Lowenthal v. Quicklegal, Inc., Case No. 16-cv-03237-LB
| Court | United States District Courts. 9th Circuit. United States District Courts. 9th Circuit. Northern District of California |
| Writing for the Court | LAUREL BEELER United States Magistrate Judge |
| Docket Number | Case No. 16-cv-03237-LB |
| Parties | JUSTIN C LOWENTHAL, Plaintiff, v. QUICKLEGAL, INC., et al., Defendants. |
| Decision Date | 28 September 2016 |
JUSTIN C LOWENTHAL, Plaintiff,
v.
QUICKLEGAL, INC., et al., Defendants.
Case No. 16-cv-03237-LB
UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF CALIFORNIA San Francisco Division
September 28, 2016
ORDER GRANTING IN PART AND DENYING IN PART THE DEFENDANTS' MOTIONS TO DISMISS; DENYING DEFENDANT ZAL'S MOTION TO QUASH
Re: ECF Nos. 17, 24, 27, 30, 38, 42
This employment dispute arises from a start-up's alleged failure to pay its general counsel stock-based compensation under the parties' agreement.1 Justin Lowenthal, the alleged in-house counsel, sued Lawyers on Demand, Quicklegal, and Quicklegal Practice Management — all allegedly reconstitutions of the same entity — when he worked for four months but did not receive the 5%-7% worth of common stock he was promised.2 Mr. Lowenthal also sued the entities' directors, officers, and shareholders.3 He brings claims for breaches of contract and of fiduciary duties, violations of California and federal wage and hour laws, and violation of California's
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Unfair Competition Law.4 The defendants now move to dismiss Mr. Lowenthal's claims under Federal Rules of Civil Procedure 12(b)(1) and 12(b)(6) for lack of subject-matter jurisdiction and for failure to state a claim.5 One defendant, Mr. Zal, moves to quash service.6
The court can decide the matters without oral argument and so it vacated the hearing. See N.D. Cal. Civ. L.R. 7-1(b). The court denies the defendants' motion to dismiss based on a lack of subject-matter jurisdiction. The court grants defendants Timm, Chambers, and Delgado's motions and dismisses these defendants but grants leave to amend. The court denies the remaining motions, including Mr. Zal's motion to quash.
In June and July 2014, Lawyers on Demand — acting through president and CEO Bluford and vice president Zal — hired Mr. Lowenthal as in-house general counsel.7 At that time, however, Lawyers on Demand was a "new start-up with limited funds available to pay employee salaries."8 So, Messrs. Bluford and Zal offered Mr. Lowenthal stock in lieu of salary.9 The parties entered a written "employment agreement."10
The employment agreement set forth the terms of Mr. Lowenthal's part-time employment as Lawyers on Demand's in-house counsel.11 He was to work for four months, from July to November of 2014.12 Although Mr. Lowenthal was part-time, he agreed to "devote substantial
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business efforts and time" to the position.13 He was, however, allowed to "maintain or take other employment or engagement contemporaneously."14 Lawyers on Demand agreed to pay Mr. Lowenthal in 50,000 shares of common stock, "or the equivalent of 5% of all outstanding shares on a fully-diluted basis, whichever is greater."15 Shortly after the parties signed the agreement, the defendants increased Mr. Lowenthal's equity stake to 7% as an incentive bonus.16
The same month the parties signed the agreement, Lawyers on Demand "reconstituted itself" as Quicklegal.17 Mr. Lowenthal emailed Mr. Bluford to confirm that Quickegal would honor his contract and to confirm that "that [they] modified [his] equity-stake from 5% to 7%."18 Mr. Bluford replied: "Confirmed!"19 Mr. Lowenthal then continued to serve as Lawyers on Demand and Quicklegal's general counsel for the agreement's four-month term.20 In November, his employment ended and his 7% equity stake fully vested.21
Mr. Lowenthal emailed Mr. Bluford three months later.22 He asked that Mr. Bluford reflect his common shares on the company's ledger and deliver his stock certificates.23 He also "insist[ed] that [he] be included in general communications, letters, and meeting invites as they pertain to the shareholders."24 Mr. Bluford responded, allegedly on behalf of all defendants, repudiating the employment agreement and claiming that Mr. Lowenthal "had provided 'services' as 'outside
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counsel' rather than as an employed in-house attorney."25 Mr. Bluford also suggested that Mr. Lowenthal's work "had been unsatisfactory," despite no one having suggested this before.26
The defendants then allegedly formed a new entity: Quicklegal Practice Management, Inc. ("QPMI").27 Mr. Lowenthal asserts that QPMI engages in the same business as Lawyers on Demand and Quicklegal and uses the same brand and domain names, social media accounts, and software.28 He also asserts that QPMI has or had "essentially the same board of directors, shareholders, and officers."29
Despite these similarities, Mr. Zal emailed Mr. Lowenthal to inform him that "QPMI is a totally separate entity from Quicklegal," meaning that Mr. Lowenthal had no claim against QPMI.30 Mr. Zal also told Mr. Lowenthal that Quicklegal's "bank account funds are currently frozen," and that his 7% equity share "has very little value right now."31
Through these events, none of the defendants paid Mr. Lowenthal for his four months of work.32 He accordingly sued, asserting six claims against the various defendants:
| No. | Claim | Defendants Named |
| 1. | Breach of contract | • Lawyers on Demand, Quicklegal, and QPMI (the "entity defendants") |
| 2. | Breach of fiduciary duties | • Bluford, Zal, and Chambers (in their capacities as corporate officers) • Bluford, Zal, Chambers, Delgado, and Timm (in their capacities as board members) • Bluford, Zal, Chambers, Delgado, and Timm (in their capacities as majority shareholders) |
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| No. | Claim | Defendants Named |
| 3. | Unpaid wages, penalties, and interest in violation of California's Labor Code (Cal. Labor Code §§ 201, 203, 204.2, 218.5, and 218.6) | • The entity defendants |
| 4. | Violation of the Fair Labor Standards Act ("FLSA") | • All defendants |
| 5. | Violation of California's Unfair Competition Law ("UCL") (Cal. Bus. & Prof. Code § 17200 et seq.) | • All defendants |
The defendants now move to dismiss Mr. Lowenthal's claims under Rules 12(b)(1) and 12(b)(6) on two predominant bases: (1) the court lacks subject-matter jurisdiction because Mr. Lowenthal's only federal claim (under the FLSA) is "frivolous"; and (2) Mr. Lowenthal fails to state a plausible claim.33 Mr. Zal also moves to quash the summons for insufficient service.34
1. Motion to Dismiss for Lack of Subject-Matter Jurisdiction Under Rule 12(b)(1)
A complaint must contain a short and plain statement of the ground for the court's jurisdiction (unless the court already has jurisdiction and the claim needs no new jurisdictional support). Fed. R. Civ. P. 8(a)(1). The plaintiff has the burden of establishing jurisdiction. See Kokkonen v. Guardian Life Ins. Co. of Am., 511 U.S. 375, 377 (1994); Farmers Ins. Exchange v. Portage La Prairie Mut. Ins. Co., 907 F.2d 911, 912 (9th Cir. 1990). A defendant's Rule 12(b)(1) jurisdictional attack can be either facial or factual. White v. Lee, 227 F.3d 1214, 1242 (9th Cir. 2000). "A 'facial' attack asserts that a complaint's allegations are themselves insufficient to invoke jurisdiction, while a 'factual' attack asserts that the complaint's allegations, though adequate on their face to invoke jurisdiction, are untrue." Courthouse News Serv. v. Planet, 750 F.3d 776, 780 n.3 (9th Cir. 2014). Under a facial attack, the court "accept[s] all allegations of fact in the complaint as true and construe[s] them in the light most favorable to the plaintiffs." Warren
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v. Fox Family Worldwide, Inc., 328 F.3d 1136, 1139 (9th Cir. 2003). In a factual attack, the court "need not presume the truthfulness of the plaintiff's allegations" and "may review evidence beyond the complaint without converting the motion to dismiss into a motion for summary judgment." Safe Air for Everyone v. Meyer, 373 F.3d 1035, 1039 (9th Cir. 2004).
2. Motion to Dismiss for Failure to State a Claim under Rule 12(b)(6)
A complaint must contain a "short and plain statement of the claim showing that the pleader is entitled to relief" to give the defendant "fair notice" of what the claims are and the grounds upon which they rest. See Fed. R. Civ. P. 8(a)(2); Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555 (2007). A complaint does not need detailed factual allegations, but "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. Factual allegations must be enough to raise a claim for relief above the speculative level . . . ." Twombly, 550 U.S. at 555 (internal citations omitted).
To survive a motion to dismiss, a complaint must contain sufficient factual allegations, accepted as true, "'to state a claim to relief that is plausible on its face.'" Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Twombly, 550 U.S. at 570). "A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Id. "The plausibility standard is not akin to a 'probability requirement,' but it asks for more than a sheer possibility that a defendant has acted unlawfully." Id. (quoting Twombly, 550 U.S. at 556). "Where a complaint pleads facts that are 'merely consistent with' a defendant's liability, it 'stops short of the line between possibility and plausibility of 'entitlement to relief.''" Id. (quoting Twombly, 550 U.S. at 557).
3. Leave to Amend
If a court dismisses a complaint, it should give leave to amend unless the "the pleading could not possibly be cured by the allegation of other facts." Cook, Perkiss and Liehe, Inc. v. Northern California Collection Serv. Inc., 911 F.2d 242, 247 (9th Cir. 1990).
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1. The Court Has Subject-Matter Jurisdiction
The defendants move to dismiss Mr. Lowenthal's complaint for lack of subject-matter jurisdiction.35 To summarize their argument: the court derives jurisdiction from only Mr. Lowenthal's FLSA claim, which the court must dismiss because either Mr. Lowenthal was not an "employee" or the defendants were not "employers" under that act. They accordingly...
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