Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-cand-3_03-cv-01561/USCOURTS-cand-3_03-cv-01561-4/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 TO DISMISS CERTAIN

COUNTS OF THIRD AMENDED

COMPLAINT AND/OR TO STRIKE;

VACATING HEARING

(Docket No. 329)

Before the Court is defendants’ motion, filed April 25, 2005, to dismiss certain

counts, or parts thereof, of plaintiff I-Enterprise Company LLC’s (“I-Enterprise”) Third

Amended Complaint and to strike part of the prayer for relief, pursuant to Rules 12(b)(6)

and 12(f) 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 July 22,

2005 hearing. For the reasons set forth below, the motion is GRANTED in part and

DENIED in part.

/ /

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1

 Pursuant to stipulation, the parties were realigned on January 28, 2005. (See

Docket No. 191.) I-Enterprise is now the plaintiff; DFJ-V, DFJ-VI, Draper, Fisher, and

Jurvetson are now defendants. (See id.)

2

BACKGROUND

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

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

Jurvetson Fund VI L.P. (“Fund VI”). (See Third Amended Complaint (“TAC”) ¶¶ 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, the “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.)

On December 15, 2004, the Court granted in part and denied in part defendants’

motion for partial judgment on the pleadings as to I-Enterprise’s Second Amended

Counterclaim.1 In particular, the Court found that with limited exceptions, as set forth infra,

all of I-Enterprise’s claims based on the following allegations were derivative claims that

were required to be brought on behalf of Fund V or Fund VI, the partnerships in which

I-Enterprise is a limited partner, and could not be brought by I-Enterprise on its own behalf:

(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

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2

 On April 4, 2005, the Court granted defendants’ motion to disqualify I-Enterprise’s

counsel. As a result, the hearing on the instant motion was noticed for hearing July 22,

2005, to allow time for I-Enterprise to obtain new counsel.

3

Denying in Part Counterdefendants’ Motion for Partial Judgment on the Pleadings or, in the

Alternative, for Summary Adjudication, filed December 15, 2004, at 3-4, 21 (“December 15

Order”). The Court granted defendants’ motion for judgment on the pleadings as to all

claims based on such allegations, with the exception of I-Enterprise’s claims for negligent

misrepresentation, fraud, violation of Massachusetts Blue Sky laws, and for an accounting. 

See id. The Court denied defendants’ motion as to claims based on the following

allegations: (1) failure to distribute securities to I-Enterprise; and (2) failure to provide notice

to I-Enterprise when the individual counterdefendants ceased being active in the

management of the funds. See id. at 21.

On February 24, 2005, I-Enterprise filed a motion for leave to file a Third Amended

Complaint. The proposed amendments fell into two categories. First, I-Enterprise sought

to amend its pleading to recharacterize certain of the dismissed derivative claims as

individual claims, based on defendants’ failure to provide notice to I-Enterprise of

defendants’ alleged wrongdoing, in violation of the limited partnership agreements. 

Second, I-Enterprise sought to amend its pleading to allege additional misrepresentations

by defendants, which, I-Enterprise contended, first came to light during discovery.

On April 4, 2005, the Court granted the motion; I-Enterprise’s Third Amended

Complaint was filed that same date. Defendants filed the instant motion on April 25, 2005.2

LEGAL STANDARDS

A. Motion to Dismiss

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

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(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

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). 

B. Motion to Strike

Rule 12(f) of the Federal Rules of Civil Procedure authorizes the Court to “order

stricken from any pleading any insufficient defense or any redundant, immaterial,

impertinent, or scandalous matter.” See Fed. R. Civ. P. 12(f). “[T]he function of a 12(f)

motion to strike is to avoid the expenditure of time and money that must arise from litigating

spurious issues by dispensing with those issues prior to trial. . . .” Fantasy, Inc. v. Fogerty,

984 F.2d 1524, 1527 (9th Cir. 1993) (citation omitted), rev. on other grounds, 510 U.S. 517

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3

 Both Limited Partnership Agreements are attached to the Ramani Declaration as

Exhibit C.

5

(1994). 

DISCUSSION

A. Claims Based on Failure to Notify Limited Partners of “Detrimental Acts”

The limited partnership agreements for Fund V and Fund VI require the General

Partner to provide written notice to the limited partners if any of the individual defendants

do not remain active in the management of the funds or if “the General Partner or any of its

Managing Members has committed a Detrimental Act.” (See TAC ¶ 26; see also Ramani

Decl. Ex. C (Fund V Limited Partnership Agreement) at 25 § 14.9(b) and Ex. C (Fund VI

Limited Partnership Agreement) at 28 § 14.9(b).)3

 The limited partnership agreements

further provide for termination of the funds if two-thirds of the limited partners vote to

terminate the partnership within 90 days of receiving such written notice from the General

Partner. (See id.) The limited partnership agreements define “Detrimental Act” as “(i)

actual fraud or willful misconduct which directly causes a material adverse effect to the

Partnership or its assets or (ii) being convicted of a felony or of securities fraud or

embezzlement.” (See id. (Fund V Limited Partnership Agreement) at 13 § 8.4(a) and (Fund

VI Limited Partnership Agreement) at 15 § 8.4(a).)

I-Enterprise has amended its complaint to allege that the Funds’ General Partners

breached their duty to provide written notice of the following alleged “Detrimental Acts”:

1. Distribution of Cyras stock to the Fund V General Partner, even though the stock

was not a distributable marketable security of which the General Partner was entitled to

take a share;

2. Engaging in conflict of interest and self-dealing transactions, including personal

transactions involving shares of portfolio company stock, misappropriation of partnership

opportunities and assets, and investing in affiliate companies without the requisite consent.

3. Failure to dedicate appropriate time to effectively manage the affairs of the

partnership, and agreeing to dedicate 100% of their time to funds other than Funds V and

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VI barely a year into the ten-year term of Fund VI.

4. Failure to make any of the required capital contributions to the funds.

5. Instead of returning to the limited partners capital previously reserved for followon investments in portfolio companies that had failed, embarking on a “recovery program”

to reinvest that money with changed investment objectives and in conflict with investments

being made at the same time by Fund VII.

6. Failing to follow the valuation procedures required by the Fund V Agreement. 

(See TAC ¶¶ 150-162.)

I-Enterprise alleges that defendants’ failure to give the required written notice of

these acts “deprived it of the opportunity in response, among other things (a) to withhold

further capital contributions on account of such material contract breaches; (b) to sell its

limited partnership interest in Fund V or VI; (c) to seek judicial dissolution of the

Partnerships; or (d) to obtain a vote of two-thirds in interest of the limited partners to

terminate the Partnerships.” (See TAC ¶ 162.) 

1. Direct or Derivative?

Defendants’ first argument for dismissal is that the Court has already held that any

claims based on “Detrimental Acts” must be brought as derivative claims and may not be

asserted by I-Enterprise individually. As noted, in the Court’s December 15, 2005 order,

the Court granted judgment on the pleadings in favor of defendants with respect to

I-Enterprise’s claims for damages 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 selfdealing,” on the ground that “[a]ll such claims must be brought as derivative claims and

may not be asserted by I-Enterprise individually.” (See December 15 Order at 19-20.) The

Court denied judgment on the pleadings, however, with respect to I-Enterprise’s claim that

defendants failed to provide the requisite notice that the individual defendants ceased being

active in the management of the funds, in violation of § 14.9 of the limited partnership

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agreements, finding that such allegation stated a direct claim. (See id. at 17-18.) 

I-Enterprise’s new claims for failure to provide the requisite notice of alleged Detrimental

Acts, in violation of § 14.9 of the limited partnership agreements, similarly state direct, not

derivative, claims, for the reasons set forth in the December 15 Order. (See id. at 10-11,

17-18.)

As the Court noted therein, a derivative suit, under California law, “seeks to recover

for the benefit of the corporation and its whole body of shareholders when injury is caused

to the corporation that may not otherwise be redressed because of failure of the

corporation to act.” See Jones v. H. F. Ahmanson & Co., 1 Cal. 3d 93, 106 (1969). An

action is derivative “if the gravamen of the complaint is injury to the corporation, or to the

whole body of its stock or property without any severance or distribution among individual

holders, or if it seeks to recover assets for the corporation or to prevent the dissipation of its

assets.” See id. A general rule is that “a stockholder of a corporation has no personal or

individual right of action against third persons, including the corporation’s officers and

directors, for a wrong or injury to the corporation which results in the destruction or

depreciation of the value of his stock, since the wrong thus suffered by the stockholder is

merely incidental to the wrong suffered by the corporation and affects all stockholders

alike.” See id. at 107.

Here, I-Enterprise does not allege that defendants’ Detrimental Acts reduced the

value of the partnerships’ assets, and consequently injured I-Enterprise. Such a claim

would be a derivative claim, as the injury to I-Enterprise would be incidental to the injury to

the assets of the partnerships. See id. Rather, I-Enterprise now seeks to recover

damages for defendants’ alleged failure to provide contractually-owed notice of their

wrongdoing to I-Enterprise, which prevented it from taking actions to protect its own

interests by (a) withholding further capital contributions; (b) selling its limited partnership

interest in Fund V or VI; (c) seeking judicial dissolution of the Partnerships; or (d) obtaining

a vote of two-thirds in interest of the limited partners to terminate the Partnerships. (See

TAC ¶ 162.) As noted in the December 15 Order, a claim for failure to provide notice to the

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limited partners is a direct claim. (See December 15 Order at 9-11, 17 (citing AngloAmerican Security Fund, L.P. v. S.R. Global International Fund, L.P., 829 A.2d 143, 150-

154 (Del. Ch. 2003)). In short, a failure to give notice of Detrimental Acts “would injure only

the partners, and not the partnership itself, as the financial condition of the partnership

exists regardless of whether it is reported to the limited partners.” (See December 15

Order at 11 (citing Anglo-American, 829 A.2d at 154)).

2. Damages

Defendants further argue that I-Enterprise’s “failure to notify” claims should be

dismissed because I-Enterprise was not entitled, under the limited partnership agreements,

to unilaterally withdraw from the partnerships and, thus, cannot show that it was damaged

by defendants’ alleged failure to provide notice of Detrimental Acts. Defendants correctly

point out that the partnership agreements preclude limited partners from withdrawing from

the partnership “without the prior written consent of the General Partner and a sixty-six and

two-thirds percent (66-2/3%) in interest of the Limited Partners.” (See Ramani Decl. Ex. C

(Fund V Limited Partnership Agreement) § 7.2 and Ex. C (Fund VI Limited Partnership

Agreement) § 7.2.) Defendants also note, in their reply, that a limited partner who fails to

make any of the contributions required under the partnership agreements is “in default and

the other Limited Partners . . . and the General Partner . . . have the right and option to

acquire the Partnership interest of the defaulting Partner,” (see id. § 4.5(b)), and that the

partnership agreements preclude a limited partner from selling his interest in the

partnerships “without the prior written consent of the General Partner,” (see id. § 9.3.) 

The limited partners are not entirely powerless to redress wrongdoing by the general

partners, however, as § 14.9 of the partnership agreements provides that upon notice of

Detrimental Acts, the partnerships may be terminated by “the vote of two-thirds (2/3) in

interest of the Limited Partners.” (See id. ¶ 14.9.) Defendants also fail to point to any

provision of the partnership agreements that would preclude I-Enterprise from seeking

judicial dissolution of the funds had I-Enterprise received notice of defendants’ alleged

wrongdoing. As I-Enterprise points out, under California law, any limited partner may seek

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judicial dissolution of a general partnership if, for example, “the property of the limited

partnership is being misapplied or wasted by the general partners” or “[d]issolution is

reasonably necessary for the protection of the rights or interest of the complaining

partners.” See Cal. Corp. Code § 15682. 

In short, the gravamen of I-Enterprise’s claims is that defendants’ failure to provide

notice of Detrimental Acts precluded I-Enterprise from taking action to protect its

investment in the funds, and that it suffered damage as a result thereof. As defendants

have not shown, as a matter of law, that there was no action I-Enterprise could have taken

to protect its investment had it received notice of defendants’ alleged wrongdoing, dismissal

is inappropriate.

3. Rule 9(b)

Defendants also argue that I-Enterprise has failed to plead its “failure to provide

notice” claim with the particularity required by Rule 9(b) of the Federal Rules of Civil

Procedure. Rule 9(b) requires averments of fraud to be pleaded with particularity. See

Fed. R. Civ. P. 9(b). Defendants argue that “because [I-Enterprise’s] new claims hinge on

the existence of “Detrimental Acts,” the only type of claims [I-Enterprise] could possibly

bring under this Section would be fraud claims[.]“ (See Motion at 7.) 

This argument is unpersuasive, for two reasons. First, the partnership agreement

defines “Detrimental Acts” to include “actual fraud or willful misconduct.” (See Ramani

Decl. Ex. C (Fund V Limited Partnership Agreement) § 8.4 and Ex. C (Fund VI Limited

Partnership Agreement) § 8.4.) As “Detrimental Acts” can be proved by demonstrating that

defendants engaged in “willful misconduct,” any claim based on “Detrimental Acts” is not

necessarily a fraud claim. Here, plaintiffs allege defendants engaged in Detrimental Acts

as a result of willful misconduct. (See TAC ¶ 26.) 

Second, plaintiffs do not allege that defendants’ failure to provide notice of their

wrongful acts was an act of fraud; rather, they contend the failure to provide notice was a

breach of contract and breach of fiduciary duty. (See TAC ¶¶ 26, 87, 186, 200, 256, 270.) 

Accordingly, Rule 9(b) has no application to the pleading of I-Enterprise’s “failure to

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4

 Under the Massachusetts Uniform Securities Act, which I-Enterprise refers to as

the “Massachusetts Blue Sky law,” any person who “offers or sells a security by means of

any untrue statement of material fact or any omission to state a material fact necessary in

order to make the statements made, in the light of the circumstances under which they are

made, not misleading . . . is liable to the person buying the security from him, who may sue

either at law or in equity to recover the consideration paid for the security, together with

interest at six per cent per year from the date of payment, costs, and reasonable attorneys’

fees, less the amount of any income received on the security, upon the tender of the

security.” See Mass. Gen. Laws, ch. 110A, § 410(a)(2).

10

provide notice” claims.

4. Conclusion

For the reasons set forth above, the Court will DENY defendants’ motion to dismiss

I-Enterprise’s claims based on failure to provide notice of Detrimental Acts.

B. Massachusetts Blue Sky Law

I-Enterprise alleges defendants violated the “Massachusetts Blue Sky law”4 by

selling interests in the Fund VI limited partnerships by means of various misrepresentations

and omissions contained in the offering memorandum and partnership agreement for Fund

VI. (See TAC ¶ 240-253.) I-Enterprise alleges that it is a Delaware limited liability

company with a place of business in Hingham, Massachusetts, and that its sole member is

a Delaware limited liability company, the members of which are all Massachusetts citizens. 

(See id. ¶ 4.) I-Enterprise acknowledges that Fund VI is a California limited partnership

formed pursuant to the terms of the California Revised Limited Partnership Act. (See id.

¶ 20.) Defendants move to dismiss I-Enterprise’s claim for violation of the Massachusetts

Blue Sky law on the ground that the Fund VI limited partners, including I-Enterprise,

specifically agreed that California law would govern the terms of the Fund VI investment,

and that application of Massachusetts law is inconsistent with the public policy of the state

of California.

The Fund VI Limited Partnership Agreement expressly provides: “This Agreement

shall be governed by and construed under the laws of the State of California as applied to

agreements among the residents of such state made and to be performed entirely within

such state.” (See Ramani Decl. Ex. C (Fund VI Limited Partnership Agreement) § 15.1.) In

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a diversity action, the Court, in determining the enforceability of a contractual choice of law

provision, applies the choice of law rules of the forum state. See General Signal Corp. v.

MCI Telecommunications Corp., 66 F.3d 1500, 1505 (9th Cir. 1995). Under California

choice of law rules, courts “must apply the law designated by the contractual provision

unless (1) the chosen state has no substantial relationship to the parties or transaction; or

(2) such application would run contrary to a California public policy or evade a California

statute.” See id. at 1506 (citing Nedlloyd Lines B.V. v. Superior Court, 3 Cal. 4th 459, 466

(1992)). 

I-Enterprise concedes that defendant DFJ-VI is a California limited liability company,

(see TAC ¶ 6), and that individual defendants Draper, Fisher, and Jurvetson are all

residents of California, (see id. ¶¶ 7-9). Accordingly, the parties’ choice of California law

has a substantial relationship to the parties or transaction.

There is no argument that application of California law to the instant dispute would

run contrary to California public policy or evade a California statute. Thus, both parts of the

California test for applying a contractual choice of law provision are satisfied in the instant

action.

In addition, the California Supreme Court has held that “[w]hen a rational

businessperson enters into an agreement establishing a transaction or relationship and

provides that disputes arising from the agreement shall be governed by the law of an

identified jurisdiction, the logical conclusion is that he or she intended that law to apply to all

disputes arising out of the transaction or relationship.” See Nedlloyd Lines B.V. v. Superior

Court, 3 Cal. 4th at 469 (emphasis in original). Accordingly, in the absence of any other

contractual provision to the contrary, California law is applicable to the instant dispute, and

I-Enterprise’s claim under Massachusetts law is subject to dismissal.

As I-Enterprise points out, however, although the parties agreed, in the Fund VI

Subscription Agreement, that I-Enterprise’s subscription to Fund VI would “be enforced,

governed and construed in all respects in accordance with the laws of the State of

California,” (see Ramani Decl. Ex. B (Fund VI Subscription Agreement) ¶ 6), the parties

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 I-Enterprise points out that both California and Massachusetts securities law

include an anti-waiver provision. See Cal. Corp. Code § 25701 (“Any condition, stipulation

or provision purporting to bind any person acquiring any security to waive compliance with

any provision of this law or any rule or order hereunder is void.”); see also Mass. Gen.

Laws, ch. 110A, § 410(g) (“Any condition, stipulation, or provision binding any person

acquiring any security to waive compliance with any provision of this chapter or any rule or

order hereunder is void.”).

6

 The Court makes no dispositive finding on this issue, but rather construes the

agreement in the light most favorable to I-Enterprise, as it is required to do in ruling on the

instant motion to dismiss. See, e.g., NL Industries, Inc. v. Kaplan, 792 F.2d at 898 (holding

court, in analyzing motion to dismiss, must construe allegations in light most favorable to

nonmoving party).

12

also agreed: “Notwithstanding any of the representations, warranties, acknowledgments or

agreements made herein by the undersigned, the undersigned does not hereby or in any

other manner waive any rights granted to him or her under federal or state securities laws.” 

(See id. ¶ 3.)5 Read together, the two sections are susceptible of an interpretation under

which California law generally governs, but investors in Fund VI are not precluded from

bringing suit to enforce their rights under any applicable federal or state securities law.6

The Massachusetts Supreme Court has held that the Massachusetts Blue Sky law

applies where the defendants offer or sell a security in Massachusetts. See Marram v.

Kobrick Offshore Fund, Ltd., 442 Mass. 43, 52 (2004). An offer to sell is deemed to have

been made in Massachusetts when the offer either (1) originates in Massachusetts or (2) is

directed by the seller to a purchaser in Massachusetts. See Mass. Gen. Laws, ch. 110A,

§ 414(c). The Fund VI Subscription Agreement and Limited Partnership Agreement each

indicate that Stephen Roy (“Roy”), the purchaser from whom I-Enterprise obtained its

interest, is located in Massachusetts. (See Ramani Decl. Ex. B (Fund VI Subscription

Agreement), signature page, and Ex. C (Fund VI Limited Partnership Agreement),

signature page.)

 Defendants argue, however, that application of Massachusetts law to the instant

transaction would violate California public policy. As noted above, a contractual choice of

law provision is not enforceable under California choice of law rules if “such application

would run contrary to a California public policy or evade a California statute.” See General

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Signal Corp. v. MCI Telecommunications Corp., 66 F.3d at 1505 (citing Nedlloyd Lines B.V.

v. Superior Court, 3 Cal. 4th at 466). Defendants argue that although both California and

Massachusetts securities laws protect investors from those who sell a security by means of

untrue statements of material fact or omissions of material fact, (see Cal. Corp. Code §§

25401, 25501; Mass. Gen. Laws, ch. 110A, § 410(a)(2)), the California Securities Act has a

shorter statute of limitations than the four-year period set forth under the Massachusetts

Blue Sky law. Compare Cal. Corp. Code § 25506 (“no action shall be maintained . . .

unless brought before the expiration of four years after the act or transaction constituting

the violation or the expiration of one year after the discovery by the plaintiff of the facts

constituting the violation, whichever shall first expire”) with Mass. Gen. Laws, ch. 110A, §

410(e) (“No person may sue . . . more than four years after the discovery by the person

bringing the action of a violation”). Defendants argue that California public policy precludes

enforcement of claims under another state law that would be time-barred if brought under

California law.

The Ninth Circuit has held that “California’s interest in applying its own law is

strongest when its statute of limitations is shorter than that of the foreign state, because a

“state has a substantial interest in preventing the prosecution in its courts of claims which it

deems to be ‘stale.’” Deutsch v. Turner Corp., 324 F.3d 692, 717 (9th Cir. 2003) (citing

Restatement (Second) of Conflict of Laws § 142, cmt. f (1988)). There is no showing,

however, that I-Enterprise’s claims would be time-barred if brought under California law. 

As I-Enterprise notes, the complaint in the instant action was filed April 11, 2003, within four

years of the date Roy entered into the Fund VI Subscription Agreement and Limited

Partnership Agreement. (See Ramani Decl. Ex. B (Fund VI Subscription Agreement),

entered into July 31, 1999, and Ex. C (Fund VI Limited Partnership Agreement), entered

into August 13, 1999.) As noted, a claim for violation of the California Securities Act must

be “brought before the expiration of four years after the act or transaction constituting the

violation or the expiration of one year after the discovery by the plaintiff of the facts

constituting the violation, whichever shall first expire.” See Cal. Corp. Code § 25506. 

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Defendants have made no showing that, as a matter of law, I-Enterprise discovered the

alleged violations more than one year before the complaint was filed. Thus, defendants

have not shown that application of Massachusetts law would violate California public policy.

Accordingly, because the Fund VI Subscription Agreement may have reserved to

I-Enterprise the right to bring suit under any applicable state securities law, and there has

been no showing that application of Massachusetts law would violate California public

policy, the Court will DENY defendant’s motion to dismiss I-Enterprise’s claim for violation

of the Massachusetts Blue Sky law.

C. Negligent Misrepresentation

I-Enterprise asserts claims for negligent misrepresentation based on the allegation

that defendants made various material misrepresentations and/or failed to disclose material

information to I-Enterprise in connection with the marketing of Funds V and VI. (See TAC

¶¶ 173, 228.) Defendants now move to dismiss I-Enterprise’s claims for negligent

misrepresentation based on some, but not all, of the alleged misrepresentations.

The elements of negligent misrepresentation are: (1) “misrepresentation (false

representation, concealment, or nondisclosure)”; (2) the plaintiff’s justifiable reliance on the

misrepresentation; and (3) damages. See Small v. Fritz Companies, Inc., 30 Cal. 4th 167,

173 (2003). “The tort of negligent misrepresentation does not require scienter or intent to

defraud.” Id. Negligent misrepresentation encompasses “the assertion, as a fact, of that

which is not true, by one who has no reasonable ground for believing it to be true” and “the

positive assertion, in a manner not warranted by the information of the person making it, of

that which is not true, although he believes it to be true.” See id. (citing Cal. Civ. Code

§§ 1710(2) and 1572(2)).

In addition, “[t]o state a cause of action for negligent misrepresentation, plaintiff must

allege facts establishing that the defendant owed him a duty to communicate accurate

information.” See Friedman v. Merck & Co., 107 Cal. App. 4th 454, 477 (2003). “California

courts have recognized a cause of action for negligent misrepresentation, i.e., a duty to

communicate accurate information . . . where information is conveyed in a commercial

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setting for a business purpose.” See id. In addition, “a seller of a limited partnership

interest owes a fiduciary duty [to disclose all material facts] to the prospective purchaser of

such an interest.” See Eisenbaum v. Western Energy Resources, Inc., 218 Cal. App. 3d

314, 322, 324 (1990). Further, where “one is under no duty to speak, but yet undertakes to

do so, either voluntarily or in response to inquiry, he must make a full and fair disclosure

and conceal no facts within his knowledge which materially qualify those stated[.]” See

Kuhn v. Gottfried, 103 Cal. App. 2d 80, 86 (1951).

 Accordingly, I-Enterprise has adequately alleged that defendants owed I-Enterprise

“a duty to communicate accurate information” about the Funds. See Friedman v. Merck &

Co., 107 Cal. App. 4th at 477.

1. General Market Trends

Defendants move to dismiss I-Enterprise’s negligent misrepresentation claims, to the

extent such claims are based on failure to disclose general market trends that might affect

anticipated future performance and investment strategies, on the ground defendants had

no duty to disclose such trends. In response, I-Enterprise contends that it “does not seek

to recover for speculative statements Defendants might have made about future market

performances or future market changes,” but rather alleges that defendants made

misrepresentations about “their place in the venture capital market.” (See Opp. at 19-20.)

Both parties rely on allegations set forth in paragraphs 77 through 81 of the Third

Amended Complaint. In particular, plaintiffs allege that defendants made the following

misrepresentations in the Fund V and Fund VI Offering Memoranda:

78. For example, contrary to the representations of the Individual Defendants

that they filled an industry “void,” that early stage investing was an

“underserved” niche, that there were only a handful of early stage venture

funds, that they rarely encountered other such funds in head-to-head

competition, that they had strong pricing leverage when they made initial

investments, and that the larger size of Fund VI was necessary in order to

maintain large early ownership positions through follow-on rounds, in fact, the

venture capital market had experienced explosive growth with a dramatic

increase in the number of venture capital firms at all stages, there were

historically high levels of capital available in the market, DFJ faced intense

competition from other funds, and in order to participate in deals they were

having to write much bigger checks and make much larger initial investments

than in the past.

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79. Contrary to the representations of the Individual Defendants that their

positioning enabled them to get favorable terms for follow-on investments

from “mainstream” venture firms that have to compete with one another under

“pressure to invest the significant amount of capital they manage,” in fact,

DFJ was itself transitioning to become a “mainstream” firm, and the Individual

Defendants were under significant pressure to invest the ever-increasing

amounts of capital they were raising. 

80. Contrary to the representations of the Individual Defendants that they

would invest small amounts in many start-up and “true ‘seed’ deals,” in fact,

the large size of Funds V and VI and the small number of experienced

investment professionals who would invest them created a structural inability

to make and closely manage the small investments start-ups and true seed

deals require.

(See TAC ¶¶ 78-80.)

Defendants argue they had no duty to disclose “anticipated market performance or

possible market changes.” (See Motion at 13.) As an initial matter, the Court notes that

defendants rely on federal case law interpreting federal securities laws. Such reliance on

federal law has been held inappropriate, however, because, although “[f]ederal precedent

may be appropriate in the absence of existing state law on an issue, . . . California has an

existing body of law on the tort of negligent misrepresentation.” See Anderson v. Deloitte &

Touche LLP, 56 Cal. App. 4th 1468, 1476 n.4 (1997). Defendants fail to address whether

any such duty to disclose exists under California law, and, for that reason alone, are not

entitled to dismissal. In addition, contrary to defendants’ assertion, the above-cited

paragraphs do not allege a failure to disclose anticipated market performance or possible

market changes. Rather, I-Enterprise alleges defendants made affirmative misstatements

in the Offering Memoranda about their currently-existing structure and position in the

market.

Relying on Glen Holly Entertainment Inc. v. Tektronix Inc., 352 F.3d 367 (9th Cir.

2003), defendants further contend the challenged statements are non-actionable “puffery.” 

In Glen Holly, the Ninth Circuit held three statements “generally describing the ‘high priority’

[the defendant] placed on product development and alluding to marketing efforts” could not

be the basis of a claim for negligent misrepresentation because “[t]he statements were

generalized, vague and unspecific assertions, constituting mere ‘puffery’ upon which a

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reasonable consumer could not rely.” See id. at 379. Here, the Court cannot say as a

matter of law that the challenged statements are mere puffery. I-Enterprise alleges that

defendants misrepresented their existing position in the market in specific ways, and in

particular, that defendants advertised Funds V and VI as two of the few venture funds

capable of investing in early stage companies, when in fact there were many such funds

already in existence and, further, Funds V and VI were structurally incapable, due to their

large size, of managing the small investments early stage companies require. (See TAC

¶¶ 78-80.) The Court cannot say as a matter of law that such statements were so

generalized, vague and unspecific that a reasonable investor could not rely on them. See

Anderson v. Deloitte & Touche LLP, 56 Cal. App. 4th at 1479 (holding that in all but rare

instances, “whether the plaintiff’s reliance is reasonable is a question of fact”).

Accordingly, the Court will DENY defendants’ motion to dismiss the negligent

misrepresentation claim to the extent it is based on misrepresentations alleged in ¶¶ 77-81

of the Third Amended Complaint.

2. Investment Objectives

Defendants move to dismiss, as time-barred, I-Enterprise’s claim that defendants

misrepresented, in the Offering Memoranda, the Funds’ investment objectives. Defendants

rely on the three-year statute of limitations for fraud actions set forth in California Code of

Civil Procedure § 338(d), under which a fraud claim “is not to be deemed to have accrued

until the discovery, by the aggrieved party, of the facts constituting the fraud or mistake.” 

See Cal. Code Civ. Proc. § 338(d). According to defendants, plaintiffs have conceded that

they received the Offering Memorandum for Fund V on June 26, 1998, and for Fund VI in

July 1999, and that both dates are more than three years before the instant action was filed

on April 11, 2003. (See TAC ¶¶ 49, 55.) Defendants further contend I-Enterprise has not

alleged facts sufficient to demonstrate that their claims based on misrepresentation of

investment objectives are timely.

The statute of limitations is an affirmative defense to be raised by the defendants,

however, not a pleading requirement that must be satisfied by the plaintiff. See Fed. R.

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 Because fraud, by its very nature, is predicated on a lack of knowledge of the

wrongful conduct at the time that conduct is committed, § 338(d), unlike many statutes of

limitation, does not provide for accrual at the time of an event other than discovery.

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Civ. P. 8(c); see also California Sansome Co. v. U.S. Gypsum, 55 F.3d 1402 (9th Cir.

1995) (“A defendant raising the statute of limitations as an affirmative defense has the

burden of proving the action is time barred.”) A statute of limitations defense is properly

raised in a motion to dismiss only “if the running of the statute is apparent from the face of

the complaint.” See Ledesma v. Jack Stewart Produce, Inc., 816 F.2d 482, 484 n.1 (9th

Cir. 1987); see also Supermail Cargo, Inc. v. United States, 68 F.3d 1204, 1207 (9th Cir.

1995) (“[A] complaint cannot be dismissed unless it appears beyond doubt that the plaintiff

can prove no set of facts that would establish the timeliness of the claim.”). Only if the

complaint on its face demonstrates the cause of action is time-barred, and the plaintiff

relies on the discovery rule to show timeliness, does the plaintiff have the burden to

“specifically plead facts which show (1) the time and manner of discovery and (2) the

inability to have made earlier discovery despite reasonable diligence.” See CAMSI IV v.

Hunter Technology Corp., 230 Cal. App. 3d 1525, 1536 (1991); see also California Gypsum

Co. v. U.S. Gypsum, 55 F.3d 1402 (9th Cir. 1995) (citing CAMSI IV). In cases involving a

fiduciary relationship between the parties, however, “the usual duty of diligence to discover

facts does not exist” and “the limitations period does not begin to run until plaintiff actually

discovers the facts constituting the cause of action, even though the means for obtaining

the information are available.” See Eisenbaum, 218 Cal. App. 3d at 325.

Here, the complaint on its face does not demonstrate plaintiff’s claim is time-barred. 

Plaintiff’s receipt of the Offering Memoranda provides no basis for inferring that plaintiff

knew, as of that date, that the representations contained therein were false.7

 Defendants

point to no allegation in the complaint suggesting that plaintiff was aware more than three

years before the instant action was filed that the representations contained in the Offering

Memoranda were false. Because the complaint, on its face, does not show the cause of

action to be time-barred, the Court will DENY defendants’ motion to dismiss plaintiff’s claim

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 Documents whose contents are alleged in the complaint, and whose authenticity

no party questions, but which are not physically attached to the pleading, may be

considered in ruling on a motion to dismiss. See Branch v. Tunnell, 14 F.3d at 454. 

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for negligent misrepresentation, to the extent such claim is based on misrepresentation of

investment objectives in the Offering Memoranda.

3. Failure to Devote Appropriate Time to Managing Funds

Defendants move to dismiss I-Enterprise’s negligent misrepresentation claim to the

extent such claim is based on misrepresentations about the amount of time defendants

promised to devote to the management of Funds V and VI. I-Enterprise alleges the Fund V

and VI Limited Partnership Agreements provide that each individual defendant would

“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.” (See TAC ¶ 137.) In fact, I-Enterprise alleges, the individual defendants

“have failed to dedicate appropriate time to Fund V and Fund VI and have instead pursued

other interests to the detriment of I-Enterprise.” (See TAC ¶ 140.) I-Enterprise alleges

that, in addition to Funds V and VI, the individual defendants marketed and promoted Fund

VII, a $640 million fund, raised another $690 million for a global technology fund, acted as

sub-adviser to a $330 million publicly traded venture fund, and were promoting seven or

more regional funds of $100 million or more each, which resulted in the individual

defendants’ failure to dedicate appropriate time to Funds V and VI. (See id. ¶ 142.) 

I-Enterprise further alleges that defendant Fisher relocated to London for a substantial

period of time to organize the global technology fund, and did not dedicate appropriate time

to managing Funds V and VI. (See id. ¶ 144.) Moreover, defendant Draper, according to

I-Enterprise, spent a substantial portion of his time campaigning for a ballot initiative in

California in 2000, rather than dedicating appropriate time to managing Funds V and VI. 

(See id. ¶ 145.)

Defendants argue that the very terms of the limited partnership agreements on

which I-Enterprise rely contradict I-Enterprise’s claim of misrepresentation.8 The Fund V

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 The Court expresses no opinion as to whether defendants, as I-Enterprise argues,

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. The cause of action at

issue is negligent misrepresentation, which requires a false representation or omission. 

See Small v. Fritz Companies, Inc., 30 Cal. 4th at 173. 

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and Fund VI Limited Partnership Agreements both state: 

Each Managing Member of the General Partner hereby agrees that, so long

as he remains a Managing Member of the General Partner, he shall 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. The Limited Partners acknowledge that each

managing member of the General Partner has existing commitments to other

entities, that such commitments will continue during the term of the

Partnership and that additional commitments may be added during the term

of the Partnership.

(See Ramani Decl. Ex. C (Fund V Limited Partnership Agreement) § 8.3, and Ex. C (Fund

VI Limited Partnership Agreement) § 8.3.)

In the contractual language set forth above, defendants are expressly given the

authority to determine how much time is necessary to manage the funds effectively. 

I-Enterprise does not allege that defendants, in fact, devoted no time to that endeavor. 

Rather, I-Enterprise alleges that defendants failed to disclose other, then-existing

commitments. The limited partnership agreements specifically disclose, however, the

existence at that time of “commitments to other entities.” (See id.) The failure to specify

the particular commitments does not render those statements false or misleading.

Additionally, as to Fund VI, I-Enterprise alleges that DFJ-VI and the individual

defendants failed to disclose the existence and terms of a “side agreement entered into by

them prior to the closing of Fund VI,” by which the individual defendants were required to

devote only half their time to the business of all DFJ funds combined, “and guaranteed

them each personally millions of Fund VI management fees even if they devoted no time to

Fund VI at all.” (See TAC ¶ 170.) There is nothing inconsistent, however, between the

statements made in the Fund VI Limited Partnership Agreement and the alleged “side

agreement.” Under such circumstances, I-Enterprise has not alleged falsity of the abovequoted statement in the Fund VI Limited Partnership Agreement.9

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Accordingly, defendants’ motion to dismiss I-Enterprise’s negligent

misrepresentation claim to the extent such claim is based on misrepresentations about the

amount of time defendants promised to devote to the management of Funds V and VI will

be GRANTED. 

4. Failure to Disclose “Inter-Fund Loans or Retention of Directed

Shares”

Defendants argue that I-Enterprise’s allegations that defendants failed to disclose

“inter-fund loans or retention of directed shares” fails to state a claim for negligent

misrepresentation because I-Enterprise has not alleged any damages arising from the

alleged nondisclosure. With respect to such nondisclosure, I-Enterprise alleges 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 TAC ¶ 164-165.) Defendants argue that such allegations amount to a failure “to

disclose an accounting technicality.” (See Motion at 19.) Defendants further argue that

I-Enterprise fails to allege that any of the loans was not repaid in full or that the accountants

for Fund V or Fund VI determined that the loans should have been disclosed to the limited

partners. (See id.) I-Enterprise fails to address this portion of defendants’ motion in its

opposition and, thus, effectively concedes that it is not pursuing a negligent

misrepresentation claim based on paragraphs 164 and 165 of the Third Amended

Complaint.

Accordingly, the Court will GRANT defendants’ motion to dismiss I-Enterprise’s

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negligent misrepresentation claim to the extent such claim is based on the nondisclosures

alleged in paragraphs 164 and 165 of the Third Amended Complaint.

5. Failure to Disclose Information About Management Fees

Defendants move to dismiss I-Enterprise’s negligent misrepresentation claim to the

extent such claim is based on nondisclosure of information about management fees, on the

ground the calculation of management fees was disclosed in the limited partnership

agreements, and defendants had no duty to disclose any more than they did. In

I-Enterprise’s opposition, it states that its “allegations with respect to management fees do

not state a separate claim.” (See Opp. at 19 n.10.) As I-Enterprise does not assert a

negligent misrepresentation claim based on nondisclosure of information about

management fees, defendants’ motion to dismiss such claim will be DENIED as MOOT.

C. Relief Based on Violation of California Unfair Business Practices Act

Defendants move to strike I-Enterprise’s prayer for rescission of its investment in

Fund VI as a remedy for violation of the California Unfair Business Practices Act. 

Defendants argue that the Court has already dismissed with prejudice I-Enterprise’s claim

for violation of that Act. In its opposition, I-Enterprise states that the request for relief was

inadvertent and that it does not oppose defendants’ motion to strike. (See Opp. at 23

n.14.)

Accordingly, the Court will GRANT defendants’ motion to strike I-Enterprise’s prayer

for relief for violations of the California Unfair Business Practices Act.

CONCLUSION

For the reasons set forth above,

1. Defendants’ motion to dismiss is hereby GRANTED in part and DENIED in part,

as follows:

a. Defendants’ motion to dismiss I-Enterprise’s negligent misrepresentation

claim to the extent such claim is based on misrepresentations about the amount of time

defendants promised to devote to the management of Funds V and VI is hereby

GRANTED. 

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b. Defendants’ motion to dismiss I-Enterprise’s negligent misrepresentation

claim to the extent such claim is based on the nondisclosures alleged in paragraphs 164

and 165 of the Third Amended Complaint is hereby GRANTED.

c. The remainder of defendants’ motion to dismiss is DENIED.

2. Defendants’ motion to strike I-Enterprise’s prayer for relief for violations of the

California Unfair Business Practices Act is hereby GRANTED.

This order terminates Docket No. 329.

IT IS SO ORDERED.

Dated: July 15, 2005

/s/ Maxine M. Chesney 

MAXINE M. CHESNEY

United States District Judge

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