Stauffer v. Orpheus Flow Technologies, LLC

[3] 4 UNITED STATES DISTRICT COURT 5 NORTHERN DISTRICT OF CALIFORNIA [6] 7 JOB STAUFFER, Case No. 21-cv-00567-JD 8 Plaintiff, ORDER RE SECURITIES LAW JURY 9 v. INSTRUCTION 10 ORPHEUS FLOW TECHNOLOGIES, LLC, et al., [11] Defendants. [12] 13 At the pretrial conference in January 2025, the Court said that it would advise the parties 14 whether proposed jury instructions would be given for plaintiff Stauffer’s claim under the 15 California Corporate Securities Law, Cal. Corp. Code § 25401.1 Dkt. No. 84. The parties filed 16 revised proposed jury instructions with arguments for and against the securities instructions. Dkt. 17 No. 87 at 22-26. The instructions will not be given, and the claim is dismissed. 18 The reasons for this disposition are straightforward. The first amended complaint (FAC) 19 alleges that Stauffer was “a co-founder of defendant Orpheus Flow Technologies LLC, who was 20 promised equity in return for his work.” Dkt. No. 19 ¶ 1. Stauffer’s “job duties were far reaching 21 and integral to the entire backbone of the business,” and included marketing and communications 22 work, directing designers, videographers, and contractors, brand development, and other functions. [23] Id. ¶ 10 . In exchange for working as “a co-founder and a top manager of Orpheus Flow,” Stauffer 24 was offered a compensation package consisting of “a significant portion of the equity of Orpheus 25 Flow” and “monthly earned income.” Id. ¶ 9 ; see also id. ¶ 39 (defendants offered “to pay Mr. [26] 1 The first amended complaint did not state the statutory basis of the securities claim, but in [27] opposition to summary judgment Stauffer said it was Section 25401, which makes it unlawful to 1 Stauffer not only a specified salary, but with equity interest in Orpheus Flow.”). This “offer” is 2 said to be the security for purposes of Section 25401 of the securities statute. Id. ¶¶ 41-43 . 3 The problem for Stauffer is that his compensation package offer was manifestly not a 4 security. Although the definition of a security in Section 25019 is “expansive,” it “is not applied 5 literally.” People v. Black, 8 Cal. App. 5th 889, 900 (2017) (quoting People v. Figueroa, 41 Cal. 6 3d 714, 734 (1986)). The “critical question” in defining a security “is whether a transaction falls 7 within the regulatory purpose of the law regardless of whether it involves an instrument which 8 comes within the literal language of the definition.” Id. (quoting Figueroa, 41 Cal. 3d at 735); see 9 also People v. Syde, 37 Cal. 2d 765, 768 (1951) (whether instrument is a security depends on the 10 facts of each case and the purpose of the statute). 11 The regulatory purpose of the California securities law is plain. “[T]he general purpose of 12 the law is to protect the public against the imposition of unsubstantial, unlawful and fraudulent 13 stock and investment schemes and the securities based thereon.” Syde, 37 Cal. 2d at 768 (citation 14 omitted). “Its main objective is the creation of a balanced regulatory scheme to cope with the 15 problems of modern securities markets.” Black, 8 Cal. App. 5th at 899 (internal quotation 16 omitted). 17 Pay offers and compensation packages such as Stauffer’s do not come within the scope of 18 these concerns. “An agreement to render personal services for compensation cannot be considered 19 a security, even though the sale of a beneficial interest in such an agreement may come within the 20 statute.” Syde, 37 Cal. 2d at 768 ; see also People v. Jaques, 137 Cal. App. 2d 823, 834 (1955) (if 21 “investor” has “active participation” in formation of an enterprise, or enterprise’s “operation is 22 dependent for its success partly on the efforts of the particular investor,” then “the Corporate 23 Securities Law does not apply.”). 24 That is the situation here. Stauffer alleges that he was offered equity and monthly pay in 25 exchange for performing “far reaching and integral” job duties for defendants. Dkt. No. 19 ¶ 10. 26 This agreement is a far cry from an instrument that embodies the “passive role of an investor 27 only,” which is the focus of the securities statute. Syde, 37 Cal. 2d at 769 . The “risk capital” and 1 defines a security by whether it entails, among other factors, “an indiscriminate offering to the 2 || public” and “a passive position on the part of the investor” in an enterprise. Black, 8 Cal. App. 5th 3 at 900 (quoting Silver Hills Country Club v. Sobieski, 55 Cal. 2d 811, 815 (1961)). The Howey 4 || test borrows from an eponymous United States Supreme Court decision to ask “whether the 5 scheme involves an investment of money in a common enterprise with profits to come solely from 6 the efforts of others.” Jd. (quoting S.E.C. v. WJ. Howey Co., 328 U.S. 293, 301 (1946)). 7 Stauffer’s compensation agreement fails both tests by a wide margin. 8 Consequently, the jury will not be instructed on the securities claim. For the same reasons, 9 || itis dismissed from the case. 10 IT IS SO ORDERED. 11 Dated: February 27, 2025 a 12 JAMES/ONATO 5 14 United ftates District Judge [16] it 4 18