Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-cand-4_07-cv-00001/USCOURTS-cand-4_07-cv-00001-2/pdf.json

Nature of Suit Code: 850
Nature of Suit: Securities, Commodities, Exchange
Cause of Action: 15:78m(a) Securities Exchange Act

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United States District Court

For the Northern District of California

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United States District Court

For the Northern District of California

IN THE UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF CALIFORNIA

MICHAEL K. SUSAI,

Plaintiff,

v.

B.V. JAGADEESH, et al., 

Defendants.

 /

No. C 07-00001 SBA

ORDER

This matter comes before the Court on defendants’ Joint Petition to Compel Arbitration [Docket

No. 24], Joint Motion to Dismiss the First Amended Complaint [Docket No. 22], and plaintiff’s Request

for Judicial Notice [Docket No. 30]. Having read and considered the arguments presented by the parties

in the papers submitted to the Court, the Court finds this matter appropriate for resolution without a

hearing. The Court hereby GRANTS defendants’ Joint Petition to Compel Arbitration.

BACKGROUND

I. Background Facts

Plaintiff Michel K. Susai founded defendant NetScaler, Inc. (“NetScaler”) in 1997 to develop

and sell products for delivery of information over the internet using so-called “content switching”

technology. FAC ¶¶ 14, 15. During the first five years of the company’s existence, it went through

several rounds of financing and consequent changes in its board of directors and management. Id. at ¶¶

17-28. By 2000, defendant Gabriel Venture Partners, L.P. (‘Gabriel’) had become a major investor in

NetScaler, and its nominee to the company’s board was defendant Bolander. Id. at ¶ 24. By this time,

Gabriel and the investors it led and the board members who represented them had effective control of

NetScaler and forced Susai, who then controlled approximately 20% of the company’s stock, to step

down as CEO, although he remained the Chairman of the Board and an employee of the company. Id.

at ¶¶ 25, 26. Defendant Jagadeesh was thereafter appointed CEO and President. Id. at ¶ 27.

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By 2002, NetScaler was in need of a significant infusion of capital. Id. at ¶ 29. In October of

that year, Sequoia Capital opened negotiations for what is now known as the “Series 1 Financing,” by

which Sequoia eventually secured 60% ownership of NetScaler by the end of 2002. As a condition to

the Series 1 Financing, the existing shareholders of the company were to be diluted. Id. at ¶36. The

financing was accomplished through a series of transactions including a stock conversion, a reverse

stock split, amendments to a stock option plan, and the Severance Agreement with Susai (“Agreement,”

(FAC, Ex. B)), which reduced Susai’s stock holdings and voided a voting agreement between Susai and

other shareholders. The Agreement was executed on December 17, 2002. Thereafter, the Series 1

Financing was consummated and new equity positions were established. Id. at ¶¶ 36-43. In the end,

Susai terminated all connection with NetScaler and his equity in the company was reduced to 3% of the

post-Series 1 stock in the company. Id. at ¶ 42.

The terms and agreements regarding Susai’s stock ownership were memorialized in the

Agreement. The Agreement also included a release clause and an expansive arbitration provision. FAC,

Ex. B at ¶ 9 (emphasis added). The release clause, entitled “Release of Claims” states that Susai and

Netscalar, including its employees, officers, investors, and shareholders, mutually release each other

from

any claim, duty, obligation, or cause of action relating to any matters of any kind,

whether presently known or unknown, suspected or unsuspected, that [they] may possess

arising from any omissions, acts or facts that have occured . . . [including] any and all

claims relating to, or arising from, Mr. Susai’s ownership . . . of shares of stock in the

Company, including without limitation, any claims for fraud, misrepresentation, breach

of fiduciary duty, breach of duty under applicable state corporate law, and securities

fraud under any state or federal law.

Id. ¶ 3(b). The parties further agreed to the release of “any and all claims for . . . fraud; fraudulent

inducement; negligent or intentional misrepresentation; unfair business practices . . . [and] any and all

claims for violation of any federal, state, or municipal statute.” Id.

The arbitration provision states:

The Parties agree that any and all disputes arising out of the terms of this Agreement,

their interpretation, or any of the matters herein released, shall be subject to binding

arbitration . . . The Parties hereby agree to waive their right to have any dispute

between resolved in a court of law by a judge or jury.

Id. ¶ 9 (emphasis in original). Additionally, the parties waived their rights to the protections afforded

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Section 1542 states: “A general release does not extend to claims which the creditor does

not know or suspect to exist in his or her favor at the time of executing the release, which if known

by him or her must have materially affected his or her settlement with the debtor.” Cal. Civ. Code §

1542.

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by California Civil Code section 1542, which provides that a general release does not extend to claims

of which the parties are not aware of at the time of the execution of the release.1

II. The Present Lawsuit

In 2005, NetScaler was acquired for $325 million by Citrix. Id. at ¶ 53. As the FAC

relates:

Shortly after the acquisition, Susai learned that either the day after or very shortly after

he had entered into the December 2002 agreements, disposing of his pre-Series 1 stock

in NetScaler, the option holders [who] remained with the Company after the Sequoia

round and had been employed for four years were immediately vested in 70% of their

options. Under all the circumstances, the intention to grant such options to those persons

existed before and as of the time Susai was induced to approve the transactions and

agreements alleged herein above.

Id. at ¶ 54. Susai states that he was “shocked” by this information. Opp. at 3. Susai states, in relaying

the gravamen of his complaint, that 

In 2002, he had been unaware of defendants’ pre-Series 1 intention to grant themselves

such post-financing accelerated options. The intention was concealed from Susai, even

though defendants did confirm that options would of course be granted to continuing

employees. But defendants concealed the most material of all information about the

options, under the circumstances that existed in late 2002.

Id. The FAC further states:

Had Susai known of the feature, he would have, inter alia, used his then-existing

holdings and position in NetScaler to insist that he receive options with the vesting

feature . . . and/or otherwise receive fair value for his pre-Series 1 stock in

NetScaler—proportionate in value to what Jagadeesh, Bolander and others received for

their pre-Series 1 stock.

FAC at ¶ 46.

Susai filed this lawsuit on January 3, 2007, over four years after the December 2002 Agreement

was consummated. Susai alleges claims for violation of Rule 10b-5, fraud, deceit, negligent

misrepresentation, breach of fiduciary duties, unjust enrichment, and violation of the California unfair

business practices law, all based on defendants’ alleged concealments, as well as their “oppression and

coercion of Susai as a minority shareholder.”See FAC at ¶¶ 84-98.

The original complaint filed by Susai made no reference to the Agreement. However, after

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defendants informed Susai of their intention to enforce the arbitration provision of the Agreement during

a meet-and-confer discussion on March 5, 2007, Susai amended his pleadings to assert a cause of action

alleging the invalidity of the arbitration and release provisions in the Agreement. Pet. to Compel. at 

¶ 9. Susai alleges in his Seventh Claim that in 2002, defendants not only knew that their actions would

“lead to Susai’s loss of his rightful interests in NetScaler,” but also “knew that, upon discovery by Susai

[of defendants’ scheme], he would assert claims for relief against them for the loss of such interests.”

Id. at ¶ 103. “With the specific intent of avoiding such claims and while concealing from Susai that the

claims were about to arise, defendants procured from him the release and arbitration provisions that are

the cornerstones of the defense motions now before the Court.” Opp. at 4; see FAC at ¶¶ 104-108.

LEGAL STANDARD

A party to a valid arbitration agreement may “petition any United States district court for an

order . . . directing that such arbitration proceed in the manner provided for in such agreement.” 9 U.S.C.

§ 4. The district court must only determine whether an arbitration agreement exists and whether it

encompasses the dispute at issue. See Lifescan, Inc. v. Premier Diabetic Servs., Inc., 363 F.3d 1010,

1012 (9th Cir.2004); see also Chiron Corp. v. Ortho Diagnostic Sys., Inc., 207 F.3d 1126, 1130 (9th

Cir.2000). Any doubts concerning the scope of arbitrable issues should be resolved in favor of

arbitration. Moses H. Cone Memorial Hospital v. Mercury Construction Corp., 460 U.S. 1, 24-25

(1983). Thus, arbitration should only be denied where “it may be said with positive assurance that the

arbitration clause is not susceptible of an interpretation that covers the asserted dispute.” AT & T

Technologies, Inc. v. Communication Workers, 475 U.S. 643, 650 (1986) (quoting United Steelworkers

v. Warrior & Gulf Navigation Co., 363 U.S. 574, 582-83 (1960)).

Arbitration provides a forum for resolving disputes more expeditiously and with greater

flexibility than litigation. Lifescan, 363 F.3d at 1011. The Federal Arbitration Act provides that

arbitration agreements governed by the Act “shall be valid, irrevocable, and enforceable, save upon such

grounds as exist at law or in equity for the revocation of any contract.” 9 U.S.C. § 2. The Act was

created to “reverse the longstanding judicial hostility to arbitration agreements” and “to place arbitration

agreements on the same footing as other contracts.” Gilmer v. Interstate/Johnson Lane Corp., 500 U.S.

20, 24 (1991). Section 2 of the Act evinces “a liberal federal policy favoring arbitration agreements,

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not withstanding any state substantive or procedural policies to the contrary.” Moses H. Cone Mem’l

Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24 (1983). 

ANALYSIS

Defendants raise two primary arguments in their petition: 1) since the arbitration clause states

that disputes relating to the “interpretation” of, or matters “released” under, the Agreement are to be

submitted to the arbitrator, the questions of the validity and scope of the arbitration clause are to be

decided by the arbitrator and not this Court, and 2) assuming the Court reaches the issue of the scope

of the arbitration clause, plaintiff’s claims are clearly within the scope of the expansive clause. In

response, Susai argues that 1) in the absence of a “clear and unmistakable” intention to submit the

specific issue of the scope of an arbitration clause to the arbiter, this Court must decide that issue, and

2) since the FAC does not allege that the Agreement as a whole is invalid but only specifically

challenges the arbitration provision, this Court must decide the issue of the validity of the arbitration

clause.

I. Arbitrability

This Court has already considered – and rejected – Susai’s first argument. In Anderson v. Pitney

Bowes, Inc., 2005 WL 1048700 (N. D. Cal. May 4, 2005) (Armstrong, J.), this Court held that where

the parties “‘clearly and unmistakably’ empowered an arbitrator to determine arbitrability, the Court

must compel arbitration.”Id. at *2 (citing AT & T Technologies, 475 U.S. at 649). This Court found a

“clear and unmistakable” intention to submit the question of arbitrability to an arbitrator when the

agreement provided that “the Arbitrator shall have exclusive authority to resolve any dispute relating

to the interpretation, applicability, or enforceability or formation of this Agreement, including . . . any

claim that all or any part of this Agreement is void or voidable.” Id. at *3. Susai asserts that, in contrast,

“[n]o such language exists in the Arbitration Provision here.”

This Court disagrees. The arbitration clause in this case states that “any and all disputes arising

out of the terms of this Agreement, their interpretation, or any of the matters herein released” shall be

subject to binding arbitration. FAC, Ex. B at ¶ 9 (emphasis added). While the arbitration clause in

Anderson specifically submitted to the arbitrator “any claim that all or any part of this Agreement is void

or voidable,” the arbitration clause here broadly states that “any of the matters herein released” shall

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be subject to arbitration. By incorporating the matters described in the release clause, the parties

effectively submitted any dispute between them to the arbitrator, including allegations of fraud in the

inducement of agreement to the arbitration provisions. The release clause states that “any claim, duty,

obligation, or cause of action relating to any matters of any kind . . . including without limitation, any

claims for fraud [or] misrepresentation” are thereby released. Susai absurdly argues that since the

arbitration clause literally covers “matters herein released,” in order to determine the scope of the

arbitration clause, the Court must first determine which matters are in fact “released” by the release

provision, which in turn requires the Court to determine whether the release and arbitration clauses are

themselves valid, which would require an inquiry into precise the matters at issue, i.e., whether Susai

was fraudulently induced into entering into those provisions. However, Susai’s tortured interpretation

would render the “matters herein released” language in the arbitration provision nonsensical, as it would

mean that “released” matters -- matters that by definition could not be submitted to the Court or the

arbitrator -- would be submitted to the arbitrator. 

When the language of a contractual provision is unintelligible if read literally, a court may give

the language a practical interpretation which makes it intelligible. U.S. v. Data Translation, Inc., 984

F.2d 1256, 1260 (1st Cir. 1992) (citing Restatement (Second) of Contracts §§ 200, 203 (1981)). While

perhaps not a paragon of clarity, the intended meaning of the arbitration clause is clear enough: all of

the claims described in the release clause are to be submitted to the arbitrator, and it is for the arbitrator,

and not this Court, to determine the scope and validity of the release clause, and by incorporation, the

scope and validity of the arbitration provision.

Finally, the arbitration provision provides that any dispute related to the “interpretation” of the

“terms” of the Agreement shall be submitted to the arbitrator. The question of the scope of the

arbitration clause is precisely a question of the interpretation of the terms of the Agreement. Parties to

an arbitration agreement are free to submit questions related to the scope of the agreement to the

arbitrator. AT & T Technologies, 475 U.S. at 649. The exceedingly broad arbitration provision in this

case covers disputes related to the scope of the arbitration provision itself, and therefore this issue must

be submitted to the arbitrator.

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II. Validity of the Arbitration Clause

Susai also argues that because he specifically challenges the validity of arbitration and release

provisions but does not seek to invalidate the Agreement as a whole, this Court must pass on the issue

of the validity of the provisions, which inquiry would require the Court to determine whether Susai was

in fact defrauded -- the very claim that forms the basis of his lawsuit. In Buckeye Check Cashing, Inc.

v. Cardegna, 546 U.S. 440 (2006), the Supreme Court recognized that challenges to arbitration

agreements fall into two categories: (1) those “challeng[ing] specifically the validity of the agreement

to arbitrate;” and (2) those “challeng[ing] the contract as a whole, either on a ground that directly affects

the entire agreement ( e.g., the agreement was fraudulently induced), or on the ground that the illegality

of one of the contract's provisions renders the whole contract invalid.” 126 S.Ct. at 1208. 

In clarifying its interpretation of Buckeye, the Ninth Circuit in Nagrampa v. MailCoups, Inc.,

469 F.3d 1257, 1268-69 (9th Cir.2006), sitting en banc, held that “when the crux of the complaint

challenges the validity or enforceability of the agreement containing the arbitration provision, then the

question of whether the agreement, as a whole, is unconscionable must be referred to the arbitrator.” Id.

at 1263-1264 (citing Buckeye, supra, 546 U.S. 440). However, the court continued, “[w]hen the crux

of the complaint is not the invalidity of the contract as a whole, but rather the arbitration provision itself,

then the federal courts must decide whether the arbitration provision is invalid and unenforceable.” Id.

at 1264.

As an initial matter, it appears that Susai’s seventh claim alleging the invalidity of the arbitration

provision was added only once Susai became aware that defendants intended to compel arbitration. As

noted above, the original complaint filed by Susai made no reference to the Agreement. However, after

defendants informed Susai of their intention to enforce the arbitration provision of the Agreement during

a meet-and-confer discussion on March 5, 2007, Susai amended his pleadings to assert a cause of action

alleging the invalidity of the arbitration and release provisions in the Agreement. Pet. to Compel at ¶

9. Specifically, Susai alleges that defendants knew that their actions would “lead to Susai’s loss of his

rightful interests in NetScaler,” and that, “[w]ith the specific intent of avoiding such claims and while

concealing from Susai that the claims were about to arise, defendants procured from him the release and

arbitration provisions that are the cornerstones of the defense motions now before the Court.” Opp. at

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4; see FAC at ¶¶ 104-108.

However, there is no question that the “crux” of Susai’s complaint is that he was fraudulently

induced into entering into the Agreement as a whole. Susai does not allege facts relating to the

supposedly fraudulently induced arbitration provision that are independent of defendant’s alleged

scheme to defraud Susai of his rights by enticing him to entering into the Agreement as a whole under

false pretenses. Cf. Nagrampa, 469 F.3d at 1271 (examining the “crux of the complaint” in that case

made it “abundantly clear” that plaintiff's challenge went specifically, and only, to the arbitration clause,

where plaintiff alleged contract was one of adhesion, and only filed suit only after defendant

successfully moved the arbitral venue for the contract claims at issue to the other side of the country and

the AAA rejected her petition to waive the arbitral fees). While he does not specifically allege the

invalidity of the Agreement (which he apparently avoided doing to avoid triggering the arbitration

provision, as described above), all of the damages he describes flow from the his claim that, had he

known all of the purported facts at the time he entered into the Agreement, he would not have done so.

There is no factual basis which distinguishes Susai’s other claims from his challenge to the arbitration

provision. Accordingly, under the rule articulated in Buckeye and Nagrampa, the question of the validity

of the arbitration clause must be referred to the arbitrator. Where, as here, there is no independent

challenge to the arbitration clause in that the plaintiff alleges the same facts as alleged in the underlying

dispute to void the arbitration clause, the court must honor the arbitration clause. Western Hospitals

Federal Credit Union v. E.F. Hutton & Co., Inc., 700 F.Supp. 1039, 1043 (N.D. Cal. 1988) (Henderson,

J.). Susai may not “bootstra[p] the conduct for which [he] is suing [defendants] into a separate reason

for voiding the arbitration clause.” Id. at 1042. Susai’s cynical attempt to avoid this sound rule by simply

adding a cause of action challenging the validity of the arbitration clause therefore fails.

Because the Court does not reach the merits of the case, the motion to dismiss is denied as moot.

CONCLUSION

For the foregoing reasons, the defendants’ Petition to Compel Arbitration [Docket No. 24] is

GRANTED, and this case is STAYED pending arbitration. The Motion to Dismiss [Docket No. 22]

is DENIED AS MOOT. Plaintiff’s Request for Judicial Notice [Docket No. 30] is GRANTED.

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IT IS SO ORDERED.

 

Dated: 6/14/07 _______________________________

SAUNDRA BROWN ARMSTRONG

United States District Judge

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