Tom Lehman v. Medialab AI, Inc.

UNITED STATES DISTRICT COURT

CENTRAL DISTRICT OF CALIFORNIA

CIVIL MINUTES —- GENERAL ‘oO’

Case No. 2:23-cv-09055-CAS(JPRx) Date April 15, 2024

Title Tom Lehman v. Medialab AI, Inc. et al.

Present: The Honorable CHRISTINA A. SNYDER

Catherine Jeang Laura Elias N/A

Deputy Clerk Court Reporter / Recorder Tape No.

Attorneys Present for Plaintiffs: Attorneys Present for Defendants:

Ethan Jacobs Maurice Pessah

Proceedings: DEFENDANTS’ MOTION TO DISMISS (Dkt. 26, filed on January

15, 2024)

I. INTRODUCTION

Presently before the Court is defendants’ motion to dismiss. Dkt. 26 (“Mot.’).

On October 26, 2023, plaintiff Tom Lehman filed a complaint against defendants

Medialab AI, Inc. (“Medialab”), Otin Holdings, LLC (“Otin Holdings”), Michael

Heyward (“Heyward”), and Does 1-10 (collectively “defendants”’) alleging (1) breach of

contract; (2) tortious interference with contract; and (3) fraud. Dkt. 3-1 (“Compl.’).

On January 15, 2024, Heyward and Medialab filed the instant motion to dismiss or,

in the alternative, to stay this action. Dkt. 26 (“Mot.”). On February 5, 2024, plaintiff

filed an opposition to the motion to dismiss. Dkt. 31-2 (“Opp.”). On February 12, 2024,

the moving defendants filed a reply. Dkt. 38 (“Reply”).

On February 26, 2024, the Court reserved judgment on defendants’ motion to

dismiss pending the completion of jurisdictional discovery. On March 25, 2024, the

Court held a status conference. Dkt. 45. At the status conference, the parties agreed that

Otin Holdings’ members are California residents. On the same day, defendant Otin

Holdings filed a joinder to the motion to dismiss. Dkt. 44.

On April 15, 2024, the Court held a hearing. Having carefully considered the

parties’ arguments and submissions, the Court finds and concludes as follows.

UNITED STATES DISTRICT COURT

CENTRAL DISTRICT OF CALIFORNIA

CIVIL MINUTES — GENERAL ‘Oo’

Case No. 2:23-cv-09055-CAS(JPRx) Date April 15, 2024

Title Tom Lehman v. Medialab AI, Inc. et al.

Il. BACKGROUND

Unless otherwise noted, the following facts are taken from plaintiffs complaint.

Plaintiff Tom Lehman is “an entrepreneur and businessperson” who lives in

Germantown, New York. Compl. § 7. Defendant MediaLab is a Delaware corporation

with its headquarters in Los Angeles, California, and is “a holding company of consumer

internet brands.” Id. §] 8. Defendant Michael Heyward is the Chief Executive Officer of

MediaLab and lives in Los Angeles, California. Id. { 10. Defendant Otin Holdings is

believed to be a Delaware limited liability company with no physical presence in any

state. Id. ]9. At the hearing, the parties confirmed that Otin Holdings’ members are

California residents. Defendants Doe 1-10 (the “Doe Defendants’) are entities that

loaned money to MediaLab. Id. 11.

In 2009, Tom Lehman co-founded Genius Media Group (“Genius”) as “a website

where users could read and decode intricate rap lyrics.” Id. ] 20. In September 2021,

Medialab acquired Genius for $80 million. Id. ] 22. As part of the acquisition,

MediaLab granted Lehman shares of MediaLab stock. Id. 2. At or around the time of

the acquisition, MediaLab created Otin Holdings to buy all of Lehman’s MediaLab

shares. Id. MediaLab also entered into two agreements with Lehman: a September 13,

2021 Put Agreement (the “Put Agreement”), and a September 13, 2021 Employment

Agreement (the “Employment Agreement”). Id. § 23.

The Put Agreement contains several relevant provisions. Section 1(a) of the Put

Agreement “sets out [a] schedule under which Otin Holdings is obligated to purchase |]

Lehman’s shares of MediaLab’s common stock at a pre-determined price,” and required

Otin Holdings to purchase “a// shares currently owned by [] Lehman on September 13,

2023.” Id. § 35 (emphasis added). Section 3 obligated MediaLab to provide Otin

Holdings with an irrevocable standby letter of credit to fund Otin Holding’s purchase of

MediaLab shares from Lehman. Id. 4 36. In Section 5, MediaLab provided a series of

representations, including that “MediaLab shall take such necessary action to fund

amounts drawn pursuant to the Letter of Credit.” Id. 937. Plaintiff alleges that

“Ta|lthough Brad Brooks signed the Put Agreement on behalf of Otin Holdings, Section 7

of the Put Agreement identifies |] Heyward as the contact for Otin Holdings at

MediaLab’s physical address and at [] Heyward’s MediaLab email address.” Id. §j 42.

UNITED STATES DISTRICT COURT

CENTRAL DISTRICT OF CALIFORNIA

CIVIL MINUTES —- GENERAL ‘oO’

Case No. 2:23-cv-09055-CAS(JPRx) Date April 15, 2024

Title Tom Lehman v. Medialab AI, Inc. et al.

Plaintiff alleges that Brooks is “Heyward’s business partner and is a member of

MediaLab’s board of directors.” Id. § 43.

Before September 2023, MediaLab, rather than Otin Holdings, purchased

Lehman’s MediaLab shares according to the schedule and terms set out in Section (1)(a)

of the Put Agreement.

In the Employment Agreement, MediaLab promised Lehman a retention bonus to

be paid in four installments. Id. ] 26. While Medialab paid the first two installments, it

did not make the third payment when the payment became due on March 13, 2023. Id.

When Lehman inquired about the missed payment, he was told that “MediaLab

was in breach of a financial covenant and that its lenders therefore had told MediaLab not

to pay [Lehman’s] bonus.” Id. 29. MediaLab informed Lehman that his payment “was

contingent on MediaLab renegotiating the terms of its debt” and that it anticipated a “new

agreement with its lenders would be executed the week of April 3, 2023.” Id. 4 30.

On April 11, 2023, after Lehman found out that a new agreement had been

executed, he followed up with Heyward to inquire about the payment. Id. On May 14,

2023, Heyward told Lehman that MediaLab was “prepared to pay || Lehman in full in the

next four weeks” or by September 13, 2023, at the latest. Id. { 31. However, he refused

to confirm this understanding in writing. Id.

On June 8, 2023, Lehman brought an arbitration before JAMS to enforce the

Employment Agreement. Id. 33. Defendants claim that, in the arbitration, plaintiff □□□

alleging that MediaLab failed to pay Lehman’s retention bonus arising out of the

Employment Agreement.” Opp. at 5. On August 8, 2023, Heyward agreed to purchase a

portion of Lehman’s MediaLab shares in exchange for Lehman staying his arbitration

through September 13, 2023. Compl. § 39.

On September 13, 2023, neither Otin Holdings nor Medialab purchased the

remainder of Lehman’s MediaLab shares. Id. { 41. Lehman alleges that the amount Otin

Holdings was supposed to pay Lehman for his remaining MediaLab shares is “more than

$75,000.” Id. MediaLab personnel have allegedly explained that, in 2023, MediaLab’s

lenders “directed MediaLab not to pay Mr. Lehman his third and fourth retention bonus

payments and not to fund the repurchase of his remaining MediaLab shares.” Id. § 51.

UNITED STATES DISTRICT COURT

CENTRAL DISTRICT OF CALIFORNIA

CIVIL MINUTES — GENERAL ‘Oo’

Case No. 2:23-cv-09055-CAS(JPRx) Date April 15, 2024

Title Tom Lehman v. Medialab AI, Inc. et al.

On September 14, 2023, Lehman’s counsel emailed Heyward demanding that Otin

Holdings and MediaLab comply with their obligations under the Put Agreement to

purchase Lehman’s remaining shares and further “demand|[ed] that Otin [Holdings] and

MediaLab provide evidence that MediaLab issued the irrevocable standby letter of credit

required under Section 3 of the Put Agreement.” Id. 44. MediaLab again responded

that “it could not fund the purchase of |] Lehman’s MediaLab shares . . . because its debt

covenants forbid it from doing so when its ratio of EBITDA to debt or to its debt

payments falls below a certain threshold.” Id. § 46.

Plaintiff alleges that, prior to the effective date of the Put Agreement, “MediaLab

agreed with its lenders that, as a condition of borrowing funds, MediaLab would breach

its obligations to [] Lehman by refusing to fund the purchase of his shares whenever

MediaLab was not sufficiently profitable.” Id. 49. He further alleges that MediaLab

and Heyward concealed this agreement from Lehman in order to induce Lehman to enter

into the Put Agreement. Id. § 51.

On September 25, 2023, Lehman provided notice to MediaLab that “its failure to

pay his retention bonus was a breach of the Employment Agreement and that he would

resign for “Good Reason’ after the 30-day cure period if MediaLab did not pay it.” Id.

452. On October 25, 2023, Medialab emailed Lehman that it would be the last day of his

employment. Id. 4 53.

Il. LEGAL STANDARD

A. Federal Rule of Civil Procedure 12(b)(1)

A motion to dismiss an action pursuant to Fed. R. Civ. P. 12(b)(1) raises the

objection that the federal court has no subject matter jurisdiction over the action. This

defect may exist despite the formal sufficiency of the allegations in the complaint. T.B.

Harms Co. v. Eliscu, 226 F. Supp. 337, 338 (S.D.N.Y. 1964), aff'd 339 F.2d 823 (2d Cir.

1964). When considering a Rule 12(b)(1) motion challenging the substance of

jurisdictional allegations, the Court 1s not restricted to the face of the pleadings, but may

review any evidence, such as declarations and testimony, to resolve any factual disputes

concerning the existence of jurisdiction. See McCarthy v. United States, 850 F.2d 558,

560 (9th Cir. 1988).

UNITED STATES DISTRICT COURT

CENTRAL DISTRICT OF CALIFORNIA

CIVIL MINUTES —- GENERAL ‘oO’

Case No. 2:23-cv-09055-CAS(JPRx) Date April 15, 2024

Title Tom Lehman v. Medialab AI, Inc. et al.

Once a Rule 12(b)(1) motion has been raised, the burden is on the party asserting

jurisdiction. Sopcak v. N. Mountain Helicopter Serv., 52 F.3d 817, 818 (9th Cir. 1995):

Ass’n of Am. Med. Coll. v. United States, 217 F.3d 770, 778-79 (9th Cir. 2000). If

jurisdiction is based on a federal question, the pleader must show that he has alleged a

claim under federal law and that the claim is not frivolous. See 5B Charles A. Wright &

Arthur R. Miller, Federal Practice and Procedure, § 1350, pp. 211, 231 (3d ed. 2004). If

jurisdiction is based on diversity of citizenship, the pleader must show real and complete

diversity, and also that his asserted claim exceeds the requisite jurisdictional amount of

$75,000. See id.

B. Federal Rule of Civil Procedure 12(b)(6)

A motion pursuant to Federal Rule of Civil Procedure 12(b)(6) tests the legal

sufficiency of the claims asserted in a complaint. Under this Rule, a district court

properly dismisses a claim if “there is a ‘lack of a cognizable legal theory or the absence

of sufficient facts alleged under a cognizable legal theory.’” Conservation Force v.

Salazar, 646 F.3d 1240, 1242 (9th Cir. 2011) (quoting Balisteri v. Pacifica Police Dep’t,

901 F.2d 696, 699 (9th Cir. 1988)). “While a complaint attacked by a Rule 12(b)(6)

motion to dismiss does not need detailed factual allegations, a plaintiffs obligation to

provide the ‘grounds’ of his “entitlement to relief’ requires more than labels and

conclusions, and a formulaic recitation of the elements of a cause of action will not do.”

Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555 (2007). “[F]Jactual allegations must

be enough to raise a right to relief above the speculative level.” Id.

In considering a motion pursuant to Rule 12(b)(6), a court must accept as true all

material allegations in the complaint, as well as all reasonable inferences to be drawn

from them. Pareto v. FDIC, 139 F.3d 696, 699 (9th Cir. 1998). The complaint must be

read in the light most favorable to the nonmoving party. Sprewell v. Golden State

Warriors, 266 F.3d 979, 988 (9th Cir. 2001). However, “a court considering a motion to

dismiss can choose to begin by identifying pleadings that, because they are no more than

conclusions, are not entitled to the assumption of truth. While legal conclusions can

provide the framework of a complaint, they must be supported by factual allegations.”

Ashcroft v. Iqbal, 556 U.S. 662, 679 (2009); see Moss v. United States Secret Service,

572 F.3d 962, 969 (9th Cir. 2009) (“[F]or a complaint to survive a motion to dismiss, the

non-conclusory “factual content,’ and reasonable inferences from that content, must be

plausibly suggestive of a claim entitling the plaintiff to relief.”). Ultimately,

UNITED STATES DISTRICT COURT

CENTRAL DISTRICT OF CALIFORNIA

CIVIL MINUTES —- GENERAL ‘oO’

Case No. 2:23-cv-09055-CAS(JPRx) Date April 15, 2024

Title Tom Lehman v. Medialab AI, Inc. et al.

determining whether a complaint states a plausible claim for relief will . . . be a

context-specific task that requires the reviewing court to draw on its judicial experience

and common sense.” Iqbal, 556 U.S. at 679.

Unless a court converts a Rule 12(b)(6) motion into a motion for summary

judgment, a court cannot consider material outside of the complaint (e.g., facts presented

in briefs, affidavits, or discovery materials). In re American Cont’] Corp./Lincoln Sav. &

Loan Sec. Litig., 102 F.3d 1524, 1537 (9th Cir. 1996), rev’d on other grounds sub nom

Lexecon, Inc. v. Milberg Weiss Bershad Hynes & Lerach, 523 U.S. 26 (1998). A court

may, however, consider exhibits submitted with or alleged in the complaint and matters

that may be judicially noticed pursuant to Federal Rule of Evidence 201. In re Silicon

Graphics Inc. Sec. Litig., 183 F.3d 970, 986 (9th Cir. 1999); see Lee v. City of Los

Angeles, 250 F.3d 668, 689 (9th Cir. 2001).

As a general rule, leave to amend a complaint which has been dismissed should be

freely granted. Fed. R. Civ. P. 15(a). However, leave to amend may be denied when “the

court determines that the allegation of other facts consistent with the challenged pleading

could not possibly cure the deficiency.” Schreiber Distrib. Co. v. Serv-Well Furniture

Co., 806 F.2d 1393, 1401 (9th Cir. 1986).

Cc. ‘Federal Rule of Civil Procedure 9(b)

Federal Rule of Civil Procedure 9(b) requires that the circumstances constituting a

claim for fraud be pled with particularity. Federal Rule of Civil Procedure 9(b) applies

not just where a complaint specifically alleges fraud as an essential element of a claim,

but also where the claim is “grounded in fraud” or “[sounds] in fraud.” Vess v. Ciba-

Geigy Corp. U.S.A., 317 F.3d 1097, 1103—04 (9th Cir. 2003). A claim is said to be

“srounded in fraud” or “sounds in fraud’” where a plaintiff alleges that defendant

engaged in fraudulent conduct and relies on solely on that conduct to prove a claim. Id.

“Tn that event, . . . the pleading of that claim as a whole must satisfy the particularity

requirement of [Fed. R. Civ. P.] 9(b).” Id. However, where a plaintiff alleges claims

grounded in fraudulent and non fraudulent conduct, only the allegations of fraud are

subject to heightened pleading requirements. Id. at 1104.

A pleading is sufficient under Fed. R. Civ. P. 9(b) if it “[identifies] the

circumstances constituting fraud so that the defendant can prepare an adequate answer

from the allegations.” Walling v. Beverly Enters., 476 F.2d 393, 397 (9th Cir. 1973).

UNITED STATES DISTRICT COURT

CENTRAL DISTRICT OF CALIFORNIA

CIVIL MINUTES —- GENERAL ‘oO’

Case No. 2:23-cv-09055-CAS(JPRx) Date April 15, 2024

Title Tom Lehman v. Medialab AI, Inc. et al.

This requires that a false statement must be alleged, and that “circumstances indicating

falseness” must be set forth. In re GlenFed Sec. Litig., 42 F.3d 1541, 1548 (9th Cir.

1994). Thus, Rule 9(b) requires a plaintiff to “identify the ‘who, what, when, where and

how of the misconduct charged,’ as well as ‘what is false or misleading about [the

purportedly fraudulent conduct], and why it is false.” Cafasso, ex rel. United States v.

Gen. Dynamics C4 Sys.. Inc., 637 F.3d 1047, 1055 (9th Cir. 2011) (quoting Ebeid ex rel.

United States v. Lungwitz, 616 F.3d 993, 998 (9th Cir. 2010)).

IV. DISCUSSION

Defendants argue that (1) the complaint should be dismissed because plaintiff has

failed to plead diversity jurisdiction; (2) in the alternative, the fraud claim should be

dismissed; (3) plaintiff has waived his right to a jury trial; and (4) in the alternative, this

action should be stayed pending the completion of arbitration. The Court addresses each

argument in turn.

A. Diversity Jurisdiction

Defendants argue that plaintiff failed to plead an adequate amount in controversy.!

Specifically, plaintiff alleges that “[t]he amount Otin Holdings was supposed to pay for []

Lehman’s remaining MediaLab’s shares is more than $75,000” but “d[oes] not indicate

with any specificity the amount on the face of the [c]omplaint.” Id. at 10 (citing Compl. §

41).

In opposition, plaintiff contends that the existing allegations are sufficient to

establish an amount in controversy over $75,000 but adds that “the exact amount claimed

is ust over $1 million, and [] Lehman can amend the Complaint to include additional

allegations to that effect.” Opp. at 8.

In the Ninth Circuit, courts apply the “legal certainty” test to determine whether

the complaint meets § 1332(a)’s amount in controversy requirement. Naffe v. Frey, 789

F.3d 1030, 1039 (9th Cir. 2015). Under this test, “the sum claimed by the plaintiff

1 Defendants also initially argued that plaintiff failed to establish complete diversity by

failing to plead the citizenship of Otin Holdings’ members. However, after the

completion of jurisdictional discovery, the parties agreed that Otin Holdings’ members

are California residents. Plaintiff is a New York resident. Compl. § 7. Accordingly,

plaintiff has sufficiently established complete diversity between plaintiff and defendants.

UNITED STATES DISTRICT COURT

CENTRAL DISTRICT OF CALIFORNIA

CIVIL MINUTES —- GENERAL ‘oO’

Case No. 2:23-cv-09055-CAS(JPRx) Date April 15, 2024

Title Tom Lehman v. Medialab AI, Inc. et al.

controls if the claim is apparently made in good faith. It must appear to a legal certainty

that the claim is really for less than the jurisdictional amount to justify dismissal.” Id. at

1040 (internal quotation omitted). “Only three situations clearly meet the legal certainty

standard: 1) when the terms of a contract limit the plaintiff's possible recovery; 2) when a

specific rule of law or measure of damages limits the amount of damages recoverable;

and 3) when independent facts show that the amount of damages was claimed merely to

obtain federal court jurisdiction.” Id.

The Court finds that the amount in controversy requirement has been met in this

case. Plaintiff made a good faith claim that “[t]he amount Otin Holdings was supposed to

pay for [] Lehman’s remaining MediaLab shares is more than $75,000.” Compl. § 41.

Plaintiff has further clarified that the amount is “just over $1 million,” and defendant

does not dispute this figure. Opp. at 8. Accordingly, the Court DENIES defendants’

motion to dismiss for lack of subject matter jurisdiction.

B. Fraud Claim

Defendants argue that the fraud claim should be dismissed because the complaint

cites California rather than Delaware law. Mot. at 10. They note that Section 14 of the

Put Agreement contains a Delaware choice of law provision:

This Agreement shall be governed by and construed in accordance with the

internal laws of the State of Delaware without giving effect to any choice or

conflict of law provision or rule (whether of the State of Delaware or any other

jurisdiction) that would cause the application of Laws of any jurisdiction other than

those of the State of Delaware.

Id. at 11.

Defendants argue that plaintiffs fraud claim “is based on California Civil

Procedure §§ 1572, 1709, and 1710” and accordingly must be dismissed. Id. (citing

Compl. 14).

Defendants separately argue that plaintiff's fraud claim against Heyward fails

because plaintiff has not pled “alter ego” liability against him. Mot. at 12. Defendants

contend that plaintiff's claims “all arise out of the Put Agreement, to which |] Heyward is

not an individual party.” Id. They further claim that the complaint lacks any allegations

that Heyward is the alter ego of MediaLab and “fails to even recite the bare bones

UNITED STATES DISTRICT COURT

CENTRAL DISTRICT OF CALIFORNIA

CIVIL MINUTES —- GENERAL ‘oO’

Case No. 2:23-cv-09055-CAS(JPRx) Date April 15, 2024

Title Tom Lehman v. Medialab AI, Inc. et al.

elements of alter ego liability.” Id. Moreover, the completely allegedly “fails to state any

facts to justify piercing the corporate veil.” Id. at 13.

Defendants additionally argue that plaintiffs fraud claim fails under FRCP 9(b),

Delaware law, and California law. Mot. at 14. Defendants contend that, pursuant to all

three bodies of law, plaintiff must meet a higher pleading standard for allegations of

fraud. Id. Here, plaintiff's allegations of fraud are allegedly “wholly conclusory and

unsubstantiated by any specific factual details.” Id, at 15. They note that plaintiff did not

attach a copy of the Put Agreement to his complaint and does not specify which

statements might constitute fraudulent “promises” by MediaLab, Otin Holdings, or

Heyward. Id. To the extent that defendants “promised [] Lehman .. . that Otin Holdings

would purchase [] Lehman’s Medialab shares and that MediaLab would fund those

purchases,” defendants argue that plaintiff has “failed to specify which statements were

materially false, when they were made, how they were made, who made them|,] and why

the[y] were false.” Id. Defendants further assert that the complaint does not make it

clear whether any alleged misrepresentations or promises in the Put Agreement were also

made in advance of the entry of the agreement. Id. at 16. They also assert that plaintiff

has failed to plead facts demonstrating either justifiable reliance on defendants’ promises

or resulting damages, both elements of a fraud claim under Delaware law, beyond a “bare

conclusory statement.” Id. at 16-17 (citing Stephenson v. Capano Development, Inc., 462

A.2d 1069, 1074 (Del. 1983)).

Finally, defendants argue that the fraud claim should be dismissed pursuant to

California’s economic loss rule. Mot. at 18. Specifically, they contend that “a party

cannot seek damages that are purely economic for alleged ‘fraud’ based on acts that arise

from an alleged breach of contract.” Id. (citing Robinson Helicopter Co., Inc. v. Dana

Corp., 34 Cal.4th 979, 988 (2004)). Here, plaintiff allegedly “replicates the same

allegations of economic damage in its breach of contract claim . . . as in his [f|raud

[c|laim.” Id. at 19. Defendants assert that the “alleged harm-—the non-purchase of shares

“as required by the Put Agreement’—constitutes the precise economic damages of breach

of contract.” Id. They additionally claim that the inducement exception does not apply

because, here, the alleged misrepresentation that forms the basis of the fraud claim is

“plainly that of the contract itself.” Id. at 20 (internal quotations omitted).

In opposition, plaintiff argues that the fraud claim should not be dismissed merely

because of a reference to California’s fraud statutes in the heading of the claim. Opp. at

8. He notes that “[b]oth [Delaware and California] have fraud causes of actions” and

UNITED STATES DISTRICT COURT

CENTRAL DISTRICT OF CALIFORNIA

CIVIL MINUTES —- GENERAL ‘oO’

Case No. 2:23-cv-09055-CAS(JPRx) Date April 15, 2024

Title Tom Lehman v. Medialab AI, Inc. et al.

contends that defendants failed to “identify any differences between the elements of

promissory fraud under California and Delaware law.” Id, Plaintiff also claims that

defendants “skipped the choice of law analysis that determines whether [the Put

Agreement’s choice of law provision] should supersede California law for tort claims.”

Id. at 9. He asserts that defendants have not met their burden of “demonstrating that

[Delaware] has a substantial relationship to the parties or their transaction, or that a

reasonable basis otherwise exists for the choice of law.” Id.

With respect to alter ego liability, plaintiff argues that his fraud claim against

Heyward “does not rely on attributing MediaLab’s conduct or liability to |Heyward].”

Id. at 10. Rather, he contends that Heyward, “through his own conduct, and by

authorizing MediaLab’s conduct,” “induced [plaintiff] to enter into the Put Agreement

when MediaLab knew it did not intend to perform.” Id. at 11. He alleges that Heyward

affirmatively concealed MediaLab’s “agree|ment] with its lenders to violate its

obligations under the Put Agreement to fund the purchase of [plaintiffs] shares.” Id. at

10.

Additionally, plaintiff asserts that the complaint adequately pleads promissory

fraud. He claims that he was not obligated to attach the Put Agreement to the complaint

and, regardless, “the Put Agreement 1s incorporated by reference into the Complaint.” Id.

at 12. Plaintiff has submitted the Put Agreement as an attachment with his opposition.

Plaintiff also notes that FRCP 9(b) governs the pleading standard for fraud, not Delaware

or state rules of procedure. Id. He contends that the complaint satisfies Rule 9(b)’s

pleading requirements by “mak[ing] clear the who, what, where, and when of

[djefendant’s fraud:”

MediaLab, Otin Holdings, and |] Heyward knew at the time they induced |]

Lehman to enter into the Put Agreement that MediaLab had promised or would

soon promise MediaLab’s lenders that MediaLab would not perform its obligations

to [] Lehman under the Put Agreement unless MediaLab’s EBITDA to debt or to

debt payments ratio exceeded a certain threshold.

Compl. § 70. The complaint additionally alleges that Medialab failed to issue a letter of

credit to Otin Holdings, and Otin Holdings failed to demand one. Opp. at 15 (citing

Compl. §] 44-45). Plaintiff alleges that he did in fact rely upon defendants’

“representation that MediaLab intended to perform under the Put Agreement,” and notes

that “whether a party’s reliance was reasonable is not generally suitable for resolution on

UNITED STATES DISTRICT COURT

CENTRAL DISTRICT OF CALIFORNIA

CIVIL MINUTES —- GENERAL ‘oO’

Case No. 2:23-cv-09055-CAS(JPRx) Date April 15, 2024

Title Tom Lehman v. Medialab AI, Inc. et al.

a motion to dismiss.” Id. at 15-16. With respect to damages, plaintiff claims that

damages in a fraud claim “do not have to be pled with particularity . . . [and] can be pled

generally.” Id. at 16 (citing Swipe Acquisition Corp. v. Krauss, 2020 WL 5015863, at *9

(Del. Ch. Aug. 25, 2020)). He asserts that defendants “cite no authority suggesting that a

promissory fraud claim cannot seek as damages the harm caused by the resulting breach

of the promise,” even if the harm is the same as the harm from the breach of contract

claim. Id. at 16.

Finally, plaintiff claims that this case falls into the “exception to the economic loss

rule for fraudulent inducement.” Id. at 17 (citing Robinson Helicopter Co., v. Dana

Corp., 34 Cal.4th 979, 990-91 (2004)). Moreover, he argues that the economic loss rule

cannot apply to the fraud claim against Heyward because “[Heyward] is not a party to the

Put Agreement” and is therefore not in privity with plaintiff. Id. at 19.

In reply, defendants again argue that plaintiff “fails to establish the requisite

who/what/when of the [allegedly fraudulent] statement required to sustain [his] claim.”

Reply at 4. They contend that plaintiff does not specify “specific statement|s|” that each

of the defendants made, “when the alleged promises were made, how they were

communicated, and in what form.” Id. They also claim that plaintiff fails to allege that

defendants “knew that any representation they allegedly made was false, or knew that

they did not intend to honor a promise, at the time the representation or promise was

made.” Id. (emphasis in original). Plaintiff also allegedly fails to “identify [MediaLab’s]

lenders” and “lacks specific facts showing [Heyward’s| intent at the time” that Heyward

allegedly “directed and supervised the fraud.” Id. at 5. Defendants also again argues that

the economic loss rule bars plaintiff's fraud claim because plaintiff “does not claim any

harm above and beyond a contractual promise.” Id. at 6. They assert that the lack of

privity between plaintiff and Heyward does not preclude application of the economic loss

rule because the “determinative factor is whether [p|laintiff has alleged harm beyond a

broken contractual promise, not the relationship between the parties.” Id.

“Federal courts deciding state law fraud claims look to state law for the elements

of a fraud claim but also apply Rule 9(b)’s heightened pleading standard.” Qbex

Computadoras S.A. v. Intel Corp., No. 17-CV-03375-LHK, 2017 WL 5525939, at *5

(N.D. Cal. Nov. 17, 2017).

As a threshold matter, the Court finds that California law governs plaintiffs fraud

claim. The choice of law provision in the Put Agreement only provides that “[t/his

UNITED STATES DISTRICT COURT

CENTRAL DISTRICT OF CALIFORNIA

CIVIL MINUTES —- GENERAL ‘oO’

Case No. 2:23-cv-09055-CAS(JPRx) Date April 15, 2024

Title Tom Lehman v. Medialab AI, Inc. et al.

Agreement shall be governed by and construed in accordance with the internal laws of the

State of Delaware”; it does not extend to claims independent from the Agreement, such

as plaintiff's fraud claim. See Mot. at 11.

The Court finds that plaintiff has pled his fraud claim with sufficient particularity

under Rule 9(b). Under California law, “[t]he elements of fraudulent inducement are (1)

misrepresentation; (2) knowledge of its falsity; (3) intent to induce reliance; (4) justifiable

reliance; and (5) damages. Yiv. Circle K Stores, Inc., 258 F. Supp. 3d 1075, 1087 (C.D.

Cal. 2017), aff'd, 747 F. App’x 643 (9th Cir. 2019). The Rule 9(b) standard is “relaxed

with respect to matters within the opposing party’s knowledge.” Neubronner v. Milken,

6 F.3d 666, 672 (9th Cir. 1993): see also Aquamen Ent., LLC v. Pigmental, LLC, No. CV

17-58-GW(GJSX), 2017 WL 7806619, at *8 (C.D. Cal. May 8, 2017) (“For example, in

cases of corporate fraud, plaintiffs will not have personal knowledge of all of the

underlying facts.”). In such instances, “the particularity requirement is satisfied if the

allegations are accompanied by a statement of facts upon which the belief is founded.”

Galaxia Elecs. Co. v. Luxmax, U.S.A., No. LA-CV-1605144-JAK-GJSX, 2023 WL

2347085, at *22 (C.D. Cal. Feb. 1, 2023).

Here, plaintiff alleges that, “on information and belief, . .. Heyward knew at the

time [he] induced |] Lehman to enter into the Put Agreement that MediaLab had

promised or would soon promise MediaLab’s lenders that MediaLab would not perform

its obligations to [] Lehman under the Put Agreement unless MediaLab’s EBITDA to

debt or to debt payments ratio exceeded a certain threshold.” Compl. 4 70. He alleges

that he was told by plaintiffs, on at least one occasion, that Medialab “could not fund the

purchase of [] Lehman’s MediabLab shares . . . because its debt covenants [with its

lenders] forbit it from doing so[.|’” Compl. { 46. This is sufficient to satisfy Rule 9(b)’s

particularity requirement.

The Court also finds that the economic loss rule does not bar plaintiffs fraud

claim. “|A]|n adequately pled promissory fraud claim that induces the formation of a

contract is sufficient to trigger the fraudulent inducement exception to the economic loss

rule.” R Power Biofuels, LLC v. Chemex LLC, No. 16-CV-00716-LHK, 2017 WL

1164296, at *6 (N.D. Cal. Mar. 29, 2017): see also J2 Cloud Servs.. Inc. v. Fax87, No.

13-05353 DDP (AJWX), 2016 WL 6833904, at *4 (C.D. Cal. Nov. 18, 2016) (holding

that “the economic loss rule cannot preclude [p]laintiffs’ promissory fraud claim at □□□□

motion to dismiss stage]”). Here, plaintiff appears to bring a claim for promissory fraud.

See Compl. § 70 (alleging that “Heyward knew at the time [he] induced [] Lehman to

UNITED STATES DISTRICT COURT

CENTRAL DISTRICT OF CALIFORNIA

CIVIL MINUTES —- GENERAL ‘oO’

Case No. 2:23-cv-09055-CAS(JPRx) Date April 15, 2024

Title Tom Lehman v. Medialab AI, Inc. et al.

enter into the Put Agreement that MediaLab had promised or would soon promise

MediaLab’s lenders that MediaLab would not perform its obligations to |] Lehman under

the Put Agreement unless MediaLab’s EBITDA to debt or to debt payments ratio

exceeded a certain threshold”).

Additionally, the Court finds that plaintiff may proceed with his fraud claim

against Heyward without pleading “alter ego” liability. Here, plaintiff alleges that

“Heyward concealed [the agreement between MediaLab and its lenders] from |] Lehmen

when Otin Holdings promised to purchase [| Lehman’s MediaLab shares—and MediaLab

promised to fund those purchases—in order to induce |] Lehman to agree to enter into the

Put Agreement.” Compl. 450. He also alleges that Heyward “knew at the time [he]

induced [] Lehman to enter into the Put Agreement that MediaLab had promised or

would soon promise MediaLab’s lenders that MediaLab would not perform its

obligations to [] Lehman under the Put Agreement unless MediaLab’s EBITDA to debt

or to debt payments ratio exceeded a certain threshold.” Id. 70. Thus, plaintiff has

sufficiently alleged direct liability for promissory fraud against Heyward.

C. Jury Trial Waiver

Plaintiff requested a jury trial in his complaint. Compl. at 17. However,

defendants argue that plaintiff waived his right to a jury trial in the Put Agreement. Mot.

at 21. Section 15 of the Put Agreement allegedly provides that:

Each party irrevocably and unconditionally waives any right it may have to a trial

by jury in respect of any legal action arising out of or relating to this Agreement or

the transactions contemplated hereby. Each party to this Agreement certifies and

acknowledges that (a) no representative of any other party has represented,

expressly or otherwise, that such other party would not seek to enforce the

foregoing waiver in the event of a legal action; (b) such party has considered the

implications of this waiver; (c) such party makes this waiver voluntarily; and (d)

such party has been induced to enter into this Agreement by, among other things,

the mutual waivers and certifications in this Section 15.

Id.

In opposition, plaintiff argues that the Put Agreement’s jury trial waiver is invalid.

Opp. at 19. He argues that a federal court sitting in diversity must “import . . . state law

governing jury trial waivers where . . . state law is even more protective than federal law

UNITED STATES DISTRICT COURT

CENTRAL DISTRICT OF CALIFORNIA

CIVIL MINUTES —- GENERAL ‘oO’

Case No. 2:23-cv-09055-CAS(JPRx) Date April 15, 2024

Title Tom Lehman v. Medialab AI, Inc. et al.

of the jury trial right.” Id. (citing In re County of Orange, 784 F.3d 520, 524 (9th Cir.

2015)). Plaintiff claims that, under California’s choice of law analysis, the Put

Agreement’s jury waiver provision “violates a fundamental California policy and so is

unenforceable.” Id. (citing Rincon EV Realty LLC v. CP III Rincon Towers, Inc., 8

Cal.App.5th 1, 11-18 (2017)).

Seeing as the Put Agreement contains a Delaware choice of law provision, the

threshold issue is whether the Section 15 jury trial waiver is governed by Delaware or

California law. California courts apply a two-pronged choice of law test: “(1) whether

the chosen state has a substantial relationship to the parties or their transaction, or (2)

whether there is any other reasonable basis for the parties’ choice of law.” Washington

Mut. Bank, FA v. Superior Court, 24 Cal. 4th 906, 916 (2001). If either prong is met, the

choice of law will be enforced unless “contrary to a fundamental policy of California”

and if California “has a materially greater interest in the determination of the particular

issue.” Id. at 917.

The Court finds that California law applies. Regardless of whether either of the

two choice of law prongs is satisfied, the choice of law provision is not enforceable

because Delaware law regarding jury waivers is contrary to a fundamental policy of

California. In Delaware, “[a] party may . . . waive [the mght to a jury trial] by contract.”

PVP Aston, LLC v. Fin. Structures Ltd., No. CV-N21C-09095-AML-CCLD, 2022 WL

1772247, at *9 (Del. Super. Ct. May 31, 2022). However, “California law holds, as a

matter of public policy, that a litigant cannot waive its right to a jury trial by entering into

a contract that contains a pre-dispute jury trial waiver clause.”” In re Cnty. of Orange,

? While the right to a jury trial is generally a federal procedural issue controlled by

federal law, the Ninth Circuit has held that “federal courts sitting in diversity must apply

the relevant state law to evaluate the validity of a pre-dispute jury trial waiver when that

law is more protective than federal law.” In re Cnty. of Orange, 784 F.3d at 531-32. The

Ninth Circuit has additionally acknowledged that, while “the Federal Arbitration Act, 9

U.S.C. §§ 1-19, permits pre-dispute jury trial waivers,” the Act “addresses such waivers

only in the context of arbitration clauses.” Id, at 529 n.4. Here, it appears that the Put

Agreement does not contain an arbitration clause. Thus, this Court, “sitting in diversity|,]

must apply California’s rule on pre-dispute jury trial waivers to [a] contract| | governed

by California law.” Id.

UNITED STATES DISTRICT COURT

CENTRAL DISTRICT OF CALIFORNIA

CIVIL MINUTES — GENERAL ‘Oo’

Case No. 2:23-cv-09055-CAS(JPRx) Date April 15, 2024

Title Tom Lehman v. Medialab AI, Inc. et al.

784 F.3d at 532. Accordingly, the Court finds that Section 15 of the Put Agreement does

not bar plaintiff from seeking a jury trial.

D. Stay of Litigation Pending Arbitration

In the alternative, defendants ask the Court to stay this action until the ongoing

arbitration between the parties is complete. Mot. at 21. They contend that the arbitration

is “based upon the same nucleus of facts” 1.e., two agreements between the parties

following the acquisition of plaintiff's company. Id.

In opposition, plaintiff argues that a stay is not warranted because “[r]esolution of

[plaintiff's] arbitration claim against MediaLab for breach of his employment agreement

will not determine the outcome of any claim in this lawsuit, all of which relate in some

way to the Put Agreement.” Opp. at 20 (emphasis added). Thus, there is allegedly “no

risk of inconsistent judgments or other reason to stay this action pending resolution of the

arbitration.” Id.

The Court finds that a stay is not warranted in this case. The ongoing arbitration

between the parties appears to be limited to disputes arising out of the Employment

Agreement, while this action arises out of the Put Agreement.

V. CONCLUSION

In accordance with the foregoing, the Court DENIES defendant’s motion to

dismiss and DENIES defendant’s request for a stay. Additionally, the Court finds that

plaintiff has not waived his right to a jury trial.

IT IS SO ORDERED.

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Initials of Preparer CMJ