, KOSE acted on QUANTUM's behalf in all dealings

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with [Hassan and Sisigma]. [¶] In the alternative, because KOSE and HASSAN negotiated contract terms in front of Cavusoglu, the chairman of the board of Havelsan, QUANTUM's sole or majority shareholder, KOSE had ostensible authority to bind QUANTUM."

The original complaint also included causes of action for promissory estoppel, unjust enrichment, breach of confidential relationship, trade secret misappropriation, fraud, and violation of Business and Professions Code section 17200.

After defense counsel sent plaintiffs' counsel a meet and confer letter (Code Civ. Proc., § 430.41 [requirement to meet and confer prior to filing demurrer]), plaintiffs obtained new counsel and filed a first amended complaint.

B. First Amended Complaint

The first amended complaint included several allegations that were different from the allegations of the original complaint. Significantly, the first amended complaint expressly alleged that Kose and Quantum had formed a joint venture with Hassan and Sisigma and that Kose was the agent of Quantum. Plaintiffs also alleged that in August 2017 Kose and Cavasoglu "claimed that they had complete authority over [Quantum] and had the power to bind it to legal agreements and commitments." According to plaintiffs, Kose and Cavasoglu said that they had this authority because Havelsan owned Quantum, Cavasoglu was Havelsan's chairman, and Kose was Quantum's agent "to obtain the necessary resources to effect a turnaround at [Quantum]." However, Kose and Cavasoglu also stated that they lacked "practical control" over Quantum and "requested that the joint venture's work be kept secret until they achieved certain business objectives."

The first amended complaint further alleged that the terms of the parties' oral agreement to form a joint venture included contributions by a division of Sisigma, KnotReal, and contributions by Quantum. KnotReal, through Hassan, would analyze Quantum's management, operations, and culture, reinvent Quantum's product strategy, and adopt new business strategies to make Quantum a high performing business.

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Quantum would cooperate in these efforts and give KnotReal 30 percent of Quantum's gross revenue.

Kose allegedly became a "Liaison Officer" for Quantum in August 2017 and began implementing some of Hassan's recommendations. Hassan performed work to turn Quantum around similar to the work alleged in the original complaint. However, Kose and Cavasoglu did not want to make the parties' joint venture public until certain milestones were met in Quantum's turnaround, including Kose being appointed CEO. Once these milestones were met, Kose and Cavasoglu promised that Hassan would be made a director of Havelsan, Havelsan would promote Sisigma in Turkey, and Havelsan would...