Talece Inc. v. Zhang

Background

Talece Inc. sued Zheng Zhang, its former chief executive officer and chief financial officer. Talece alleged that, during Zhang’s service, he refused to provide information about the company’s finances, submitted incorrect financial reports, transferred money from company accounts into an account allegedly connected to him, and took Talece’s intellectual property for use in a new company. Talece asserted claims for breach of fiduciary duty, unjust enrichment, conversion, and accounting.

Zhang moved to dismiss the First Amended Complaint under Federal Rule of Civil Procedure 12(b)(6), which tests whether a complaint legally states a claim. He argued that the complaint failed to satisfy the heightened pleading rules for shareholder derivative actions under Rule 23.1(b), contained conclusory or implausible allegations, failed to plead the alleged intellectual-property theft with the particularity required for fraud allegations under Rule 9(b), and did not support an accounting claim. In the alternative, he moved under Rule 12(e) for a more definite statement, which is a request for clarification when a pleading is too vague or ambiguous to answer.

Court’s analysis

The court declined to consider attachments and declarations that Zhang submitted with his motion. On a Rule 12(b)(6) motion, courts generally evaluate the complaint itself, subject to limited exceptions. The court found that neither the incorporation-by-reference doctrine nor judicial notice applied to the materials Zhang cited.

The court rejected Zhang’s argument that Talece’s lawsuit was effectively a shareholder derivative action. A derivative action is brought by a shareholder to enforce a claim belonging to the corporation, generally after the corporation’s board refuses to sue. The court concluded that the named plaintiff was Talece, acting as a corporation, and that the First Amended Complaint did not indicate that Ming Zhang was bringing the case on Talece’s behalf as an individual shareholder. The court therefore held that Talece was not subject to Rule 23.1(b)’s heightened pleading requirement.

The court also rejected Zhang’s challenge to the plausibility of the claims. It found that the allegations about transfers from Talece’s accounts, including Zhang’s alleged exclusive access to updated financial records and refusal to provide records, supported an inference at this stage that the destination account belonged to him. The court likewise found that the allegations about a new company’s website being nearly identical to Talece’s website, including its aesthetic, content, services, user interface, name, and logo, were enough to support the alleged taking of intellectual property without requiring a website image at the pleading stage.

The court agreed that the intellectual-property allegations were subject to Rule 9(b), which requires fraud-related allegations to identify the relevant circumstances with particularity, including the who, what, when, where, and how. It nevertheless held that Talece met that standard by identifying the intellectual property at issue, approximately when it was taken, the person alleged to have taken it, and the new company where it was allegedly used.

The court allowed the accounting claim to proceed. It explained that an accounting may be available when the parties have a fiduciary relationship, even without allegations that the accounts are unusually complicated. Because Zhang had been Talece’s CEO and CFO, the court found that Talece had sufficiently established a fiduciary relationship for pleading purposes.

Finally, the court denied the request for a more definite statement. It found that the complaint adequately explained why Zhang’s alleged use of $57,341.00 for undisclosed matters, rather than for internal operations related to a specific customer, was claimed to be wrongful. The court also found that the complaint identified the intellectual property at issue. It stated that printouts or comparisons of the websites were evidence that could be obtained in discovery, not information required through a more definite statement.

Disposition

Beth Labson Freeman denied Zhang’s Motion to Dismiss and denied Zhang’s Motion for a More Definite Statement. The order did not dismiss Talece’s First Amended Complaint.