Lloyd v. Mullenex

Background

The complaint alleged that Lloyd and Mullenex founded a technology company in March 2013. According to Lloyd, Mullenex promised him an annual salary of $185,000 and said that Mullenex would invest $1 million in the company. Lloyd alleged that, based on those promises, he left his job and worked full-time for the company. The complaint stated that Lloyd received nothing during his first year and only a fraction of the promised salary afterward.

Lloyd also alleged that Mullenex misrepresented the company’s ownership structure, promised that Lloyd would eventually receive a larger ownership share and higher salary, failed to pursue patent applications for Lloyd’s inventions, withheld company records, charged personal expenses to the company, hired overpaid consultants, and mismanaged the business. Lloyd further alleged that Mullenex concealed a proposed sale of the company’s assets to Zimperium, Inc. and negotiated terms that favored Mullenex, his family, and friends.

Lloyd sued for fraud, fraudulent inducement, negligent misrepresentation, conversion, breach of fiduciary duty, intentional interference with prospective business relations, negligent interference with prospective business relations, unfair competition, and accounting. Mullenex moved to dismiss all claims under Federal Rule of Civil Procedure 9(b), which requires fraud-based claims to be pleaded with particular detail, and Rule 12(b)(6), which tests whether a complaint states a legally sufficient claim. Mullenex also argued that some claims were filed too late.

Court’s Analysis

The court denied Mullenex’s request to take judicial notice of two board-consent documents attached to the motion. Judicial notice permits a court to accept certain facts or documents without ordinary proof. The court found that the complaint did not refer to these documents, so they were not incorporated into the complaint by reference.

The court found that the fraud, fraudulent inducement, and negligent misrepresentation claims satisfied Rule 9(b). Although the complaint did not include direct quotations of every alleged statement, it identified relevant dates, events, representations, and circumstances sufficiently to notify Mullenex of the alleged conduct. The court also found that the claims were not barred by California’s three-year statute of limitations. The court relied on allegations that Lloyd did not discover important aspects of the alleged conduct until between 2016 and 2018.

The court granted the motion to dismiss the breach-of-fiduciary-duty claim because the complaint did not clearly identify the conduct supporting that claim or explain why Lloyd could pursue it personally rather than on behalf of the company. The court granted the motion to dismiss the intentional and negligent interference claims because the complaint did not adequately identify the relevant relationships with Mi3 or Zimperium or explain how those relationships were disrupted.

The court granted the motion to dismiss the unfair-competition claim because Lloyd alleged that he was a Florida resident but did not clearly allege that the relevant conduct occurred in California, as required for the claim under the court’s analysis. The court also stated that Lloyd could amend his request for a disgorgement remedy to clarify whether he sought permissible restitutionary disgorgement rather than impermissible nonrestitutionary disgorgement.

The court granted the motion to dismiss the conversion claim because Lloyd alleged that Mi3, rather than Lloyd personally, owned the proceeds from the Zimperium transaction. The complaint therefore did not allege that Lloyd personally had a right to possess the funds. The court denied the motion to dismiss the accounting claim because the adequately pleaded fraud-based allegations supplied alleged misconduct supporting an accounting.

Disposition

Judge Nathanael M. Cousins granted in part and denied in part Mullenex’s motion to dismiss. The court denied the motion to dismiss the claims for fraud, fraudulent inducement, negligent misrepresentation, and accounting. It granted the motion to dismiss the claims for conversion, breach of fiduciary duty, intentional interference with prospective business relations, negligent interference with prospective business relations, and unfair competition, and granted Lloyd leave to amend those claims. Lloyd could file an amended complaint or notify the court that he did not wish to amend by December 6, 2019.