Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-cand-3_04-cv-03508/USCOURTS-cand-3_04-cv-03508-10/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

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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

TELEPHIA INC,

Plaintiff,

 v.

STEVEN CUPPY; SCOTT McCULLEY; and

DAVID SIMON,

Defendants.

_____________________________________/

 AND RELATED COUNTERCLAIMS.

 /

No. C 04-03508 SI

ORDER GRANTING PLAINTIFF’S

MOTION FOR LEAVE TO FILE SECOND

AMENDED COMPLAINT AND MOTION

TO STRIKE JURY DEMAND

On December 2, 2005, this Court heard oralargument on plaintiff’s motions for leave to file a se cond

amended complaint (docket # 109) and to strike the jury demand (docket # 123). Having carefully considered

the arguments of counsel and the papers submitted, the Court GRANTS both motions. 

BACKGROUND

Plaintiff, Telephia, Inc., “collects and analyzes data on cell phone usage for wirelessservice providers.”

First Am. Compl. at ¶ 2. In 2002, Telephia filed suit against Criterion Wireless Corp. (“Criterion”), alleging

that Criterion had misappropriated Telephia’s intellectual property. Id. at ¶ 16. As part of a settlement

agreement stemming fromthat lawsuit, Telephia agreed to purchase Criterion fromitsfounders, the defendants

in this case. Id. at ¶ 17. On October 31, 2002, Telephia and defendants executed a Securities Purchase

Agreement ("SPA"), setting forth the governing terms of the purchase. Id. at ¶ 18.

On July 30, 2004, Telephia filedthis lawsuit in California state court, claiming that defendants had failed

to disclose numerous deficienciesin Criterion’s business, and seeking damages for both breach of contract and

fraudulent inducement. The core of plaintiff’s complaint was that defendants had made a series of

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misrepresentations about the quality of Criterion’s product, known as “Veritas Technology.” After defendants

removed the case to federal court, Telephia filed an amended complaint. At an August 26, 2005 case

management conference, Telephia informed defendants that it wished to file a second amended complaint.

Defendants objected, and the parties met and conferred unsuccessfully over the next month.

Telephia now brings two motions before the Court. First, Telephia seeks leave to file its second

amended complaint. Second, Telephia seeks to enforce a jury trial waiver provision in the SPA.

LEGAL STANDARD

Under Federal Rule of Civil Procedure 15, a plaintiff may amend its complaint “once as a matter of

course before a responsive pleading is served,” and “only byleave of court or by written consent ofthe adverse

party” thereafter. Fed. R. Civ. P. 15(a). Leave to amend “shall be freely given when justice so requires.” Id.;

see also Owens v. Kaiser Foundation Health Plan, Inc., 244 F.3d 708, 712 (9th Cir. 2001) (“We have

stated that this policy is to be applied with extreme liberality.”) (internal quotation marks omitted). Rule 15

embodies a strong federalpolicy in favor ofdeciding cases on their merits. Thus, leave to amend is freely given

unless the opposing party can establish a factor such as “undue delay, bad faith or dilatory motive on the part

ofthe moving party, repeated failure to cure deficiencies by amendments previously allowed, undue prejudice

to the opposing party by virtue of the allowance of the amendment, [or] futility of amendment.” Foman v.

Davis, 371 U.S. 178, 182, 83 S. Ct. 227, 230 (1962); see also Owens, 244 F.3d at 712 (“In determining

whether leave to amend is appropriate, the district court considers ‘the presence of any of four factors: bad

faith, undue delay, prejudice to the opposing party, and/or futility.’”) (quoting Griggs v. Pace Am. Group,

Inc., 170 F.3d 877, 880 (9th Cir. 1999)).

Under FederalRule ofCivil Procedure 39(a), a Court may strike a jury demand where the parties have

executed a waiver of their right to a jury trial. See Great Earth Int’l Franchising Corp. v. Milks

Development, 311 F. Supp. 2d 419, 436-38 (S.D.N.Y. 2004); Okura & Co., Inc. v. Careau Group, 783

F. Supp. 482, 488-89 (C.D. Cal.1991). Any such waiver must be “knowingly and voluntarily executed.”

Okura & Co., 783 F. Supp. at 488.

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DISCUSSION

Telephia arguesthat itshould be allowed to file a second amended complaint, and that the Courtshould

strike defendants’ demand for a jury trial. For the reasons set forth below, the Court agrees.

1. Motion for leave to file second amended complaint

Telephia requests that the Court permit it to file an amended complaint that “does not add any new

claims, but merely clarifies Telephia’s existing claims by conforming themto facts learned through discovery.”

Pl. Br. at 2. Like Telephia’s first amended complaint, the proposed second amended complaint contains only

causes of action for breach of contract and fraud. The proposed complaint, however, contains significantly

more detailed descriptions of Telephia’s acquisition of Criterion, the negotiation of the SPA, and the defects

in Criterion’s Veritas Technology. In addition, the proposed complaint alleges that Telephia was injured by

paying too much for Criterion, whereas the first amended complaint only alleged that Telephia was injured by

expenditures it made to fix Criterion’s technology.

As mentioned above, a request to file an amended complaint should be granted absent “undue delay,

bad faith or dilatory motive on the part of the movant, . . . undue prejudice to the opposing party by virtue of

the allowance of the amendment, [or] futility of amendment.” Foman v. Davis, 371 U.S. 178, 182 (1962).

Defendants oppose Telephia’s motion based on each of these reasons.

A. Undue prejudice

Defendants claim that allowing Telephia to file its second amended complaint would cause themundue

prejudice because the second amended complaint contains a “significant shift from the focus of the first

amended complaint.” Def. Br. at 4. While the first amended complaint claimed damages based upon the costs

Telephia incurred in fixing the Veritas technology, the second amended complaint also allegesthatTelephia was

damaged by paying too much for Criterion. Defendants claim this subtle shift in focus from post-deal costs to

pre-deal valuation “would greatly modify the nature, scope, and focus of the litigation,” causing them undue

prejudice.

In support of their position, defendants cite to two cases: Kaplan v. Rose, 49 F.3d 1363 (9th Cir.

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1994), and Minor v. Northville Public Schools, 605 F. Supp. 1185 (E.D. Mich. 1985). In both cases,

requests to file amended complaints were denied because the requests were made at a late stage of the

proceedings. Both cases, however, are distinguishable.

Kaplan involved a plaintiff’s informal request to amend its complaint at the summary judgment stage

of the proceedings. “Trial was only two months away, and discovery was completed.” Kaplan, 49 F.3d at

1370. Given the late stage of the proceedings, the district court denied plaintiff’s request for leave to amend,

and the Sixth Circuit affirmed. Id. In this case, in contrast, almost two months of fact discovery remained when

Telephia first gave notice of its desire to amend its complaint. The issue was first raised in a joint case

management statement filed on August 16, 2005, and fact discovery did not end until October 14, 2005. In

addition, Telephia promptly amended both its interrogatories and its initial disclosures. Thus, this case simply

does not present the same level of prejudice as was present in Kaplan.

Minor involved an attempt by a plaintiff to amend her complaint to include three new counts, all of

which were based on different factual grounds than the rest of her complaint. Minor, 605 F. Supp. at 1200.

Because of the introduction of new factual allegations at a late stage of the litigation, the Court denied the

plaintiff’s request. Id. In contrast, in this case Telephia’s valuation theory of damages is very closely related

to its existing claims, and will require little, if any, additional discovery. Minor explicitly distinguished other

cases on this ground:

In each case, the proposed amendmentsought to amend only a theory ofrecovery. The facts

underlying the claims had been fully explored prior to trial. Thus, no further discovery would

have been required and there was no issue as to surprise to the defendant or expanding both

the factual and legal issues at trial.

Minor, 605 F. Supp. at 1201-02.

Telephia’s valuation-theory amendment is closely related to its existing claims and willtherefore require

little additionaldiscovery. Given this fact, defendants were notified of the proposed amendment sufficiently in

advance of the close of discovery that the second amended complaint will not cause them undue prejudice.

B. Undue Delay

Defendants’ next basis for opposing Telephia’s motion is undue delay. Defendants claim that Telephia

knew of the allegations contained in its second amended complaint at the time it filed its first amended

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complaint, and thatTelephia’s motion should be denied because of its delay in introducing the new allegations.

The undue delay inquiry is closely tied to the examinationof prejudice -- part of what makes delay “undue” is

the amount of prejudice suffered by the opposing party. See Bowles v. Reade, 198 F.3d 752, 758 (9th Cir.

1999) (“Undue delay by itself . . . is insufficient to justify denying a motion to amend.”); Lockheed Martin

Corp. v. Network Solutions, Inc., 194 F.3d 980, 986 (9th Cir. 1999) (“[D]elay is not a dispositive factor in

the amendment analysis, [but] it is relevant . . . .”).

For the reasons setforth above, the Court findsthe defendants willincurlittle prejudice fromTelephia’s

second amended complaint. Moreover, Telephia announced its intention to file a second amended complaint

on August 16, 2005, only five months after it filed its first amended complaint on March 9, 2005. Given that

Telephia has made significant efforts to include substantially more detail in its second amended complaint, the

Court finds that any delay on Telephia's part was reasonable.

C. Failure to plead fraud with specificity

Defendants also argue that Telephia's motion should be denied because Telephia's second amended

complaint fails to plead fraud with specificity. Federal Rule of Civil Procedure 9(b) requires that allegations

of fraud be pled with particularity. This means that “[a]verments of fraud must be accompanied by ‘the who,

what, when, where, and how’ of the misconduct charged.” Vess v. CIBA-GEIGY Corp., 317 F.3d 1097,

1106 (9th Cir. 2003).

Defendants base their argument on Telephia’s statement that “[d]efendants also withheld other facts

that, if known to a prospective purchaser, would have discounted the value oftheir business.” Pl. Second Am.

Compl. at ¶ 28. They claim that this statement is too vague to satisfy the 9(b) standard. Later in the second

amended complaint, however, Telephia describes its allegations in considerably more detail. See id. at ¶¶

47-48, 54-56, 83-84. The second amended complaint discusses defendants’ failure to disclose concerns that

Verizon had voiced over “Path B,” a system of gauging market share by using autodialers to call wireless

customers. See id. at ¶¶ 47-48, 84. It also discusses defendants’ misrepresentations concerning the viability

of “Path C,” which measured wireless market share by analyzing wireless numbers that had transferred from

one wireless carrier to another. See id. at 54-56, 83. This is more than sufficient detail to comply with the

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requirements of Rule 9(b). 

D. Futility of amendment

Defendants’ finalargument against Telephia’ssecond amended complaint is thatthe amendment would

be futile. Defendants base this argument on two grounds: first, their contention that Telephia’s allegations of

Verizon’s concerns about “Path B” are contradicted by deposition testimony; second, their contention that

Telephia’s valuation theory of damages is too speculative. Both of these arguments, however, involve the

consideration of factual material and are therefore inappropriate for the pleadings stage. 

E. Request for costs

Finally, defendants request that, if the amended complaint is allowed, they be awarded costs for

discovery thatmust be reopened to cover the first amended complaint. The Court finds that this request is not

properly presented. Should Telephia need to reopen depositions or propound additional discovery it may

move the Court, after meeting and conferring with plaintiff, for costs on the basis of specific subject matter and

specific witnesses. Any such motion shall take the form of a letter brief of no more than five pages in length.

2. Motion to strike

Telephia’ssecond motion is a motion to enforce a jury trial waiver contained in the SPA. The waiver

reads: 

Each party hereto irrevocably waives allright to trialby jury in any proceeding (whether based

on contract, tort or otherwise) arising out of or relating to this Agreement, the other

Transaction Agreements, or any transaction or agreement contemplated hereby or thereby or

the actions of any party hereto in the negotiation, administration, performance or enforcement

hereof.

Pl. Mot, Exh. C, at 43. 

As an initial matter, the Court finds that the claims at issue in this case all fall within the jury waiver’s

terms because all the claims “relate to” the SPA. The claims for both breach of contract and fraudulent

inducement both clearly invoke the SPA. Thus, the jury trial waiver applies to Telephia’s action.

Defendants raise three arguments against the enforceability of the jury waiver provision. First,

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defendants argue thatTelephia should be estopped from enforcing the provision; second, they argue thatsuch

provisions are unenforceable under California law; third, they argue that they did not voluntarily agree to the

provision.

A. Estoppel

Defendants argue that Telephia should be estopped fromenforcing the jury waiver provision because

it is inconsistent with its earlier demand for a jury trial, and because defendants have relied on Telephia’s

demand. In support of this argument, defendants argue that Telephia originally demanded “trial by jury of all

claims so triable” in itsfirst amended complaint. In addition, defendants argue that Telephia did not object to

their jury trial demands in their notice of removal and in their answer to Telephia’s complaint. 

In response, Telephia argues that its demand for a jury trial was limited to “all claims so triable,” and

was specifically intended to preserve itsright to enforce the jury waiver provision. It also argues that any prior

motion to strike the jury trial demand would have been premature because discovery had not yet been

completed.

The Court agrees with plaintiff. Although Telephia earlier demanded a jury trial, that demand was not

“clearly inconsistent” with the jury waiver provision. See New Hampshire v. Maine, 532 U.S. 742, 750 (“[A]

party’s later position must be ‘clearly inconsistent’ with its earlier position.”). Rather, Telephia’s jury trial

demand was sufficiently limited to preserve its rights under the SPA. In addition, Telephia brought this motion

five months in advance oftrial, and promptly at the end of discovery. Because Telephia did not wait until the

eve oftrialto bring this motion, the Court is lessinclined to believe thatTelephia’s action “threatens the integrity

of the judicial process,” as defendants allege. Def. Reply Br. at 4. Finally, to the extent that Telephia is now

taking an inconsistent position with its earlier jury trial demand, that position does not go to the merits of the

case. This further convinces the Court that Telephia is not manipulating the judicial process. Compare

Helfand v. Gerson, 105 F.3d 530, 534 (9th Cir. 1997) (party judicially estopped by prior position in state

court about how to interpret testamentary documents); New Hampshire, 532 U.S. at 751 (New Hampshire

was judicially estopped where its “claim that the Piscataqua River boundary runs along the Maine shore [was]

clearly inconsistent with its interpretation of the words ‘Middle of the River’” in prior litigation).

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B. California law

Defendants’ next argument is that, because the SPA provides that it is governed by California law, the

California Supreme Court’s decision in Grafton Partners L.P. v. Superior Court, 36 Cal. 4th 944 (2005),

should bar the enforcement ofthe jury waiver provision. In Grafton Partners, the California Supreme Court

found that contractual jury waivers are unenforceable under the California Constitution. Id. at 967.

As pointed out by Telephia, however, the right to a jury trial in federal court flows from the Seventh

Amendment, not the California Constitution. Thus, regardless of the SPA’s choice-of-law provision, federal

law controls the waiver ofthatright, notstate law. Cf. Simler v. Conner, 372 U.S. 221, 222 (1963) (holding

that to achieve uniformity that Seventh Amendment demands, the right to a jury trial in a diversity case is

determined by federal law).

C. Involuntary waiver

Defendants’ final argument is thatit did not voluntarily waive its right to a jury trial. Defendants argue

that Telephia, a much larger company, offered a “take it or leave it” SPA that defendants were coerced into

accepting. The Court, however, finds that defendants were represented by counsel during the negotiation of

the SPA. In addition, the jury waiver provisionwas conspicuously placed in the SPA, and was added to the

SPA almost two weeks before it was signed. In such circumstances, the Court cannot find that defendants

were coerced into accepting the SPA. See, e.g., Telum, Inc. v. E.F. Hutton Credit Corp., 859 F.2d 835,

837 (“Telum and Hutton, on the other hand, were both sophisticated parties, and the provision here was in the

normal print size of the contract.”); Standard Wire & Cable Co. v. AmeriTrust Corp., 697 F. Supp. 368,

375 (C.D. Cal. 1988) (upholding jury trial waiver where parties were represented by counsel). 

CONCLUSION

For the foregoing reasons and for good cause shown, the Court hereby GRANTS Telephia’s Motion

for Leave to File Second Amended Complaint (Docket No. 109), and GRANTS Telephia’s Motion to Strike

Defendants’ Demand for Jury Trial (Docket No. 123).

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IT IS SO ORDERED.

Dated: December 2, 2005 

 

SUSAN ILLSTON

United States District Judge

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