The opinion
1
2
3
4 UNITED STATES DISTRICT COURT
5 NORTHERN DISTRICT OF CALIFORNIA
6
7 ADVSR, LLC, Case No. 19-cv-02670-JCS
8 Plaintiff,
ORDER REGARDING MOTION TO
9 v. DISMISS
10 MAGISTO LTD., et al., Re: Dkt. No. 60
Defendants.
11
12 I. INTRODUCTION
13 Plaintiff Advsr, LLC alleges in this action that Defendants Magisto Ltd. and Yahal Zilka
14 are liable for claims arising from an acquisition of Magisto after Magisto had entered a consulting
15 contract with Advsr to secure such an acquisition. Magisto has answered Advsr’s complaint, but
16 Zilka now moves under Rule 12(b)(6) of the Federal Rules of Civil Procedure to dismiss the two
17 claims against him, for intentional interference with contractual relations and intentional
18 interference with prospective economic relations, for failure to state a claim on which relief can be
19 granted. The Court held a hearing on February 28, 2020. For the reasons discussed below, Zilka’s
20 motion is DENIED.1
21 II. ALLEGATIONS OF THE COMPLAINT
22 Because a plaintiff’s factual allegations are generally taken as true in resolving a motion to
23 dismiss under Rule 12(b)(6), this section summarizes the relevant allegations of Advsr’s complaint
24 as if true. Nothing in this order should be construed as resolving any issue of fact that might be
25 disputed at a later a stage of the case.
26 Magisto is an Israeli technology company and “the developer of an application for
27
1 automated video editing.” 1st Am. Compl. (“FAC,” dkts. 47-4 (sealed version), 50 (public
2 redacted version)) ¶¶ 8, 18. Zilka was a major shareholder of Magisto and a member of its board
3 of directors. Id. ¶ 5.
4 Advsr and Magisto entered an agreement on May 22, 2017 for Advsr to facilitate the
5 acquisition of Magisto in return for a fee totaling 3% of the price paid in such an acquisition,
6 among other terms. See id. ¶¶ 19, 22. Under the terms of the contract, Advsr was entitled to its
7 fee if Magisto “entered into” a covered transaction during the term of the agreement or within nine
8 months following its termination, and Magisto was prohibited from intentionally structuring or
9 delaying a transaction to avoid that obligation. Id. ¶ 23. Relying in part on a provision of the
10 contract stating that its “intent is for a transaction to be viewed contextually and equitably and not
11 narrowly,” Advsr contends that “entering into” a transaction within the covered period of time
12 does not require signing a final binding agreement during that time. Id. ¶¶ 24–25 & Ex. 2
13 (Statement of Work, § 5).
14 In the months following execution of its contract with Magisto, Advsr performed
15 substantial work to identify and court potential acquirers, including introducing Magisto to IAC,
16 “a leading media and internet company with more than 150 brands, including Vimeo.” Id. ¶¶ 35–
17 39. With Advsr’s assistance, Magisto and IAC entered a nondisclosure agreement in July of 2017,
18 and continued discussions thereafter. Id. ¶¶ 40–41.
19 In November of 2017, Magisto CEO Oren Boiman informed Advsr that Magisto wished to
20 take a different approach to pursuing an acquisition than Advsr had recommended, and Advsr
21 responded by encouraging Magisto to follow Advsr’s initial approach. Id. ¶ 42. On December 14,
22 2017, Boiman told Advsr that Magisto intended to terminate its contract, but Boiman and Advsr
23 agreed that Advsr would continue to support a potential deal between Magisto and IAC during the
24 nine-month tail period. Id. ¶ 43. Magisto provided formal thirty-day notice of termination on
25 December 17, 2017, which, if effective, would have resulted in termination on January 14, 2018,
26 and a conclusion of the tail period in mid-October of 2018. Id. ¶ 45 n.3.
27 Advsr continued its work supporting Magisto’s discussions with IAC and Vimeo. Id.
1 and Advsr, at Magisto’s request, prepared a detailed economic analysis of Magisto’s potential
2 value to IAC, which Advsr presented to IAC. Id. ¶¶ 52–56. Magisto and IAC entered a second
3 nondisclosure agreement on September 4, 2018 to facilitate sharing more sensitive information
4 and conduct due diligence in anticipation of a merger. Id. ¶¶ 57–60. At Magisto CEO Boiman’s
5 request, Advsr then pushed IAC to offer a potential valuation range for an acquisition. Id. ¶ 61.
6 Other Magisto personnel asked Advsr to explore other potential acquirers at the same time,
7 but because there was not sufficient time left in the tail period of the terminated contract to enter a
8 new transaction with a different buyer, Advsr notified Boiman that it would only work to find
9 other buyers if Magisto extended the tail period by three months. Id. ¶ 62. Boiman did not
10 respond, and Advsr did not pursue other buyers. Id.
11 In response to inquiries from Advsr, IAC provided Magisto with a favorable valuation
12 range on September 28, 2018, “far greater than anything Magisto could have achieved using a
13 traditional approach” rather than Advsr’s approach to negotiations. Id. ¶ 65. Given the
14 approaching end of the tail period, Advsr asked Magisto to confirm that Advsr would be paid if
15 the transaction closed, and Magisto CEO Boiman responded “that there was ‘no question’ that
16 Advsr would be paid if the Transaction was consummated.” Id. ¶ 66. Later on September 28th,
17 Boiman stated in an email to Vimeo CEO Sud that the price range offered by IAC was “definitely
18 worthy to start getting into the details.” Id. ¶ 69 (emphasis omitted). A deal eventually closed on
19 May 28, 2019 within the range provided on September 28, 2018. See id. ¶¶ 71–73.
20 In October of 2018, Advsr continued to act as a point of contact between Magisto and IAC,
21 and also prepared a presentation for Magisto’s board of directors outlining Advsr’s work and
22 strategy for the acquisition. Id. ¶ 74. Boiman deflected Advsr’s requests to present to the board,
23 instead telling Advsr to meet with Magisto’s major investor and board member Defendant Zilka,
24 who, Boiman said, disliked Advsr and had called for Advsr’s contract to be terminated in
25 November of 2017. Id. ¶ 75. When Advsr’s CEO met with Zilka in October of 2018, Zilka
26 criticized Advsr’s performance and stated that Magisto’s board was not aware of and had not
27 approved Advsr and Magisto’s pursuit of a deal with IAC during the tail period of the contract.
1 a recommendation to the board on how to proceed. Id. ¶ 77 (emphasis omitted). Zilka also said
2 that after Advsr’s contract was terminated, Magisto had pursued funding from investors, which
3 was not consistent with its strategy of pursuing an acquisition. Id. Boiman thereafter became
4 “increasingly evasive” in communications with Advsr, stating that the issue of Advsr’s
5 compensation “was a matter for Zilka, the Board, and Magisto’s lawyers.” Id. ¶ 79.
6 Advsr learned through discovery in this action that Boiman and Zilka continued to pursue
7 to the transaction with IAC for seven weeks after IAC presented its valuation range on September
8 28, 2018 “while concealing it and Advsr’s role from the Board and shareholders.” Id. ¶ 80
9 (emphasis omitted). In an October 18, 2018 message to Boiman regarding negotiations with other
10 bankers, Zilka instructed him that the “tail period should be short as possible” because Magisto
11 was “hurt significantly by the tail period,” which Advsr construes as indicating Zilka’s belief that
12 Magisto owed Advsr money for its work in the tail period. Id. ¶ 82. Magisto and Vimeo signed a
13 non-solicitation agreement on October 23, 2018, but Boiman and Zilka did not notify Magisto’s
14 board of that agreement or negotiations with Vimeo at a board meeting on October 25, 2018. Id.
15 ¶¶ 83–84.
16 According to Advsr, potential reasons for Boiman and Zilka to conceal the negotiations
17 from the Magisto board included: (1) ongoing efforts to solicit new investment without revealing
18 the valuation range offered by IAC; (2) aversion to revealing that Magisto had breached
19 agreements with shareholders to notify them of interest in acquisitions; (3) desire to steer
20 negotiations to a final form without input of “difficult questions” from other shareholders and
21 board members; and (4) increasing Boiman and Zilka’s personal profit at the expense of more
22 recent investors by structuring the acquisition as an all-cash rather than Vimeo stock deal; and
23 (5) “bilk[ing] Advsr out of its well-earned fee.” Id. ¶¶ 85–90. Acknowledging Advsr’s
24 entitlement to its fee would have revealed that negotiations had been ongoing for an extended
25 period without the board’s knowledge. Id. ¶ 91.
26 Advsr’s counsel sent Magisto an email on November 12, 2018 seeking assurance that
27 Advsr would be paid its fee. Id. ¶ 92. That email provoked a “frantic response” by Zilka and
1 some new event or document to parade as the faux starting point for the Transaction” outside of
2 the tail period. Id. ¶¶ 93–94. Boiman and Zilka flew to Los Angeles on November 14, 2018 to
3 meet with IAC and request a letter of intent (“LOI”) to share with Magisto’s board. Id. ¶ 94. IAC
4 proposed acquiring Magisto at the low end of the September 28, 2018 valuation range. Id. ¶ 95.
5 Internal correspondence from IAC personnel at the meeting indicate that “Zilka was ‘in the
6 driver’s seat’ at the meeting, it was Zilka who asked for an LOI to ‘share with the board to
7 formally kick off their internal review process,’ and it was Zilka who insisted that Magisto needed
8 to hire new bankers” to replace Advsr. Id.
9 IAC sent an LOI on behalf of Vimeo the next day, again at the low end of earlier valuation
10 range. Id. ¶ 96. Boiman and Zilka rushed to discuss the LOI with Deutsche Bank, which had not
11 yet been formally engaged by Magisto, and planned a counteroffer, but only after notifying the
12 board and shareholders. Id. ¶ 97. Boiman emailed the board to notify it of the LOI on Saturday,
13 November 17, 2018, and major shareholders were notified on November 20, 2018. Id. ¶¶ 99–100.
14 Advsr alleges that Magisto never signed that LOI and Boiman and Zilka never intended for it to do
15 so, but instead always intended to make a counteroffer after presenting it to the board. Id. ¶ 100.
16 According to Advsr, the sequence of events indicates that Boiman and Zilka could have obtained
17 an LOI from Magisto at any time, but only did so as a pretext to reveal the negotiations to the
18 board and establish a transaction date outside of the tail period after Advsr sent its demand letter.
19 Id. ¶ 101.
20 Magisto denied Advsr’s demand for its fee on November 25, 2018, asserting that the
21 discussions during the tail period did not constitute entering into a transaction covered by the
22 parties’ agreement. Id. ¶ 102. Advsr alleges that the short denial letter misrepresented the nature
23 of Magisto’s discussions with IAC. Id. ¶ 103.
24 Magisto continued to negotiate with Vimeo and IAC, eventually reaching a price for an all-
25 cash asset purchase near the middle of the September 28, 2018 valuation range, or perhaps higher
26 if other benefits to Magisto and its key employees are taken into account. Id. ¶¶ 108–116.
27 Magisto and Vimeo executed the agreement on April 11, 2019, “which was consummated on or
1 and Boiman continued to take steps to conceal the early negotiations involving Advsr, including
2 Zilka advising Boiman not to include the date of the September 4, 2018 nondisclosure agreement
3 in a revised letter of intent, id. ¶ 108, and Zilka instructing Boiman and others in a conversation
4 regarding tax liability for the acquisition to “[p]lease delete ALL correspondence on this matter
5 ASAP,” id. ¶ 113.
6 Advsr asserts the following claims, not at issue in the present motion, against Magisto:
7 (1) breach of express contract; (2) breach of implied contract; (3) breach of the implied covenant
8 of good faith and fair dealing; (4) fraud; (5) quantum meruit; (6) promissory estoppel; and (7)
9 unjust enrichment. Id. ¶¶ 122–85.
10 Advsr’s two claims against Zilka are for intentional interference with contractual relations
11 and intentional interference with prospective economic relations. Id. ¶¶ 186–200. Both depend on
12 allegations that “Zilka acted intentionally and without Board approval” to induce a breach or
13 disrupt relations by:
14 (a) improperly refusing to present Advsr’s Board Presentation to the
Board in October 2018; (b) falsely implying to Advsr in October 2018
15 that it would be paid for its services if the Transaction closed;
(c) instructing Boiman not to pay Advsr its fee; (d) hiding the
16 Transaction and Advsr’s involvement from the Board and Magisto’s
shareholders for personal gain; (e) ultra vires leading negotiations
17 with other bankers to further conceal the Transaction from the Board
and usurp its authority; (f) requesting the sham November 15th LOI
18 to further hide the Transaction and Advsr’s involvement;
(g) negotiating and obtaining a lesser purchase price from Vimeo than
19 Magisto would have received had Zilka not engaged in the foregoing
activities; and (h) deliberately deleting documents – and inducing
20 other Board members to delete documents – relevant to Advsr’s
efforts to recover its fee.
21
22 Id. ¶¶ 189, 196. Advsr alleges that but for Zilka’s conduct, Magisto would have paid Advsr its fee
23 for the Vimeo acquisition. Id. ¶¶ 191–92, 199–200.
24 III. ANALYSIS
25 A. Legal Standard
26 A complaint may be dismissed for failure to state a claim on which relief can be granted
27 under Rule 12(b)(6) of the Federal Rules of Civil Procedure. “The purpose of a motion to dismiss
1 Comm’n, 720 F.2d 578, 581 (9th Cir. 1983). Generally, a claimant’s burden at the pleading stage
2 is relatively light. Rule 8(a) of the Federal Rules of Civil Procedure states that a “pleading which
3 sets forth a claim for relief . . . shall contain . . . a short and plain statement of the claim showing
4 that the pleader is entitled to relief.” Fed. R. Civ. P. 8(a).
5 In ruling on a motion to dismiss under Rule 12(b)(6), the court takes “all allegations of
6 material fact as true and construe[s] them in the light most favorable to the non-moving party.”
7 Parks Sch. of Bus. v. Symington, 51 F.3d 1480, 1484 (9th Cir. 1995). Dismissal may be based on a
8 lack of a cognizable legal theory or on the absence of facts that would support a valid theory.
9 Balistreri v. Pacifica Police Dep’t, 901 F.2d 696, 699 (9th Cir. 1990). A pleading must “contain
10 either direct or inferential allegations respecting all the material elements necessary to sustain
11 recovery under some viable legal theory.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 562 (2007)
12 (citing Car Carriers, Inc. v. Ford Motor Co., 745 F.2d 1101, 1106 (7th Cir. 1984)). “A pleading
13 that offers ‘labels and conclusions’ or ‘a formulaic recitation of the elements of a cause of action
14 will not do.’” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Twombly, 550 U.S. at 555).
15 “[C]ourts ‘are not bound to accept as true a legal conclusion couched as a factual allegation.’”
16 Twombly, 550 U.S. at 555 (quoting Papasan v. Allain, 478 U.S. 265, 286 (1986)). “Nor does a
17 complaint suffice if it tenders ‘naked assertion[s]’ devoid of ‘further factual enhancement.’” Iqbal,
18 556 U.S. at 678 (quoting Twombly, 550 U.S. at 557). Rather, the claim must be “‘plausible on its
19 face,’” meaning that the claimant must plead sufficient factual allegations to “allow the court to
20 draw the reasonable inference that the defendant is liable for the misconduct alleged.” Id. (quoting
21 Twombly, 550 U.S. at 570).
22 A motion to dismiss may be granted based on an affirmative defense where “the defense
23 raises no disputed issues of fact.” Scott v. Kuhlmann, 746 F.2d 1377, 1378 (9th Cir. 1984).
24 “Whether a particular ground for opposing a claim may be the basis for dismissal for failure to
25 state a claim depends on whether the allegations in the complaint suffice to establish that ground,
26 not on the nature of the ground in the abstract.” Jones v. Bock, 549 U.S. 199, 215 (2007).
27 B. Elements and Causation
1 claims against Zilka. “To prevail on a cause of action for intentional interference with contractual
2 relations, a plaintiff must plead and prove (1) the existence of a valid contract between the plaintiff
3 and a third party; (2) the defendant’s knowledge of that contract; (3) the defendant’s intentional
4 acts designed to induce a breach or disruption of the contractual relationship; (4) actual breach or
5 disruption of the contractual relationship; and (5) resulting damage.” Reeves v. Hanlon, 33 Cal.
6 4th 1140, 1148 (2004).
7 The elements of a claim for interference with prospective relations are similar. “In order to
8 prove a claim for intentional interference with prospective economic advantage, a plaintiff has the
9 burden of proving five elements: (1) an economic relationship between plaintiff and a third party,
10 with the probability of future economic benefit to the plaintiff; (2) defendant’s knowledge of the
11 relationship; (3) an intentional act by the defendant, designed to disrupt the relationship; (4) actual
12 disruption of the relationship; and (5) economic harm to the plaintiff proximately caused by the
13 defendant’s wrongful act, including an intentional act by the defendant that is designed to disrupt
14 the relationship between the plaintiff and a third party.” Edwards v. Arthur Andersen LLP, 44 Cal.
15 4th 937, 944 (2008).
16 Zilka argues that “most of Advsr’s allegations” against him do not satisfy the element of
17 causation for either claim. Mot. (dkt. 60) at 2–3; see Reply (dkt. 70) at 2–6. Specifically, of the
18 allegations included in the paragraphs of Advsr’s complaint summarizing Zilka’s purportedly
19 culpable conduct, Zilka contends that only item (c)—“instructing Boiman not to pay Advsr its
20 fee,” see FAC ¶¶ 189, 196—bears any causal relationship to Advsr’s damages. He argues that the
21 remaining allegations—refusing to allow Advsr to present to the board, implying to Advsr that it
22 would be paid, concealing the negotiations and Advsr’s involvement from the board, leading
23 negotiations with other bankers “ultra vires,” “requesting the sham November 15th LOI,”
24 negotiating a lesser purchase price than Magisto would have obtained with Advsr, and deleting
25 documents, see id.—are not related to Advsr’s harm or are “purely internal governance issue[s].”
26 See Mot. at 3.
27 Zilka does not dispute that his alleged instruction not to pay Advsr its fee satisfies the
1 id. at 3. As discussed below, the Court concludes that the manager’s privilege does not warrant
2 dismissal of this case based on Advsr’s pleadings alone. The Court therefore assumes for this
3 motion and for the sake of argument that Zilka is correct as to the lack of causal relationship
4 between Advsr’s other allegations and its harm, because in the absence of the manager’s privilege,
5 the allegation that Zilka cause Magisto to withhold Advsr’s fee is sufficient to meet the element of
6 causation and deny Zilka’s motion.
7 C. Scope of the Manager’s Privilege
8 As a defense to claims of intentional interference with contract, California recognizes a
9 “manager’s privilege,” under which “‘a manager or agent may, with impersonal or disinterested
10 motive, properly endeavor to protect the interests of his principal by counseling the breach of a
11 contract with a third party which he reasonably believes to be harmful to his employer’s best
12 interests.’” Huynh v. Vu, 111 Cal. App. 4th 1183, 1195 (2003) (quoting Olivet v. Frischling, 104
13 Cal. App. 3d 831, 840–41 (1980), disapproved on other grounds by Applied Equip. Corp. v. Litton
14 Saudi Arabia Ltd., 7 Cal. 4th 503, 510 (1994)). The scope of this privilege “is neither clear nor
15 consistent,” and can take “‘three formulations . . . : (1) absolute, (2) mixed motive, and
16 (3) predominant motive.’” Id. (quoting Halvorsen v. Aramark Unif. Servs., Inc., 65 Cal. App. 4th
17 1383, 1391 (1998)).
18 In Olivet, a seminal California case considering this doctrine, the Court of Appeal held that
19 the privilege did not apply where a plaintiff alleged facts supporting an inference “that defendants
20 were acting solely in order to obtain [advantage] for themselves,” but noted that at a later stage of
21 the case the “defendants may be able to justify their conduct by showing as a matter of fact that
22 their actions were intended solely for the benefit” of the hospital for which they served as
23 directors. Olivet, 104 Cal. App. 3d at 841. That case shed little light on the grey area where a
24 director might be motivated in part by the director’s own interest and in part by the corporation’s
25 interest.
26 Two years after Olivet, the Ninth Circuit considered the issue in Los Angeles Airways, Inc.
27 v. Davis, noting that “neither Olivet nor any other reported California decision has explicitly
1 with the intent to benefit his employer’s interest as well as his own.” L.A. Airways, 687 F.2d 321,
2 328 (9th Cir. 1982). With no guidance from the California courts, the Ninth Circuit adopted the
3 “mixed motive” test, holding that so long as an advisor is motivated at least in part by the interests
4 of a principal, the privilege applies. Id. The full extent of the Ninth Circuit’s reasoning reads as
5 follows:
6 We conclude that where, as here, an advisor is motivated in part by a
desire to benefit his principal, his conduct in inducing a breach of
7 contract should be privileged. The privilege is designed to further
certain societal interests by fostering uninhibited advice by agents to
8 their principals. The goal of the privilege is promoted by protecting
advice that is motivated, even in part, by a good faith intent to benefit
9 the principal’s interest.
10 We believe that advice by an agent to a principal is rarely, if ever,
motivated purely by a desire to benefit only the principal. An agent
11 naturally hopes that by providing beneficial advice to his principal,
the agent will benefit indirectly by gaining the further trust and
12 confidence of his principal. If the protection of the privilege were
denied every time that an advisor acted with such mixed motive, the
13 privilege would be greatly diminished and the societal interests it was
designed to promote would be frustrated. We do not believe that the
14 California Supreme Court would so eviscerate the privilege, and we
decline to do so.
15
16 Id.
17 Two decades later, a California appellate court conducted a detailed survey of the doctrine,
18 and expressly declined to follow L.A. Airways. See Huynh, 111 Cal. App. 4th at 1196–200. The
19 Hyunh court noted that cases considering a manager’s decision to fire an employee had often
20 (although not exclusively) applied an absolute immunity regardless of motive, but “outside the at-
21 will employment arena the privilege is most often applied as a qualified one.” Id. at 1196–98. In
22 contexts other than employment, the court found “no consensus regarding whether this qualified
23 manager’s privilege requires that the manager’s motive to benefit the principal predominate over
24 any personal motive (the predominant motive test), or merely require a showing that the manager
25 is motivated in part, if not primarily, by a desire to benefit the principal (the mixed motive test).”
26 Id. at 1198. The court adopted the former test, holding that where “a manager stood to reap a
27 tangible personal benefit from the principal’s breach of contract, so that it is at least reasonably
1 manager should not enjoy the protection of the manager’s privilege unless the trier of fact
2 concludes that the manager’s predominant motive was to benefit the principal,” and providing the
3 following thorough reasoning:
4 Our conclusion that the predominant motive test should be applied
when a defense of manager’s privilege is asserted in response to most
5 forms of commercial tort claims rests on several factors. First, in
practical terms, adopting the mixed motive test would be tantamount
6 to proclaiming absolute immunity. Rare indeed would be the case
where the principal’s interest could not be advanced at least to some
7 degree by the manager’s advice. If not, how else would the principal
become convinced to breach its contract in the first place? Despite the
8 weight of evidence which may exist as to the real motive and interest
of the manager, if the manager can enjoy immunity from tort liability
9 merely by proffering some plausible reason the principal might
benefit from a breach, few cases will ever reach a civil jury, let alone
10 result in a verdict against the manager.
11 Second, the predominant motive test also best meets the economic
considerations applicable to the tort of interference with contract.
12 Generally, the right of a contracting party to breach a contract and pay
damages (nominally referred to as “expectation damages”), instead of
13 being required by law to perform, has driven legal economists to extol
the principle of efficient breach of contract as “ ‘[o]ne of the most
14 enlightening insights of law and economics.’ ” (McChesney, Tortious
Interference with Contract Versus “Efficient” Breach: Theory and
15 Empirical Evidence (1999) 28 J. Legal Stud. 131, 132, fn. omitted,
quoting Cooter & Ulen, Law and Economics (1988), p. 290.)
16 Essentially, where it is worth more to the promisor to breach rather
than to perform a contract, it is more efficient for the law to allow the
17 promisor to breach the contract and to pay the promisee damages
based on the benefit the promisee expected to gain by the completed
18 contract. (Ibid.) Providing a manager with immunity where the advice
to breach is given predominantly to benefit the principal is consistent
19 with the efficient breach theory: The principal/promisor is thus
enabled to obtain and rely on the manager’s advice in making a
20 judgment whether its interests are best served by performance, or by
breach and the payment of damages to the promisee.
21
However, if the manager’s privilege is absolute, or subject only to the
22 mixed motive test, the privilege would allow the manager to retain the
manager’s own benefit from the principal’s breach while escaping
23 any allocated share of liability. Where the economic benefit to the
manager occasioned by the principal’s breach of contract exceeds any
24 incremental benefit to the principal, then the privilege would permit
the manager to shift the manager’s own burden in having caused the
25 promisee’s damages improperly to the principal. In addition, if the
principal is unable to pay expectation damages to the promisee (for
26 example, if the principal becomes bankrupt), then the inefficiency of
the principal’s breach is compounded by the shortfall in damages
27 recoverable by the promisee who would be precluded from recovering
This example reveals an unnecessary inequity created by not applying
1 the predominant motive test to the manager’s privilege under a
fundamental economic theory of law. It is also not simply a
2 hypothetical illustration. (See Comment, Boxing Basinger: Oral
Contracts and the Manager’s Privilege on the Ropes in Hollywood
3 (2002) 9 UCLA Ent. L. Rev. 285, 287–291; Note, Main Line v.
Basinger and the Mixed Motive Manager: Reexamining the Agent’s
4 Privilege to Induce Breach of Contract (1995) 46 Hastings L.J. 609,
626.)
5
The final factor in our decision to adopt a predominant motive test,
6 while not compelling, is that this result is in accord with decisions of
the highest courts of several other states. (See, e.g., Geolar, Inc. v.
7 Gilbert/Commonwealth (Alaska 1994) 874 P.2d 937, 940–941; Jones
v. Lake Park Care Center, Inc. (Iowa 1997) 569 N.W.2d 369, 376–
8 378; Nordling v. Northern States Power Co. (Minn. 1991) 478
N.W.2d 498, 507; Trau-Med of America, Inc. v. Allstate Ins. Co.
9 (Tenn. 2002) 71 S.W.3d 691, 701–702 & fn. 5; see also Note, supra,
46 Hastings L.J. at pp. 629, 632–637; but see Welch v. Bancorp
10 Management Advisors, Inc. (1983) 296 Or. 208, 675 P.2d 172, 178–
179, mod. on other grounds, 296 Or. 713, 679 P.2d 866 [adopting
11 mixed motive test].)
12 Id. at 1198–100.
13 The parties here dispute whether this Court should follow the Ninth Circuit’s decision in
14 L.A. Airways or the California appellate court’s more recent decision in Huynh. Zilka cites several
15 district court decisions for the rule that this Court must follow Ninth Circuit precedent interpreting
16 California law even if California appellate courts have reached different conclusions since the
17 Ninth Circuit opined on the issue. See Reply at 10 & n.47 (Citizens of Humanity, LLC v. LAB
18 sarl, No. CV 12-10627-MMM (JEMx), 2013 WL 12129393, at *17 (C.D. Cal. Apr. 22, 2013)2;
19 Simpson v. Philip Morris Inc., No. CV03-4717SVW(CWX), 2003 WL 23341207, at *8 (C.D. Cal.
20 Nov. 6, 2003); Brewster v. Cty. of Shasta, 112 F. Supp. 2d 1185, 1188 n.5 (E.D. Cal. 2000)). This
21 Court is aware of no binding authority so holding.
22 To the contrary, the Ninth Circuit has held that its interpretation of state law is “only
23
2 Advsr makes much of the fact that the district court’s decision in Citizens of Humanity
24
dismissing claims based on the manager’s privilege is “unpublished.” See Opp’n (dkt. 66) at 5–6.
The distinction between published and unpublished cases is highly relevant for the decisions of
25
many appellate courts, where a published case constitutes binding precedent while an unpublished
decision might range from nonprecedential to non-citable. In the context of district court
26
decisions, however, the distinction is generally meaningless, and often depends on classifications
made by a reporting service rather than by the court itself. Excepting narrow doctrines of estoppel
27
and law of the case, no district court decision binds any court (or even the issuing court) in future
1 binding in the absence of any subsequent indication from the California courts that [the Ninth
2 Circuit’s] interpretation was incorrect,” and that intervening “decisions from the courts of appeal
3 [can] cast a new light on the question,” thus reaffirming—even where the Ninth Circuit has
4 previously addressed an issue of state law—the rule that “‘[i]n the absence of a pronouncement by
5 the highest court of a state, the federal courts must follow the decision of the intermediate
6 appellate courts of the state unless there is convincing evidence that the highest court of the state
7 would decide differently.’” Owen ex rel. Owen v. United States, 713 F.2d 1461, 1464 (9th Cir.
8 1983) (quoting Andrade v. City of Phoenix, 692 F.2d 557, 559 (9th Cir. 1982) (per curiam)). More
9 recently, the Ninth Circuit has held that it was “bound to follow” two intermediate California
10 appellate decisions that conflicted with a previous Ninth Circuit interpretation of California law
11 “absent convincing evidence that the California Supreme Court would reject” the California
12 appellate courts’ approach. In re Watts, 298 F.3d 1077, 1082 (9th Cir. 2002). In light of Watts
13 and Owen, this Court has previously recognized that it is not bound by Ninth Circuit
14 interpretations of state law that have since been contradicted by state appellate courts. Watkins v.
15 City of Oakland, No. 17-cv-06002-JCS, 2018 WL 574906, at *12 (N.D. Cal. Jan. 26, 2018); see
16 also In re Seagate Tech. LLC, 326 F.R.D. 223, 240 (N.D. Cal. 2018). The Court respectfully
17 disagrees with district courts that have reached the opposite conclusion, including Citizens of
18 Humanity, 2013 WL 12129393, at *17, Simpson, 2003 WL 23341207, at *8, and Brewster, 112 F.
19 Supp. 2d at 1188 n.5.
20 In L.A. Airways, the Ninth Circuit acted without the benefit of any published California
21 decision on point, and provided relatively limited reasoning to support its conclusion that a mixed
22 motive test should apply. See L.A. Airways, 687 F.2d at 328. The court justified its conclusion
23 that even a small degree of personal motivation should not always destroy the privilege, but does
24 not appear to have considered whether a “predominant motive” test would be preferable. See id.
25 In the more recent Huynh decision, the California court considered that issue, noted that a strict
26 application of the L.A. Airways “mixed motive” test would render the privilege virtually absolute,
27 and presented reasons why allowing a manager largely motivated by self-interest to escape
1 Cal. App. 4th at 1198–99. This Court discerns no “convincing evidence” in the reasoning of L.A.
2 Airways or any other authority cited by Defendants indicating that the California Supreme Court
3 would reject Huynh’s conclusion if presented with the issue. See Watts, 298 F.3d at 1082; Owen,
4 713 F.2d at 1464.
5 Zilka argues that federal courts have “steadfastly rejected Huyn [sic],” Mot. at 6–7, citing
6 one district court decision that did not address Huynh at all (Chaganti v. I2 Phone Int’l, Inc., 635
7 F. Supp. 2d 1065, 1075 (N.D. Cal. 2007)), one that acknowledged Huynh but did not explain why
8 it followed the L.A. Airways rule instead (Harrison Ventures, LLC v. Alta Mira Treatment Ctr.,
9 LLC, No. C 10-00188 RS, 2010 WL 1929566, at *6 (N.D. Cal. May 12, 2010)), and one that
10 appears to have considered itself bound by L.A. Airways despite the intervening and conflicting
11 decision in Huynh (Salandstacy Corp. v. Freeney, No. CV 12-10106 SJO (Ex), 2014 WL
12 12570924, at *5 (C.D. Cal. Jan. 3, 2014)). In his reply brief, Zilka notes that another decisions
13 from this district applied L.A. Airways’s “mixed motive” rule despite also citing Huynh, see Reply
14 at 11, but that case does not appear to have recognized any meaningful distinction between Huynh
15 and L.A. Airways, despite Huynh’s explicit characterization of L.A. Airways as adopting the
16 “mixed motive” test that Huynh rejects. See Canard v. Bricker, No. 14-cv-04986-JSC, 2015 WL
17 846997, at *3 (N.D. Cal. Feb. 25, 2015); cf. Huynh, 111 Cal App. 4th at 1196, 1198.
18 This Court respectfully disagrees with those decisions, which do not appear to have
19 considered Ninth Circuit precedent addressing the effect of intervening state appellate decisions on
20 the precedential value of earlier Ninth Circuit interpretations of state law. This Court therefore
21 follows Huynh and applies the “predominant motive” test to the case at hand.
22 Zilka’s briefs do not argue that Advsr’s allegations fail that test, arguing only that Advsr’s
23 allegations show that he “acted, at least in part, to benefit Magisto,” Reply at 13, and that
24 “whether [he] sought to benefit himself from the Transaction is beside the point here,” Mot. at 7.
25 See generally Mot. at 6–8; Reply at 10–13. At the hearing, Zilka’s counsel argued for the first
26 time that he should prevail even under the Huynh standard. Zilka is correct that some of Advsr’s
27 allegations indicate that he was motivated to save Magisto money. See, e.g., FAC ¶ 90
1 money]” as a “fourth reason” for Zilka and Boiman’s conduct). Advsr also alleges, however, that
2 || Zilka and Boiman were motivated by a separate and purely personal desire to control the deal
3 themselves so that they could structure it to benefit early Magisto investors (like themselves) at the
4 || expense of more recent Magisto investors, FAC 4] 88-89, and that paying Advsr for its work
5 would have revealed to the rest of Magisto’s board and investors that Zilka and Boiman had
6 || negotiated an acquisition in secret over an extended period of time, see id. 4] 5, 85-87, 91. Based
7 on these allegations, the Court cannot say that Advsr’s complaint reveals, as a matter of
8 || undisputed fact, that Zilka was “predominantly” motivated by Magisto’s interests. The motion to
9 dismiss is therefore DENIED.
10 || IV. CONCLUSION
11 For the reasons discussed above, Zilka’s motion to dismiss the claims against him in
12 || Advsr’s first amended complaint is DENIED.
13 IT IS SO ORDERED.
14 |] Dated: February 28, 2020
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16 ief Magistrate Judge
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