Apex.AI, Inc. v. Langmead

[3] 4 UNITED STATES DISTRICT COURT 5 NORTHERN DISTRICT OF CALIFORNIA 6 SAN JOSE DIVISION [7] 8 APEX.AI, INC., a Delaware corporation, Case No. 23-cv-02230-BLF 9 Plaintiff, ORDER VACATING MAY 2, 2024 10 v. MOTION HEARING; AND GRANTING IN PART AND DENYING IN PART 11 NEIL RICHARD LANGMEAD, an DEFENDANTS’ MOTION FOR LEAVE individual; VERIFA, INC., a Massachusetts TO FILE COUNTERCLAIMS 12 corporation; and CODECLINIC LLC dba LATTIX, a Massachusetts limited liability [Re: ECF 73] 13 company, 14 Defendants. [16] 17 Before the Court is Defendants’ motion under Federal Rule of Civil Procedure 13(e), 18 seeking leave to file counterclaims that matured after Defendants filed their answer. See Defs.’ 19 Mot., ECF 73. The Court finds the motion to be suitable for decision without oral argument, and 20 therefore the hearing set for May 2, 2024 is VACATED. See Civ. L.R. 7-1(b). 21 The motion is GRANTED IN PART AND DENIED IN PART as discussed below. 22 I. BACKGROUND 23 Plaintiff Apex.AI, Inc. (“Apex.AI”) filed this action on May 8, 2023, asserting a federal 24 trade secrets claim and related state law claims against Defendants Neil Richard Langmead 25 (“Langmead”), Verifa, Inc. (“Verifa”), and CodeClinic LLC (“CodeClinic”). See Compl., ECF 1. 26 Apex.AI claims that Langmead was granted access to Apex.AI’s software, source code, and other 27 intellectual property pursuant to a consulting agreement, and that Langmead misappropriated 1 companies, Verifa and CodeClinic. On May 10, 2023, this Court issued a temporary restraining 2 order (“TRO”) enjoining Defendants from using or disclosing any of Apex.AI’s trade secrets or 3 confidential information. See TRO, ECF 12. The parties thereafter stipulated to issuance of a 4 preliminary injunction containing the same essential terms, which was issued by the Court on May 5 19, 2023. See Preliminary Injunction, ECF 25. Defendants answered the complaint on June 5, 6 2023, but did not file counterclaims. See Answer, ECF 34. The Court issued a scheduling order 7 on September 14, 2024, setting November 13, 2023 as the last day to seek amendment of the 8 pleadings. See Order, ECF 39. 9 On December 22, 2023, Defendants filed the present motion, seeking leave to file five 10 counterclaims that matured after the answer was filed: (1) Intentional Interference With 11 Prospective Economic Advantage; (2) Tortious Interference With Contractual Relations; 12 (3) Defamation/Libel; (4) Unfair Competition/Unfair Business Practices; and (5) Breach of 13 Contract. Proposed Counterclaims 1-4 are grounded in allegations that Apex.AI sent copies of the 14 preliminary injunction to Defendants’ customers and business partners, along with accusations 15 that Defendants stole Apex.AI’s trade secrets. See Prop. Counterclaims ¶¶ 13-65, ECF 73-1. 16 Proposed Counterclaim 5 is for breach of the consulting agreement based on Apex.AI’s alleged 17 failure to pay for all services rendered. See id. ¶¶ 66-70. 18 II. LEGAL STANDARD 19 The Court “may permit a party to file a supplemental pleading asserting a counterclaim 20 that matured or was acquired by the party after serving an earlier pleading.” Fed. R. Civ. P. 13(e). 21 When ruling on a Rule 13(e) motion, district courts apply the same factors governing leave to 22 amend under Rule 15, which as relevant here are: (1) bad faith; (2) undue delay; (3) prejudice to 23 the opposing party; and (4) futility. See Phan v. Transamerica Premier Life Ins. Co., No. 20-CV24 03665-BLF, 2023 WL 6048779 , at *2 (N.D. Cal. Sept. 14, 2023) (collecting cases). 25 If the Rule 13(e) motion is filed after expiration of the deadline to amend the pleadings, the 26 movant also must show good cause for modification of the scheduling order under Federal Rule of 27 Civil Procedure 16. See Phan, 2023 WL 6048779 , at *2; Fed. R. Civ. P. 16(b)(4) (“A schedule 1 III. DISCUSSION 2 Defendants seek leave to file five counterclaims under Rule 13(e). Apex.AI opposes with 3 respect to Proposed Counterclaims 1-4, which are tort claims based on Apex.AI’s communications 4 with Defendants’ customers and business partners. Apex.AI does not oppose the filing of 5 Proposed Counterclaim 5 for alleged breach of the consulting agreement. Because the motion was 6 filed on December 22, 2023, after expiration of the November 13, 2023 deadline to seek 7 amendment of pleadings, Defendants must show good cause to modify the case schedule under 8 Rule 16 before the Court considers the merits of the motion under the applicable Rule 15 factors. 9 A. Rule 16 Showing 10 “The central inquiry under Fed. R. Civ. P. 16(b)(4) is whether the requesting party was 11 diligent.” DRK Photo v. McGraw-Hill Glob. Educ. Holdings, LLC, 870 F.3d 978, 989 (9th Cir. 12 2017). “Although the existence or degree of prejudice to the party opposing the modification 13 might supply additional reasons to deny a motion, the focus of the inquiry is upon the moving 14 party’s reasons for seeking modification.” Johnson v. Mammoth Recreations, Inc., 975 F.2d 604 , 15 609 (9th Cir. 1992). Defendants do not specifically address why they were unable to file their 16 Rule 13(e) motion prior to November 13, 2023. However, defense counsel represents that 17 “Defendants’ factual investigation is ongoing, and they are bringing this motion promptly, as early 18 in the lawsuit as reasonably possible given the late-maturing nature of Defendants’ claims against 19 Plaintiff.” Defs.’ Mot. at 5. Apex.AI does not challenge Defendants’ diligence, and Defendants 20 missed the deadline to seek leave to amend by only six weeks. Under these circumstances, the 21 Court finds that there is good cause to modify the case schedule to allow the motion. 22 B. Rule 15 Factors 23 Turning to the merits of the motion under the applicable Rule 15 factors, Apex.AI does not 24 assert the existence of bad faith, undue delay, or prejudice, and nothing in the record suggests that 25 those factors are implicated here. Thus, Defendants’ motion turns on the remaining factor, futility. 26 Apex.AI contends that permitting Defendants to file Proposed Counterclaims 1-4 would be futile, 27 because they are based on communications falling within California’s litigation privilege, codified 1 1. California’s Litigation Privilege 2 California’s litigation privilege “applies to any communication (1) made in judicial or 3 quasi-judicial proceedings; (2) by litigants or other participants authorized by law; (3) to achieve 4 the objects of the litigation; and (4) that have some connection or logical relation to the action.” 5 Silberg v. Anderson, 50 Cal. 3d 205, 212 (1990). If all of these requirements are met, § 47(b) 6 operates as an absolute privilege, barring all tort claims with the exception of malicious 7 prosecution. See id. 215-16. The privilege applies even when the communication is made with 8 actual malice. See id. “If there is no dispute as to the operative facts, the applicability of the 9 litigation privilege is a question of law.” Kashian v. Harriman, 98 Cal. App. 4th 892, 913 (2002). 10 “Any doubt about whether the privilege applies is resolved in favor of applying it.” Id. 11 “The privilege is not limited to statements made during a trial or other proceedings, but 12 may extend to steps taken prior thereto, or afterwards.” Action Apartment Assn., Inc. v. City of 13 Santa Monica, 41 Cal. 4th 1232, 1241 (2007) (quotation marks and citation omitted). “However, 14 republications to nonparticipants in the action are generally not privileged under section 47(b).” 15 Susan A. v. Cnty. of Sonoma, 2 Cal. App. 4th 88, 93 (1991) (citing Silberg, 50 Cal. 3d at 219 ). 16 “Thus, the privilege does not apply where publication is to persons in no way connected with the 17 proceeding.” Id. However, “the litigation privilege can apply to out-of-court statements to 18 nonparties who have a substantial interest in the outcome of the pending litigation.” Weiland 19 Sliding Doors & Windows, Inc. v. Panda Windows & Doors, LLC, 814 F. Supp. 2d 1033 , 1040 20 (S.D. Cal. 2011) (quotation marks and citation omitted). 21 2. Application of Litigation Privilege 22 Apex.AI contends that, under these standards, Defendants’ Proposed Counterclaims 1-4 23 are barred by California’s litigation privilege. In the Proposed Counterclaims, Defendants allege 24 that Apex.AI sent emails to Defendants’ customers and business partners, including QA Systems, 25 Parasoft, and Asensus Surgical, Inc., informing them of the present litigation, providing a copy of 26 the preliminary injunction entered in this case, and stating that Defendants may have used 27 Apex.AI’s trade secrets in work performed on behalf of Defendants’ customers. See Prop. 1 relationships that Defendants had with third parties (Proposed Counterclaim 1), interfered with 2 contracts Defendants had with third parties (Proposed Counterclaim 2), defamed Defendants 3 (Proposed Counterclaim 3), and constituted unfair competition and unfair business practices 4 (Proposed Counterclaim 4). Apex.AI asserts that, on their face, these allegations trigger 5 application of § 47(b) under the applicable four-prong test. 6 a. First Prong 7 Under the first prong, the communication at issue must have been made in judicial or 8 quasi-judicial proceedings. As noted above, the privilege applies not only to statements made 9 during court proceedings, but also to out-of-court statements to nonparties who have a “substantial 10 interest” in the litigation. 11 In Weiland, the district court found the substantial interest requirement satisfied where the 12 plaintiff in a patent infringement suit against a competitor sent a press release about the suit to 13 customers, vendors, and trade publications. See Weiland, 814 F. Supp. 2d at 1037 . The district 14 court dismissed the defendant’s counterclaim for interference with prospective business advantage 15 as barred by § 47(b), finding that the recipients of the press release had a substantial interest in the 16 litigation because actual or potential customers of the defendant’s accused products could be 17 subject to infringement liability, and those considering business with the defendant would want to 18 know which of the defendant’s products might be infringing. See id. at 1041. 19 Other district courts have found § 47(b) to bar counterclaims based on similar 20 communications regarding pending litigation. See, e.g., Ubiquiti Networks, Inc. v. Kozumi USA 21 Corp., No. C 12-2582 CW, 2013 WL 368365 , at *10-11 (N.D. Cal. Jan. 29, 2013) (applying § 22 47(b) privilege to dismiss defendant’s counterclaims arising from plaintiff’s email to customers 23 regarding pending litigation and issuance of injunction); Sharper Image Corp. v. Target Corp., [24] 425 F. Supp. 2d 1056, 1079 (N.D. Cal. 2006) (applying § 47(b) to grant summary judgment for 25 plaintiff on defendant competitor’s counterclaims arising from plaintiff’s email to retailers and 26 media regarding pending litigation). 27 For the same reasons, this Court concludes that Defendants’ customers and business 1 Defendants’ arguments to the contrary are unpersuasive. Citing Susan A., Defendants 2 argue that their customers and business partners do not have a sufficiently substantial interest in 3 this litigation to satisfy the first prong of the test for application of the privilege. See Susan A., 2 4 Cal. App. 4th 88 . Susan A. involved statements to the press by a psychologist regarding his 5 evaluation of a minor who was being tried for attempted murder. See id. at 92. The minor and his 6 parents sued the psychologist and his employer, the county, for invasion of privacy and related tort 7 claims. See id. The trial court granted summary judgment for the psychologist and county, 8 finding that the statements to the press fell within California’s litigation privilege. See id. at 929 93. The appellate court reversed, noting that “the privilege does not apply where publication is to 10 persons in no way connected with the proceeding,” and holding “the press is not connected with 11 the proceeding so as to render section 47(b) applicable.” Id. at 93-94. That holding has no 12 bearing on the present case, which does not involve a statement to the press. Defendants’ reliance 13 on Argentieri v. Zuckerberg, 8 Cal. App. 5th 768, 783-85 (2017), is similarly misplaced, as that 14 case also involved a statement to the press, and the appellate court determined that § 47(b) did not 15 apply because the press lacked a substantial interest in the subject matter of the litigation. 16 Defendants argue that the cases supporting application of § 47(b) turned on factual 17 findings regarding the email recipients’ substantial interest in the litigation, and assert that this 18 Court does not have a basis to make such a finding at this early stage of the litigation. In Weiland 19 and Ubiquiti, the district courts applied § 47(b) to dismiss counterclaims at the Rule 12(b)(6) 20 stage, based on the contents of the communications at issue and the alleged status of the third 21 party recipients as customers and potential customers. See Weiland, 814 F. Supp. 2d at 1041 ; 22 Ubiquiti, 2013 WL 368365 , at *11. Similarly, this Court finds application of § 47(b) to be 23 warranted based on the Proposed Counterclaims’ allegations regarding the contents of the emails 24 sent by Apex.AI and the alleged status of the third party recipients as Defendants’ customers and 25 business partners. 26 b. Second Prong 27 Defendants concede the second prong, under which the communication at issue must have 1 c. Third and Fourth Prongs 2 Under the third prong, the communication must have been intended to achieve the object 3 of the litigation, and under the fourth prong, the communication must have some connection or 4 logical relation to the action. It appears on the face of the proposed counterclaims that these 5 requirements are met here. Apex.AI sued Defendants to protect their trade secrets, and the emails 6 informing Defendants’ customers and business partners about the preliminary injunction clearly 7 were intended to achieve that object and were logically related to the litigation. See Pathak v. 8 United States, No. CV 09-8287-GHK (DTBx), 2010 WL 11596724 , at *1 (C.D. Cal. Mar. 16, 9 2010) (“Any efforts made by Defendants to enforce the injunction order are likewise privileged, 10 since defendants’ actions were logically and legally related to the realization of a litigation 11 objective.” (quotation marks and citation omitted)). 12 Defendants contend that Apex.AI’s true purpose in sending the emails in question was to 13 damage Defendants’ business reputations. Defendants point out that Apex.AI sent the emails to 14 multiple addresses at each recipient company, rather than limiting the emails to the most 15 appropriate company officials. It appears to be Defendants’ view that § 47(b) does not apply 16 unless “every human being whose work duties allowed them to access the email address . . . had a 17 substantial interest in this litigation.” Defs.’ Reply at 5-6. Defendant does not cite any authority 18 for the proposition that each “human being” at the recipient companies must have a substantial 19 interest in the litigation for the privilege to apply, and that position is not supported by the cases 20 discussed herein. Moreover, the litigation privilege applies even if the communication in question 21 was made with actual malice. See Silberg, 50 Cal. 3d at 215-16 . 22 The Court concludes that the third and fourth prongs of the test are satisfied. 23 d. Conclusion 24 Having evaluated Defendants’ proposed pleading in light of the applicable law on 25 California’s litigation privilege, the Court finds that on their face Proposed Counterclaims 1-4 26 would be barred by the privilege. Accordingly, the Court concludes that allowing Defendants to 27 file Proposed Counterclaims 1-4 would be futile. Defendants’ motion therefore is DENIED IN 1 Defendants’ motion is GRANTED IN PART as to Proposed Counterclaim 5, as that 2 || portion of the motion is unopposed. 3 IV. ORDER 4 (1) Defendants’ Rule 12(e) motion is GRANTED IN PART as to Proposed 5 Counterclaim 5 and DENIED IN PART as to Proposed Counterclaims 1-4; 6 (2) If Defendants elect to proceed on Proposed Counterclaim 5, they SHALL file their 7 Counterclaim by March 27, 2024; 8 (3) Leave to file is limited to Proposed Counterclaim 5 — Defendants may not add 9 additional counterclaims without prior leave of the Court; and 10 (4) This order TERMINATES ECF 73. [11] 12 Dated: March 13, 2024 _fdiiiiaadia BETH LABSON FREEMAN 14 United States District Judge 2 16