Crosscode v. Sharma

Background

Crosscode Inc. sued Aditya R. Sharma, its founder and former chief executive officer. After shareholders removed Sharma as chairman and Crosscode’s new board terminated him as chief executive officer, Sharma invoked a previously undisclosed licensing agreement concerning Crosscode’s Panoptics software. The agreement, dated August 16, 2017, identified Sharma as the software’s owner and gave Crosscode an exclusive license in exchange for 20% of global sales revenues.

Crosscode sought, among other things, a declaration that the agreement was invalid. It argued that Sharma fabricated the agreement. Crosscode initially obtained a temporary restraining order barring Sharma from invoking the agreement, using Crosscode’s software and intellectual property, or intentionally destroying evidence. The motion addressed here sought a preliminary injunction, which is temporary relief issued while a case is pending.

Personal jurisdiction, venue, and ripeness

Sharma argued that the court lacked personal jurisdiction over him for Crosscode’s request for a declaration about the agreement. The court rejected that argument. It found that Sharma purposefully directed his conduct toward California because, according to the record, he sought to regain control of a California company, force Crosscode to fire its California-based chief technology officer, and discourage Californians from investing in Crosscode. The court also noted Sharma’s dealings with California-related entities involved in developing the software and raising capital. It concluded that exercising jurisdiction was fair and that venue was proper in the Northern District of California.

The court also rejected Sharma’s argument that Crosscode’s contract claim was not ready for decision because the Patent and Trademark Office had not yet approved a patent application. The court explained that Crosscode was challenging the licensing agreement, not the validity of a patent or Crosscode’s rights as a patent holder. It therefore found the contract dispute ready for adjudication.

Likelihood of success on the contract claim

To obtain a preliminary injunction, Crosscode had to show that it was likely to succeed on the merits, likely to suffer irreparable harm without relief, that the balance of harms favored it, and that an injunction would serve the public interest.

The court found that Crosscode was likely to succeed in establishing that the licensing agreement was fabricated. Sharma produced the agreement only after his removal from Crosscode and after he had asserted and withdrawn allegations of securities fraud. Crosscode had no record of the agreement and had never paid Sharma royalties during the more than two years covered by the purported agreement. Current and former Crosscode board members and officers said they had not seen it before Sharma invoked it. The court also found that an email Sharma offered in support of the agreement appeared to be fabricated.

The court further stated that Sharma likely submitted false evidence in related litigation, including purported text messages about an alleged assault that the supposed sender denied sending. The court noted that Sharma wiped his computer using file-shredding software after receiving a preservation notice. On this record, the court concluded that Sharma’s representations appeared false and designed to manipulate the legal process.

Even if the agreement was not fabricated, the court found that Crosscode was likely to prove it unenforceable under Minnesota law for lack of consideration, meaning a lack of something legally sufficient exchanged to support the promise. The record indicated that rights in the software and patent application had already been assigned to Crosscode before Sharma later purported to license that intellectual property to Crosscode for royalties. The court did not need to consider Crosscode’s separate argument that the agreement was void because a related-party transaction had not received formal approval.

The court rejected Sharma’s argument that his removal from Crosscode’s board undermined Crosscode’s contract claim. The court read Crosscode’s notice bylaw as applying to actions taken at a meeting, while shareholders had removed Sharma by written consent. It stated that Delaware law permits shareholders to act by written consent outside a meeting.

Other preliminary-injunction factors and scope

The court found that Crosscode faced irreparable harm because its financial condition was tenuous and its intellectual property was its primary selling point to investors. The purported agreement could scare away investors and threaten the company’s continued existence. The balance of harms favored Crosscode because Sharma likely fabricated the agreement and intentionally destroyed relevant evidence. The court also found an injunction served the public interest by preventing further wrongdoing and protecting the integrity of the judicial process.

The court limited the injunction’s scope. It found that Crosscode’s contract-based claim supported barring Sharma from invoking the licensing agreement during the litigation. But Crosscode’s request to bar Sharma from using the Panoptics software did not match that claim because the complaint did not seek a ruling on Sharma’s ability to use the software. The court said Crosscode could file an amended complaint asserting claims about Sharma’s use of the software and then seek to amend the injunction.

Disposition

The court granted Crosscode’s motion for a preliminary injunction. While the litigation continued, Sharma was enjoined from invoking the purported licensing agreement or any of its provisions and from hiding, altering, or destroying evidence. Sharma and his lawyers remained obligated to preserve potentially relevant evidence. The court also set a June 22, 2020 hearing to consider whether judgment should be entered for Crosscode based on Sharma’s alleged fabrication and destruction of evidence. The order did not enjoin Sharma from using the Panoptics software at that stage.