Santelices v. Apttus Corporation ( 2020 )

1 2 3 4 UNITED STATES DISTRICT COURT 5 NORTHERN DISTRICT OF CALIFORNIA 6 7 JEFFREY SANTELICES, Case No. 19-cv-07414-HSG 8 Plaintiff, ORDER GRANTING MOTION TO REMAND AND GRANTING MOTIONS 9 v. TO SEAL 10 APTTUS CORPORATION, et al., Re: Dkt. Nos. 20, 24, 29, 35 11 Defendants. 12 13 Pending before the Court is Plaintiff Jeffrey Santelices’ motion to remand, as well as 14 several administrative motions to seal. See Dkt. Nos. 20, 24, 29, 35. The Court finds this matter 15 appropriate for disposition without oral argument and the matter is deemed submitted. See Civil 16 L.R. 7-1(b). For the reasons detailed below, the Court GRANTS the motion to remand. The 17 Court further GRANTS the administrative motions to seal. 18 I. BACKGROUND 19 Plaintiff originally filed this action in San Mateo Superior Court on February 8, 2019, 20 against his former employer, Defendant Apttus Corporation. See Dkt. No. 1-1, Ex. 1 at 7.1 21 Plaintiff alleged that Apttus failed to pay him his severance benefits as well as the value of certain 22 stock options. See id. Plaintiff brought causes of action for breach of contract, breach of the 23 implied covenant of good faith and fair dealing, and violations of the California Labor Code for 24 failing to pay wages and waiting time penalties. See id. On October 10, 2019, Plaintiff filed a 25 First Amended Complaint (“FAC”), adding Defendants Project Everest Parent, LLC and Project 26 Everest Holdings, LLC, and as relevant to this motion, an additional cause of action. See id. at 71. 27 1 Plaintiff alleges that as part of his compensation as a Vice President for Apttus 2 Corporation, Apttus offered him stock options and restricted stock units (collectively, “stock 3 options”), which entitled him to receive common stock in the company. See id. at ¶ 3. Plaintiff 4 further alleges that under the terms of the related stock plan and stock option agreements, “no 5 modification of a[] [stock] Option shall . . . impair the Optionee’s rights or increase the Optionee’s 6 obligations.” Id. at ¶¶ 3, 21–23. In August 2018, however, Apttus’s board of directors sold Apttus 7 at less than its fair market value. See id. at ¶¶ 4, 42. And as part of this transaction, Defendants 8 agreed to convert Plaintiff’s stock options to less valuable stock options in the buyer’s company. 9 Id. at ¶¶ 4–6. These converted stock options entitled Plaintiff to receive what he claims are 10 inferior “Class C Units.” See id. at ¶¶ 6–8, 44–47. Unlike common stock, these Class C Units “do 11 not receive any distributions until the liquidation preferences associated with Class A Units and 12 Class B Units are paid in full.” See id. at ¶¶ 8, 47, 51. Plaintiff alleges that these Class C Units 13 are thus “potentially worthless.” Id. Plaintiff further alleges that Defendants did not inform him 14 that his outstanding stock options would be impaired. See id. at ¶¶ 9, 44, 49, 51. 15 On the basis of these facts, Plaintiff brought a new cause of action for violation of the 16 California Corporate Securities Act of 1968, Cal. Corp. Code § 25110. See id. at ¶¶ 94–110. 17 Under § 25110, “[i]t is unlawful for any person to offer or sell in this state any security in an issuer 18 transaction . . . unless such sale has been qualified,” or is exempt or otherwise not subject to 19 qualification. See Cal. Corp. Code § 25110. According to Plaintiff, the stock options are 20 “securities” under the California Act, and Defendants issued unqualified securities to Plaintiff in 21 violation of § 25110. See FAC at ¶¶ 10, 94–110. Plaintiff further notes that Defendants could not 22 “avail [themselves] of any exemption to qualification” because they had not complied with Rule 23 701 of the Securities Act of 1933, 17 C.F. R. § 230.701, as required under California law. See id. 24 at ¶¶ 106–107 (citing Cal. Corp. Code § 25102(o)). 25 Defendants removed this action on November 8, 2019, alleging that it arises under federal 26 law under 28 U.S.C. § 1331 based on this new cause of action under the California Corporate 27 Securities Act. See Dkt. No. 1. Plaintiff moves to remand the action. See Dkt. No. 24. 1 II. LEGAL STANDARD 2 A suit may be removed from state court to federal court only if the federal court would 3 have had subject matter jurisdiction over the case. See 28 U.S.C. § 1441(a); see Caterpillar Inc. v. 4 Williams, 482 U.S. 386, 392 (1987) (“Only state-court actions that originally could have been filed 5 in federal court may be removed to federal court by the defendant.”). “If at any time before final 6 judgment it appears that the district court lacks subject matter jurisdiction, the case shall be 7 remanded.” 28 U.S.C. § 1447(c). The party seeking removal bears the burden of establishing 8 federal jurisdiction. See Provincial Gov’t of Marinduque v. Placer Dome, Inc., 582 F.3d 1083, 9 1087 (9th Cir. 2009). “The removal statute is strictly construed, and any doubt about the right of 10 removal requires resolution in favor of remand.” Moore–Thomas v. Alaska Airlines, Inc., 553 11 F.3d 1241, 1244 (9th Cir. 2009). 12 III. DISCUSSION 13 A. Motion to Remand 14 Plaintiff argues that Defendants improperly removed this action on the basis of federal 15 question jurisdiction. Federal district courts have original jurisdiction over all civil actions 16 “arising under the Constitution, laws, or treaties of the United States.” See 28 U.S.C. § 1331. 17 Such jurisdiction “exists only when a federal question is presented on the face of the plaintiff’s 18 properly pleaded complaint.” Caterpillar Inc. v. Williams, 482 U.S. 386, 392 (1987). Thus, a case 19 may arise “aris[e] under” federal law for the purpose of 28 U.S.C. § 1331 “when federal law 20 creates the cause of action asserted.” Gunn v. Minton, 568 U.S. 251, 257 (2013). However, a case 21 raising a federal defense does not “arise under” federal law “even if the defense is anticipated in 22 the complaint, and even if both parties admit that the defense is the only question truly at issue in 23 the case.” See Franchise Tax Bd. of Cal. v. Construction Laborers Vacation Trust for Southern 24 Cal., 463 U.S. 1, 14 (1983); see also Vaden v. Discover Bank, 556 U.S. 49, 60 (2009) (“Federal 25 jurisdiction cannot be predicated on an actual or anticipated defense.” (quotations omitted)). 26 Here, it is undisputed that Plaintiff’s FAC contains exclusively state law causes of action. 27 See generally FAC. Although the FAC references Rule 701 in arguing that Defendants are not 1 FAC at ¶¶ 106–107, merely referencing a federal statute in anticipation of Defendants’ possible 2 defenses is insufficient to confer federal jurisdiction. 3 The Supreme Court has nevertheless recognized that in “certain cases federal-question 4 jurisdiction will lie over state-law claims that implicate significant federal issues.” See Grable & 5 Sons Metal Prod., Inc. v. Darue Eng’g & Mfg., 545 U.S. 308, 312 (2005). Under Grable, a federal 6 court may exercise jurisdiction over a state law claim only if (1) the action necessarily raises a 7 federal issue that is (2) disputed and (3) substantial, and if (4) the Court may entertain the case 8 without disturbing the congressionally approved balance of federal and state judicial 9 responsibilities. Id. at 314. Defendants urge that this case presents such a “significant federal 10 issue.” See Dkt. No. 27 at 3–5. 11 Defendants argue that the Court has federal question jurisdiction because to find 12 Defendants liable under § 25110, the Court will necessarily have to interpret and apply federal 13 law. See Dkt. No. 27 at 4. As noted in Section I above, § 25110 prohibits the sale of unqualified 14 securities. See Cal. Corp. Code § 25110. However, the California Corporate Securities Act 15 contains certain exemptions to qualification under § 25110. Specifically, under § 25102(o), “[t]he 16 following transactions are exempted”: 17 An offer or sale of any security . . . issued pursuant to an option plan 18 or agreement, where the security at the time of issuance or grant is exempt from registration under the Securities Act of 1933, as 19 amended, pursuant to Rule 701 . . ., the provisions of which are hereby incorporated by reference into this section, provided that 20 (1) the terms of any purchase plan or agreement shall comply with Sections 260.140.42, 260.140.45, and 260.140.46 of Title 10 of the 21 California Code of Regulations, (2) the terms of any option plan or agreement shall comply with Sections 260.140.41, 260.140.45, and 22 260.140.46 of Title 10 of the California Code of Regulations, and (3) the issuer files a notice of transaction in accordance with rules 23 adopted by the commissioner no later than 30 days after the initial issuance of any security under that plan, accompanied by a filing fee 24 as prescribed by subdivision (y) of Section 25608. 25 26 Cal. Corp. Code § 25102(o) (emphasis added). The Court acknowledges that if Defendants raise 27 § 25102(o) as a defense to Plaintiff’s state law cause of action, it may have to determine, among 1 Rule 701. However, it is not enough that the case has the potential to implicate a federal issue. 2 For the Court to exercise federal jurisdiction, the federal issue must be “substantial.” See Grable, 3 545 U.S. at 314. Defendants make no effort to explain why determining whether they are exempt 4 from registration under Rule 701 would be substantial. See Dkt. No. 27 at 4–5. Simply calling the 5 issue substantial does not make it so. 6 Rule 701 allows privately-held companies to compensate their employees with securities 7 without incurring the obligations of public registration and reporting under federal securities laws. 8 See 17 C.F.R. § 230.701. The Rule requires, inter alia, that any company issuing more than $10 9 million in stock options over a 12-month period provide detailed financial statements and other 10 disclosures to the option recipients. See id. Although perhaps a fact-intensive exercise, 11 determining whether Defendants complied with Rule 701 does not appear to involve “the validity, 12 construction or effect of federal law” that is required to be considered “substantial.” See Grable, 13 545 U.S. at 313 (quotation and alteration omitted). 14 Additionally, the Court has concerns that Defendants’ argument, if accepted, proves too 15 much. The terms of Rule 701 are incorporated by reference into § 25102(o). Thus, if the mere 16 possibility that a defendant may raise Rule 701 as a defense to liability under California’s 17 securities laws were enough to establish federal question jurisdiction, then California could 18 routinely be divested of the ability to decide disputes arising under its own securities laws. This 19 result would “disturb[] the congressionally approved balance of federal and state judicial 20 responsibilities.” See Grable, 545 U.S. at 314. The Court finds that it lacks federal question 21 jurisdiction over this action. “Federal courts are courts of limited jurisdiction,” and as such, they 22 have no power to consider claims for which they lack subject matter jurisdiction. See Kokkonen v. 23 Guardian Life Ins. Co. of Am., 511 U.S. 375, 377 (1994). The Court must therefore remand this 24 action. 25 B. Motions to Seal 26 Defendants filed administrative motions to file documents under seal in connection with 27 their motion to dismiss and their opposition to Plaintiff’s motion for leave to amend the complaint. 1 i. Legal Standard 2 Courts generally apply a “compelling reasons” standard when considering motions to seal 3 documents. Pintos v. Pac. Creditors Ass’n, 605 F.3d 665, 678 (9th Cir. 2010) (quoting Kamakana 4 v. City & Cty. of Honolulu, 447 F.3d 1172, 1178 (9th Cir. 2006)). “This standard derives from the 5 common law right ‘to inspect and copy public records and documents, including judicial records 6 and documents.’” Id. (quoting Kamakana, 447 F.3d at 1178). “[A] strong presumption in favor of 7 access is the starting point.” Kamakana, 447 F.3d at 1178 (quotations omitted). To overcome this 8 strong presumption, the party seeking to seal a judicial record attached to a dispositive motion 9 must “articulate compelling reasons supported by specific factual findings that outweigh the 10 general history of access and the public policies favoring disclosure, such as the public interest in 11 understanding the judicial process” and “significant public events.” Id. at 1178–79 (quotations 12 omitted). “In general, ‘compelling reasons’ sufficient to outweigh the public’s interest in 13 disclosure and justify sealing court records exist when such ‘court files might have become a 14 vehicle for improper purposes,’ such as the use of records to gratify private spite, promote public 15 scandal, circulate libelous statements, or release trade secrets.” Id. at 1179 (quoting Nixon v. 16 Warner Commc’ns, Inc., 435 U.S. 589, 598 (1978)). “The mere fact that the production of records 17 may lead to a litigant’s embarrassment, incrimination, or exposure to further litigation will not, 18 without more, compel the court to seal its records.” Id. 19 Records attached to nondispositive motions must meet the lower “good cause” standard of 20 Rule 26(c) of the Federal Rules of Civil Procedure, as such records “are often unrelated, or only 21 tangentially related, to the underlying cause of action.” Id. at 1179–80 (quotations omitted). This 22 requires a “particularized showing” that “specific prejudice or harm will result” if the information 23 is disclosed. Phillips ex rel. Estates of Byrd v. Gen. Motors Corp., 307 F.3d 1206, 1210–11 (9th 24 Cir. 2002); see also Fed. R. Civ. P. 26(c). “Broad allegations of harm, unsubstantiated by specific 25 examples of articulated reasoning” will not suffice. Beckman Indus., Inc. v. Int’l Ins. Co., 966 26 F.2d 470, 476 (9th Cir. 1992) (quotation omitted). 27 ii. Analysis 1 and financial information relating to the Apttus merger and the company’s internal valuation 2 analysis related to this merger. See Dkt. Nos. 20, 29, 35. These documents include the merger 3 agreement itself and a single email related to the merger. Id. Because Defendants seek to seal 4 documents which pertain to their motion to dismiss, the Court applies the compelling reasons 5 standard. The Court will apply the lower good cause standard for the documents related to the 6 motion for leave to amend. 7 The Court did not rely on any of the documents that are the subject of Defendants’ 8 administrative motions to seal, given that the Court first considered Plaintiff’s pending motion to 9 remand and found that the Court lacks jurisdiction. Thus, these documents are unrelated to the 10 public’s understanding of the judicial proceedings in this case, and the public’s interest in 11 disclosure of these documents is minimal given that the Court will not rule on Defendants’ motion 12 to dismiss or Plaintiff’s motion for leave to amend. See In re iPhone Application Litig., No. 11- 13 MD-02250-LHK, 2013 WL 12335013, at *2 (N.D. Cal. Nov. 25, 2013) (“The public’s interest in 14 accessing these documents is even further diminished in light of the fact that the Court will not 15 have occasion to rule on Plaintiffs’ Motion for Class Certification.”). Accordingly, because the 16 documents divulge confidential business and financial information unrelated to the public’s 17 understanding of the judicial proceedings in this action, the Court finds that there is compelling 18 reason to file the documents under seal. See Economus v. City & Cty. of San Francisco, No. 18- 19 CV-01071-HSG, 2019 WL 1483804, at *9 (N.D. Cal. Apr. 3, 2019) (finding compelling reason to 20 seal because the sealing request divulges sensitive information no longer related to the case); In re 21 iPhone, 2013 WL 12335013 (same); Doe v. City of San Diego, No. 12-CV-689-MMA-DHB, 2014 22 WL 1921742, at *4 (S.D. Cal. May 14, 2014) (exhibit’s disclosure of personal information and 23 irrelevance to the matter are compelling reasons to seal the exhibit). 24 IV. CONCLUSION 25 Accordingly, the Court finds that it lacks subject matter jurisdiction and GRANTS 26 Plaintiff’s motion to remand, and GRANTS the administrative motions to file under seal. 27 Pursuant to Civil Local Rule 79-5(f)(1), documents filed under seal as to which the administrative 1 The Court REMANDS the action to San Mateo County Superior Court. The Court 2 || DENIES AS MOOT all other pending motions and the clerk is directed to close the case. 3 IT IS SO ORDERED. 4 || Dated: 10/2/2020 | ° HAYWOOD S. GILLIAM, JR. 6 United States District Judge 7 8 9 10 11 12 © 15 16 = 17 Z 18 19 20 21 22 23 24 25 26 27 28