Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-cand-3_03-cv-01561/USCOURTS-cand-3_03-cv-01561-18/pdf.json

Nature of Suit Code: 190
Nature of Suit: Other Contract Actions
Cause of Action: 28:1332 Diversity-Other Contract

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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

I-ENTERPRISE COMPANY LLC,

Plaintiffs,

 v.

DRAPER FISHER JURVETSON

MANAGEMENT COMPANY V, LLC, et al.,

Defendants /

No. C-03-1561 MMC

ORDER GRANTING IN PART AND

DENYING IN PART DEFENDANTS’

MOTION FOR PARTIAL DISMISSAL OF

FOURTH AMENDED COMPLAINT;

VACATING HEARING

(Docket No. 442)

Before the Court is defendants’ motion, filed September 26, 2005, for partial

dismissal of plaintiff I-Enterprise Company LLC’s (“I-Enterprise”) Fourth Amended

Complaint, pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure. I-Enterprise

has filed opposition to the motion, to which defendants have replied. Having considered

the papers submitted in support of and in opposition to the motion, the Court finds the

matter appropriate for decision without oral argument, see Civil L.R. 7-1(b), and hereby

VACATES the November 4, 2005 hearing. For the reasons set forth below, the motion is

GRANTED in part and DENIED in part.

BACKGROUND

In 1998 and 1999, I-Enterprise, through its predecessors-in-interest, invested in two

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venture capital funds, Draper Fisher Jurvetson Fund V L.P. (“Fund V”) and Draper Fisher

Jurvetson Fund VI L.P. (“Fund VI”) (collectively, “the Funds”). (See Fourth Amended

Complaint (“4AC”) ¶¶ 1, 4.) I-Enterprise alleges that it has suffered more than $40 million

in damages as a result of defendants’ fraudulent and negligent misrepresentations, breach

of contract, breach of fiduciary duty, state securities law violations, unfair business

practices, conversion, and unjust enrichment. (See id. ¶¶ 1, 3.)

Defendant Draper Fisher Jurvetson Management Company V, LLC (“DFJ-V”) is the

general partner of Fund V. (See id. ¶ 5.) Defendant Draper Fisher Jurvetson Management

Company VI, LLC (“DFJ-VI”) is the general partner of Fund VI. (See id. ¶ 6.) Defendants

Timothy C. Draper (“Draper”), John H.N. Fisher (“Fisher”), and Stephen T. Jurvetson

(“Jurvetson”) (collectively, “individual defendants”) are managing directors of DFJ-V and

DFJ-VI. (See id. ¶¶ 7-9.) The individual defendants are also general partners in the

Draper Fisher Jurvetson general partnership (“DFJ”). (See id.)

LEGAL STANDARD

A motion to dismiss under Rule 12(b)(6) cannot be granted unless “it appears

beyond doubt that the plaintiff can prove no set of facts in support of his claim which would

entitle him to relief.” See Conley v. Gibson, 355 U.S. 41, 45-46 (1957). Dismissal can be

based on the lack of a cognizable legal theory or the absence of sufficient facts alleged

under a cognizable legal theory. See Balistreri v. Pacifica Police Dept., 901 F.2d 696, 699

(9th Cir. 1990).

Generally, a district court, in ruling on a Rule 12(b)(6) motion, may not consider any

material beyond the pleadings. See Hal Roach Studios, Inc. v. Richard Feiner And Co.,

Inc., 896 F.2d 1542, 1555 n. 19 (9th Cir. 1990). Material that is properly submitted as part

of the complaint, however, may be considered. See id. Documents whose contents are

alleged in the complaint, and whose authenticity no party questions, but which are not

physically attached to the pleading, also may be considered. See Branch v. Tunnell, 14

F.3d 449, 454 (9th Cir. 1994). In addition, the Court may consider any document “the

authenticity of which is not contested, and upon which the plaintiff’s complaint necessarily

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relies,” regardless of whether the document is referred to in the complaint. See Parrino v.

FHP, Inc., 146 F.3d 699, 706 (9th Cir. 1998). Finally, the Court may consider matters that

are subject to judicial notice. See Mack v. South Bay Beer Distributors, Inc., 798 F.2d

1279, 1282 (9th Cir. 1986).

In analyzing a motion to dismiss, the Court must accept as true all material

allegations in the complaint, and construe them in the light most favorable to the

nonmoving party. See NL Industries, Inc. v. Kaplan, 792 F.2d 896, 898 (9th Cir. 1986). 

The Court may disregard factual allegations if such allegations are contradicted by the facts

established by reference to exhibits attached to the complaint. See Durning v. First Boston

Corp., 815 F.2d 1265, 1267 (9th Cir. 1987). Conclusory allegations, unsupported by the

facts alleged, need not be accepted as true. See Holden v. Hagopian, 978 F.2d 1115,

1121 (9th Cir. 1992). 

DISCUSSION

A. Conversion Claim

I-Enterprise, in its opposition, notes that the Court previously has dismissed

I-Enterprise’s claim for conversion against DFJ-V, and states it has realleged the claim in

the Fourth Amended Complaint solely to preserve the issue for appeal. 

Accordingly, as I-Enterprise is no longer asserting a conversion claim, defendants’

motion to dismiss the conversion claim will be DENIED as moot.

B. Unjust Enrichment

Defendants move to dismiss I-Enterprise’s unjust enrichment claims, on the ground

the Court previously dismissed those claims as improperly alleged derivative claims. 

Contrary to defendants’ assertion, the Court dismissed the unjust enrichment claims,

among other claims, only to the extent they were based on “(1) failure to make the requisite

capital contributions to the partnerships, (2) failure to adhere to the investment objectives

set forth in the Offering Memoranda, (3) misallocations of profits, losses, and securities, (4)

failure to devote appropriate time to management of the funds, and (5) conflict of interest

and self-dealing.” (See Order Granting in Part and Denying in Part Counterdefendants’

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Motion for Partial Judgment On the Pleadings, or in the Alternative, for Summary

Adjudication, filed December 15, 2004, (“December 2004 Order”) at 3-4, 19.) I-Enterprise’s

current claims for unjust enrichment are not so limited in scope. (See 4AC ¶¶ 208-214,

276-282.) For example, I-Enterprise alleges, in support of its unjust enrichment claims, that

it is entitled to restitution of its contributions to Funds V and VI on the ground defendants

made misrepresentations to induce I-Enterprise’s investment in those Funds. (See id.) 

Any such alleged misrepresentations were not addressed in the Court’s December 2004

Order, (see December 2004 Order at 4), and defendants, in their instant motion, set forth

no argument in support of dismissal of the unjust enrichment claims to the extent such

claims are based on allegations not addressed in the December 2004 Order.

Accordingly, defendants’ motion to dismiss the unjust enrichment claims will be

DENIED.

C. Breach of Contract, Breach of Fiduciary Duty, and Breach of the

Covenant of Good Faith and Fair Dealing

Defendants contend that I-Enterprise’s claims for breach of contract, breach of

fiduciary duty, and breach of the covenant of good faith and fair dealing (“Breach Claims”)

should be dismissed in their entirety, except to the extent such claims are based on

defendants’ failure to notify I-Enterprise of certain “detrimental acts,” asserting the Court

has already ruled to that effect in its prior orders.

Although defendants correctly note that the Court previously denied defendants’

motion to dismiss the Breach Claims to the extent such claims are based on allegations

that defendants failed to provide notice of “detrimental acts,” (see Order Granting in Part

and Denying in Part Defendants’ Motion to Dismiss Certain Counts of Third Amended

Complaint and/or to Strike, filed July 15, 2005, (“July 2005 Order”) at 9), the Court has

never held the Breach Claims are limited to that theory. Indeed, in the December 2004

Order, the Court expressly held the Breach Claims were not dismissed to the extent they

were based on allegations that defendants failed to distribute securities to I-Enterprise and

failed to provide notice to I-Enterprise that the individual defendants ceased being active in

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 In the December 2004 Order, the Court dismissed the Breach Claims only to the

extent they were based on “(1) failure to make the requisite capital contributions to the

partnerships, (2) failure to adhere to the investment objectives set forth in the Offering

Memoranda, (3) misallocations of profits, losses, and securities, (4) failure to devote

appropriate time to management of the funds, and (5) conflict of interest and self-dealing.” 

(See December 2004 Order at 3-4, 19.) To the extent I-Enterprise realleges the Breach

Claims based on those allegations, the Court’s December 2004 Order remains applicable.

2

 I-Enterprise’s claims for negligent misrepresentation, fraud, violation of

Massachusetts Blue Sky Laws, and for an accounting were not addressed in that order, as

defendants had not moved to dismiss such claims at that time. 

3

 Although in footnote 9 of the July 2005 Order, the Court stated that it “expresse[d]

no opinion as to whether defendants . . . could have breached the implied covenant of good

faith and fair dealing by failing to devote an objectively adequate amount of time to

managing the Funds,” (see July 2005 Order at 20 n.9), the Court later noted, in its

September 12, 2005 order denying defendants’ motion for clarification of the July 2005

order, the reason the Court did not address that issue, was that defendants had moved to

dismiss only the negligent misrepresentation claim. (See Order Denying Defendants’

Motion for Clarification, filed September 12, 2005, at 3.) The Court did not purport in

footnote 9 of the July 2005 Order to set aside its earlier ruling. 

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the management of the Funds.1 (See id. at 15-17.)

Accordingly, defendants’ motion to dismiss all Breach Claims that are not based on

the allegation that defendants failed to provide notice of “detrimental acts” will be DENIED.

D. Claims Based on Failure to Devote an Objectively Adequate Amount of

Time to Management of the Funds

Defendants move to dismiss any remaining claim that is based on defendants’

failure to devote an objectively adequate amount of time to management of the Funds.

Defendants correctly note that, in the December 2004 Order, the Court, to the extent

raised at that time by defendants’ motion,2 dismissed all claims that were based on a failure

to devote appropriate time to management of the Funds, on the ground such claims were

improperly alleged derivative claims.3

 (See December 2004 Order at 3-4, 16-18, 21.) 

Additionally, as defendants note, the Court, in the July 2005 Order, dismissed I-Enterprise’s

negligent misrepresentation claims to the extent such claims were based on

misrepresentations about the amount of time defendants promised to devote to the

management of the Funds. The Court found no misrepresentation was made because

each defendant promised, in the Fund V and Fund VI Limited Partnership Agreements, only

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to “devote so much of his time to the conduct of the affairs of the Partnership and the

General Partner as is appropriate in his judgment to manage effectively the affairs of the

Partnership” and disclosed therein the existence of commitments to other entities. (See

July 2005 Order at 19-21.) Defendants now move to dismiss I-Enterprise’s claims that

were not addressed in the December 2004 and July 2005 orders, specifically, the claims for

fraud, violation of the California and Massachusetts Blue Sky Laws, and for an accounting,

to the extent such claims are based on defendants’ alleged failure to devote an adequate

amount of time to managing the Funds. 

The Court agrees with defendants that its prior ruling, specifically, that I-Enterprise

failed to state a claim for negligent misrepresentation based on statements about the

amount of time defendants would devote to the management of the Funds, (see July 2005

Order at 19-21), likewise requires dismissal of I-Enterprise’s claims for fraud, violation of

California and Massachusetts Blue Sky Laws, and for an accounting, to the extent such

claims are based on the same statements, because an element of each such claim is the

existence of a misrepresentation or omission. See, e.g., Small v. Fritz Companies, Inc., 30

Cal. 4th 167, 173 (2003) (noting one element of claim for negligent misrepresentation is

“misrepresentation (false representation, concealment, or nondisclosure”); Lazar v.

Superior Court, 12 Cal. 4th 631, 638 (1996) (noting one element of fraud claim is

“misrepresentation (false representation, concealment, or nondisclosure)”); Cal. Corp.

Code § 25401 (providing claim for violation of California Blue Sky Law requires proof of

untrue statement of material fact or material omission); Mass. Gen. Laws, ch. 110A,

§ 410(a)(2) (providing claim for violation of Massachusetts Blue Sky Laws requires proof of

untrue statement of material fact or material omission); Union Bank v. Superior Court, 31

Cal. App. 4th 573, 593 (1995) (stating absence of proof of misconduct bars action for

accounting).

Defendants also move to dismiss I-Enterprise’s contract claim, to the extent such

claim is based on a failure to disclose that the individual defendants had ceased being

active in the management of the Funds. As noted above, the Court held, in the December

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2004 Order, that such claim was a direct claim, not a derivative claim, and thus not subject

to dismissal as an improperly alleged derivative claim. (See December 2004 Order at 17-

18.) As the Court later held, however, I-Enterprise does not allege that any of the individual

defendants ceased being active in the management of the Funds, but rather alleges only

that they failed to disclose other, then-existing commitments. (See July 2005 Order at 20;

see also 4AC ¶¶ 137-148.) Accordingly, as defendants correctly argue, I-Enterprise has

not stated a direct contract claim based on a failure to disclose that the individual

defendants had ceased being active in the management of the Funds. 

Accordingly, defendants’ motion to dismiss all claims that are based on defendants’

alleged failure to devote an objectively adequate amount of time to management of the

Funds, or on alleged misrepresentations about the amount of time defendants would

devote to the management of the Funds, will be GRANTED.

E. Claims Based on Nondisclosure of Retention of Directed Shares and

“Inter-Fund Loans”

In the July 2005 Order, the Court dismissed I-Enterprise’s claim against DFJ-VI and

the individual defendants for negligent misrepresentation, to the extent such claim was

based on defendants’ alleged failure to disclose retention of directed shares or a failure to

disclose what defendants characterize as “inter-fund loans.” (See July 2005 Order at 21.) 

The Court dismissed such claim, however, only because I-Enterprise had failed to address

the portion of defendants’ motion to dismiss that was directed to such claim and, thus, had

effectively conceded that it was not pursuing a negligent misrepresentation claim based on

such allegations. (See id.) The Court did not address the allegations on their merits. 

Defendants now move to dismiss I-Enterprise’s claims for breach of fiduciary duty,

breach of the covenant of good faith and fair dealing, breach of contract, unjust enrichment,

violations of Blue Sky Laws, and for an accounting, to the extent such claims are based on

the above-referenced allegations. Defendants set forth two arguments in support of

dismissal of such claims: (1) such claims are derivative claims that cannot be asserted

without joining the Funds as parties to the instant action; and (2) plaintiffs cannot show they

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suffered any damages as a result of such alleged nondisclosures.

The specific allegations at issue are the following:

164. The Fund VI General Partner and the Individual Defendants

failed to disclose that the Fund V General Partner had diverted Fund V

monies for non-Partnership purposes, including that the Fund V General

Partner in 1998 had used $375,000 of Fund V monies to purchase shares of

Wit Capital for the Fund V side-by-side fund and in July 1999 had used $1.59

million of Fund V monies to buy shares of Digital Impact for Fund IV.

165. The Fund VI General Partner and the Individual Defendants

failed to disclose that the General Partners of prior DFJ funds and the

Individual Defendants had misappropriated, and intended to continue to

misappropriate, compensation and benefits, including directed shares and

option grants, received on account of board memberships in prior fund

portfolio companies that should have been used to reduce management fees

under those funds’ Agreements.

(See 4AC ¶¶ 164-65.) I-Enterprise further alleges that such omissions made the

statements in the Offering Memorandum for Fund VI materially misleading. (See id. ¶ 163.) 

In essence, I-Enterprise alleges that DFJ-VI failed to disclose, in the Offering

Memorandum, that the managers of prior funds had misappropriated assets from those

funds.

Defendants’ argument that any claims based on such nondisclosures are improperly

alleged derivative claims is unpersuasive. I-Enterprise does not allege in the above-cited

paragraphs, for example, that DFJ-VI is liable for misappropriation of Fund VI assets, a

claim that clearly would be derivative. (See, e.g., December 2004 Order at 5 (citing Jones

v. H.F. Ahmanson & Co., 1 Cal. 3d 93, 106 (1969))). Rather, I-Enterprise alleges that, in

promoting Fund VI, DFJ-VI and the individual defendants are liable for failing to disclose

prior misappropriations of assets from other funds. In other words, I-Enterprise is not

seeking damages for an injury to the Funds, but is seeking damages for breach of a duty of

disclosure allegedly owed to I-Enterprise, individually, as a prospective investor. Such a

claim is a direct claim, not a derivative claim. (See December 2004 Order at 6 (citing

Jones, 1 Cal. 3d at 106)). 

Defendants’ alternative argument that I-Enterprise cannot show it incurred damages

as a result of the above-referenced nondisclosures likewise is unpersuasive. Defendants

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argue that “for the same reasons that [I-Enterprise] was unable to identify any damages in

connection with these allegations to support its negligent misrepresentation claim,

[I-Enterprise] could not allege the requisite damages necessary” to support any other claim

based on such nondisclosures. (See Motion at 11.) Presumably, defendants are referring

to the argument made in their earlier-filed motion to dismiss the Third Amended Complaint,

in which defendants contended I-Enterprise had failed to allege that any “inter-fund loans”

were not repaid. (See Defendants’ Motion to Dismiss Certain Counts of IEC’s Third

Amended Complaint, filed April 25, 2005, at 19.) As noted above, the Court, in its July

2005 Order, never ruled on the merits of that argument; thus, there was no finding that

I-Enterprise had failed to properly allege damages. Moreover, I-Enterprise had no reason

to allege that the “loans” were not repaid, because it does not allege that the challenged

transactions were loans. As set forth above, I-Enterprise alleges that assets of the funds

were misappropriated for non-fund uses, not that defendants took unauthorized loans from

the funds. (See 4AC ¶¶ 164-165.). Defendants fail to set forth any other argument as to

why I-Enterprise has failed to adequately allege damages.

Accordingly, defendants’ motion to dismiss all claims that are based on an alleged

failure to disclose retention of directed shares and a failure to disclose what defendants

characterize as “inter-fund loans” will be DENIED. 

CONCLUSION

For the reasons set forth above, defendants’ motion to dismiss is hereby GRANTED

in part and DENIED in part, as follows:

1. As I-Enterprise is no longer asserting a conversion claim, defendants’ motion to

dismiss the conversion claim is DENIED as moot.

2. Defendants’ motion to dismiss the unjust enrichment claims is DENIED.

3. Defendants’ motion to dismiss all Breach Claims that are not based on the

allegation that defendants failed to provide notice of “detrimental acts” is DENIED.

4. Defendants’ motion to dismiss all claims that are based on defendants’ failure to

devote an objectively adequate amount of time to management of the Funds or alleged

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misrepresentations about the amount of time defendants would devote to the management

of the Funds is GRANTED.

5. Defendants’ motion to dismiss all claims that are based on an alleged failure to

disclose retention of directed shares and a failure to disclose what defendants characterize

as “inter-fund loans” is DENIED.

This order terminates Docket No. 442.

IT IS SO ORDERED.

Dated: November 3, 2005 MAXINE M. CHESNEY

United States District Judge

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