Magic Leap, Inc. v. Xu

Background

Magic Leap, Inc. alleged that Chi Xu formerly worked for Magic Leap at its Sunnyvale, California facilities and signed a Proprietary Information and Inventions Agreement. The agreement restricted the use or disclosure of defined confidential and proprietary information during and after employment. Magic Leap alleged that Xu later formed Hangzhou Tairuo Technology Co., Ltd., doing business as Nreal, and that Nreal released competing mixed-reality glasses that were similar to Magic Leap’s confidential designs and information.

Magic Leap asserted four claims: breach of contract against Xu; interference with contract against Nreal; constructive fraud against Xu and Nreal; and unfair competition under California Business and Professions Code section 17200 and following. Defendants moved to dismiss under Rule 12(b)(6), which permits dismissal for failure to state a legally sufficient claim, and alternatively under Rule 12(b)(2) for lack of personal jurisdiction over Nreal.

Rulings on the Claims

Breach of contract. The court rejected defendants’ argument that the confidentiality provisions in the agreement were unenforceable restraints on trade as a matter of law. The court explained that determining whether the provisions imposed a substantial restraint could require factual development. However, the court agreed that Magic Leap failed to plead the breach element. Magic Leap alleged that Xu used confidential information, but did not identify what specific confidential information he used to start Nreal or create and promote the Nreal Light. The court granted the motion to dismiss this claim and granted Magic Leap leave to amend by adding facts explaining how Xu allegedly breached the agreement.

Interference with contract. Magic Leap alleged that Nreal induced Xu to breach the agreement. The court held that the fraud-based allegations did not satisfy Rule 9(b), which requires fraud to be pleaded with particular details about the alleged misconduct. The court also held that the claim failed independently because Magic Leap did not adequately plead how Xu breached the agreement or what intentional acts Nreal took to induce that breach. The court granted the motion to dismiss this claim and granted leave to amend.

Constructive fraud. Constructive fraud is a claim based on a breach of duty within a confidential or fiduciary relationship, causing reliance and injury. The court assumed for purposes of the motion that the agreement could establish a confidential relationship. It nevertheless held that Magic Leap did not identify any provision of the agreement requiring Xu to disclose his plans to form Nreal, obtain funding, promote Nreal, or promote the Nreal Light. Because Magic Leap did not allege a nondisclosure that breached a duty, the constructive-fraud claim failed against Xu. The court also rejected the related theories against Nreal because those theories depended on an underlying tort by Xu. The court granted the motion to dismiss this claim and granted leave to amend.

Unfair competition. California’s unfair-competition law covers business practices that are unlawful, unfair, or fraudulent. Magic Leap abandoned its unfair-prong theory, so the court granted the motion to dismiss that portion of the claim. The court also granted the motion to dismiss the fraudulent-prong claim because Magic Leap, a corporate competitor, could not rely on alleged deception directed only at it, and its allegations about deception of the public did not satisfy Rule 9(b). Finally, the court granted the motion to dismiss the unlawful-prong claim because Magic Leap conceded that it was based entirely on claims the court had dismissed. The court granted leave to amend the fraudulent- and unlawful-prong claims.

Personal Jurisdiction and Other Matters

The court did not resolve defendants’ alternative argument that it lacked personal jurisdiction over Nreal because it had already dismissed Magic Leap’s claims for failure to state a claim. In anticipation of an amended complaint, however, the court stated that Magic Leap could not rely on Nreal’s California contacts after June 17, 2019, and that it needed to explain how any relevant intentional conduct was expressly aimed at California and caused harm that Nreal knew was likely to be suffered there. The court also said Magic Leap could continue jurisdictional discovery consistent with prior discovery orders.

The court sustained Magic Leap’s objection to most of the challenged paragraphs in Xu’s declaration because the court did not rely on that material in deciding the pleading issue. The court separately admonished Magic Leap concerning possible professional-conduct issues involving an inquiry to Nreal, but did not resolve the motion on that basis.

Disposition

The court granted defendants’ motion to dismiss with leave to amend. Magic Leap was required to file any amended complaint within 30 days, with a redlined comparison to the original complaint. The order states that failure to amend, or failure to cure the identified deficiencies, would result in dismissal of deficient claims with prejudice. Magic Leap could not add new causes of action or parties without a stipulation or court permission.