SR Motion to Dismiss

8/14/2019 SR Motion to Dismiss

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SPOT R UNNER S MEMO OF PS & A S ISO MOT . TO DISMISS VERIFIED COMPLAINT CASE NO.: CV09-02487 PA (PLA X)

3693741_4.DOC

BORIS FELDMAN (State Bar No. 128838) [email protected] J. CLARK (State Bar No. 171499)[email protected] M. KINNEY (State Bar No. 216823)[email protected]. DAVID NEFOUSE (State Bar No. 243417)[email protected] SONSINI GOODRICH & ROSATIProfessional Corporation650 Page Mill RoadPalo Alto, CA 94304-1050Telephone: (650) 493-9300Facsimile: (650) 565-5100

Attorneys for DefendantSPOT RUNNER, INC.

UNITED STATES DISTRICT COURT

CENTRAL DISTRICT OF CALIFORNIA

WPP LUXEMBOURG GAMMATHREE SARL, on its behalf andderivatively on behalf of SPOTRUNNER INC.,

Plaintiff,

v.

SPOT RUNNER INC., NICK GROUF,DAVID WAXMAN, DANNY RIMER,ROGER LEE, ROBERT PITTMAN,PETER HUIE, BATTERYVENTURES VI, LP, BATTERYINVESTMENT PARTNERS VI, LLC,BATTERY VENTURES VII, L.P.,BATTERY INVESTMENTPARTNERS VII, LLC, INDEXVENTURES III (JERSEY) L.P.,INDEX VENTURES III(DELAWARE) L.P., INDEXVENTURES III PARALLELENTREPRENEUR FUND (JERSEY)L.P.

Defendants.

Case No.: CV 09 02487 PA (PLAx)

SPOT RUNNER, INCSMEMORANDUM OF POINTSAND AUTHORITIES INSUPPORT OF MOTION TODISMISS VERIFIEDCOMPLAINT FOR SECURITIESFRAUD, VIOLATIONS OFCALIFORNIA CORPORATIONSCODE, BREACH OFFIDUCIARY DUTY,CONSTRUCTIVE TRUST, ANDBREACH OF CONTRACT

Date: September 14, 2009Time: 1:30p.m.Judge: Hon. Percy AndersonDept.: Courtroom 15


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28SPOT R UNNER S MEMO OF PS & A S ISO MOT . TO DISMISS VERIFIED COMPLAINT

CASE NO.: CV09-02487 PA (PLA X)

-i- 3693741_4.DOC

TABLE OF CONTENTS

Page

INTRODUCTION .....................................................................................................1

BACKGROUND.......................................................................................................3

The Parties .......................................................................................................3

Series A, B and C Investments........................................................................3

Right of First Refusal and Co-Sale Agreement...............................................4

WPPs May 2007 Stock Purchase...................................................................5

Summary of the Allegations............................................................................6

ARGUMENT.............................................................................................................8

I. APPLICABLE LEGAL STANDARDS .........................................................8

A. State Law Claims ..................................................................................9

II. WPPS SECTION 10(B) AND RULE 10B-5 CLAIM SHOULD BEDISMISSED (COUNT ONE) .......................................................................10

A. The Complaint Fails to Adequately Plead Loss Causation. ...............11

III. WPP FAILS TO STATE A CLAIM FOR VIOLATIONS OFCALIFORNIA CORPORATION CODE SECTIONS 25401 AND25501 (COUNT TWO) .................................................................................13

IV. WPPS DERIVATIVE CLAIM FOR BREACH OF FIDUCIARYDUTY AGAINST SPOT RUNNER FAILS AS A MATTER OF LAW(COUNT FIVE).............................................................................................16

V. WPPS INDIVIDUAL CLAIM FOR BREACH OF FIDUCIARYDUTY AGAINST SPOT RUNNER FAILS AS A MATTER OF LAW(COUNT SIX) ...............................................................................................17

A. WPP Is Precluded From Asserting An Individual Breach of Fiduciary Duty Claim Against Spot Runner.......................................18

B. In The Alternative, WPPs Direct Claim For Breach of FiduciaryDuty Is A Derivative Claim And Fails As A Matter of Law..............19

C. Spot Runner Did Not Violate the ROFR and Co-Sale Agreement.....22

VI. WPPS CLAIM FOR CONSTRUCTIVE TRUST AGAINST SPOTRUNNER FAILS AS A MATTER OF LAW (COUNT SEVEN)...............23

CONCLUSION........................................................................................................24


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-ii- 3693741_4.DOC

TABLE OF AUTHORITIES

Page(s)

CASES

Agostino v. Hicks , 845 A.2d 1110 (Del. Ch. 2004).....................................16, 20, 21

Alessi v. Beracha , 849 A.2d 939 (Del. Ch. 2004) .......................................18, 19, 20

Arnold v. Society for Savings Bancorp, Inc. , 678 A.2d 533 (Del. 1996) ..........18, 19

Aronson v. Lewis , 473 A.2d 805 (Del. 1984), overruled on other grounds by Brehm v. Eisner , 746 A.2d 244 (Del. 2000)...............................17

Ashcroft v. Iqbal , 129 S. Ct. 1937 (2009).......................................................8, 9, 13,15, 23

Batchelder v. Kawamoto , 147 F.3d 915 (9th Cir. 1998) ...........................................9

Bell Atl. Corp. v. Twombly , 550 U.S. 544, 127 S. Ct. 1955, 167 L.Ed.2d929 (2007) ............................................................................................8, 9, 13,

15, 23

Bokat v. Getty Oil Co. , 262 A.2d 246 (Del. 1970), overruled on other grounds by Tooley v. Donaldson, Lufkin, & Jenrette, Inc ., 845A.2d 1031 (Del. 2004).......................................................................16, 17, 22

Branch v. Tunnell , 14 F.3d 449 (9th Cir. 1994), overruled on other grounds by Galbraith v. County of Santa Clara , 307 F.3d 1119(9th Cir. 2002) .................................................................................................4

Communist Party v. 522 Valencia, Inc. , 35 Cal. App. 4th 980, 41 Cal.Rptr. 2d 618 (1995) .......................................................................................23

Crescent/Mach I Partners, L.P. v. Turner , 846 A.2d 963 (Del. Ch.2000)..............................................................................................................23

Dieterich v. Harrer , 857 A.2d 1017 (Del. Ch. 2004)..............................................20

Dura Pharms., Inc. v. Broudo , 544 U.S. 336, 125 S. Ct. 1627, 161L.Ed.2d 577 (2005) ...........................................................................11, 12, 13

Edgar v. MITE Corp. , 457 U.S. 624, 102 S. Ct. 2629, 73 L.Ed.2d 269(1982) ..............................................................................................................9

Feldman v. Cutaia , 951 A.2d 727 (Del. 2008) ........................................................20

First Natl City Bank v. Banco Para El Comercio Exterior de Cuba ,462 U.S. 611, 103 S. Ct. 2591, 77 L.Ed.2d 46 (1983) ....................................9

Gaffin v. Teledyne, Inc. , 611 A.2d 467 (Del. 1992) ..........................................18, 19

In re Daou Systems, Inc. , 411 F.3d 1006 (9th Cir. 2005)........................................10


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-iii- 3693741_4.DOC

In re Digex, Inc. Sholders Litig. , 789 A.2d 1176 (Del. Ch. 2000).........................16

In re Infonet Servs. Corp. Sec. Litig. , 310 F. Supp. 2d 1080 (C.D. Cal.2003)................................................................................................................9

In re Sagent Tech., Inc. Derivative Litig. , 278 F. Supp. 2d 1079 (N.D.Cal. 2003) ..................................................................................................9, 10

In re Silicon Graphics, Inc. Sec. Litig. , 183 F.3d 970 (9th Cir. 1999)....................11

In re Stac Elecs. Sec. Litig. , 89 F.3d 1399 (9th Cir. 1996)........................................9

In re Verisign, Inc. Derivative Litig. , 531 F. Supp. 2d 1173 (N.D. Cal.2007)................................................................................................................9

Jones v. H.F. Ahmanson & Co ., 1 Cal. 3d 93, 81 Cal. Rptr. 592 (1969) ................17

Kainos Lab., Inc. v. Beacon Diagnostics, Inc. , No. C-97-4618 MHP,1998 WL 2016634, (N.D. Cal. Sept. 14, 1998) ............................................14

Kearns v. Ford Motor Co. , 567 F.3d 1120 (9th Cir. 2009)...............................10, 14

Kona Enter. Inc. v. Estate of Bishop , 179 F.3d 767 (9th Cir. 1999) .......................17

Kramer v. W. Pac. Indus. , 546 A.2d 348 (Del. 1988).................................16, 20, 21

LaSala v. Bordier et cie , 519 F.3d 121 (3d Cir. 2008)............................................20

Lentell v. Merrill Lynch & Co. , 396 F.3d 161 (2d Cir. 2005).................................11

Lewis v. Chiles , 719 F. 2d 1044 (9th Cir. 1983)......................................................17

MTC Elec. Tech. Co. v. Leung , 876 F. Supp. 1143 (C.D. Cal. 1995) .....................14 Malik v. Universal Res. Corp. , 425 F. Supp. 350 (S.D. Cal. 1976) ..................14, 15

McKee v. McKee, No. Civ. A. 17773-VCN, 2007 WL 1378349 (Del.Ch. May 3, 2007)...........................................................................................24

Metzler Inv. GMBH v. Corinthian Colls., Inc. , 540 F.3d 1049 (9th Cir.2008)........................................................................................................11, 13

Patrick v. Alacer Corp. , 167 Cal. App. 4th 995, 84 Cal. Rptr. 3d 642(2008) ............................................................................................................17

Rose Hall Ltd. v. Chase Manhattan Overseas Banking Corp. , 494 F.Supp. 1139 (D. Del. 1980) ......................................................................16, 17

Sprewell v. Golden State Warriors , 266 F.3d 979 (9th Cir. 2001)............................8

State Farm Mut. Auto. Ins. Co. v. Superior Court , 114 Cal. App. 4th434, 8 Cal. Rptr. 3d 56 (2003).......................................................................10

Taormina v. Taormina Corp. , 78 A.2d 473 (Del. Ch. 1951) ..................................16


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-iv- 3693741_4.DOC

Vess v. Ciba-Geigy Corp. USA , 317 F.3d 1097 (9th Cir. 2003).................10, 14, 15,23

STATUTES

Cal. Civ. Code 2224......................................................................................7, 8, 23

Cal. Corp. Code 25401 ...................................................................6, 13, 14, 15, 16

Cal. Corp. Code 25501 .........................................................................6, 13, 15, 16

RULES

Fed. R. Civ. P. 9(b) ............................................................................................10, 23

Fed. R. Civ. P. 23.1..................................................................................................17


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financing throughout the relevant period at issue. During each round of financing,

the price of Spot Runners stock increased . WPP was able to capitalize on this

increase, selling almost 40% of common shares it had purchased in May 2007 at a

substantial profit just ten months later. As evidence of the supposed fraud, WPP points to an email exchange with Spot Runners General Counsel. The full email

exchange makes clear that Mr. Huies statements concerning WPPs purchase of

common stock from the Company were accurate and provide no basis for securities

claims.

WPP makes other allegations concerning supposed breaches of fiduciary

duties by Spot Runner. First, as a matter of law, WPP cannot assert a derivative

claim against Spot Runner itself. Second, Spot Runner owes no fiduciary duty to

WPP as an investor in the Company. Finally, WPP, Spot Runner and its investors

negotiated at arms-length an agreement that would govern the procedure

surrounding the purchases and sales of stock in Spot Runner. Under the

agreement, WPP knew that a super-majority of the preferred shareholders could

waive any provision in the agreement. For WPP to belatedly assert derivative and

direct claims based on conduct expressly permitted under the agreement on atheory that the conduct was unfair rings hollow in the face of the plain language

of the agreement, and belies the level of sophistication of WPP as an investor.

Although the Complaint paints WPP as a victim, plaintiff is a large,

sophisticated and experienced communications company that took a chance on a

small start-up company. In the midst of a severe economic downturn, WPP filed

an opportunistic lawsuit seeking to eliminate any risk it faces with its investment.

The fiduciary and securities laws were not constructed to reimburse investors for

losses due to a poor economy or other normal investment risks that start-up

businesses face. WPPs claims against Spot Runner should be dismissed with

prejudice.


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BACKGROUND

The Parties

Plaintiff WPP is a Luxembourg company that is one of the worlds largest

communications services groups. As noted above, defendant Spot Runner is a private start-up company that was founded by Nick Grouf and David Waxman.

See Cmpl. 22. Spot Runner is a Delaware corporation that engages in media

buying and is developing an internet media-buying platform that provides an

innovative way for businesses to purchase cable and broadcast TV advertising

services online. Id. 5, 23.

Mr. Grouf is the current Chief Executive Officer and a member of the Board.

Id. 6. Mr. Waxman is a co-founder and a member of Spot Runners Board of

Directors. Id. 7. Collectively they are referred to as the Founders. Mr. Grouf

and Mr. Waxman, together with Robert Pittman, Roger Lee and Danny Rimer,

comprise Spot Runners Board of Directors (the Board Defendants). The

Complaint also names as a defendant Peter Huie, the general counsel for Spot

Runner, and Series A and Series B investors Battery Ventures, and its affiliated

entities (Battery), and Index Ventures, and its affiliated entities (Index). Id. 11-18. The Founders, the Board Defendants, Mr. Huie and Battery and Index are

collectively referred to as Defendants.

Series A, B and C Investments

Spot Runners capital structure is like that of many high-risk/high-reward

start-ups. The Company was initially financed by Mr. Grouf and later venture

capitalists invested money in it. Battery and Index each invested approximately $6

million in Spot Runner through early 2006, buying preferred stock in the

Companys Series A and Series B financing rounds. Id. 25. Battery and Index

are preferred stockholders of Spot Runner, collectively representing more than

sixty percent (60%) of shares held by preferred investors. Id. 26. In August

2006, Spot Runner held the Series C financing round, in which WPP purchased


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approximately 2.7 million shares for approximately $10 million. Id. 31-32.

WPP and Spot Runner entered into a Board Observer Rights Agreement, which

provided that Spot Runner and WPP would mutually agree on a WPP

representative who would be entitled to attend Spot Runners meetings of theBoard of Directors. Id. 34-36; see Declaration of L. David Nefouse in Support

of Spot Runners Motion to Dismiss (Nefouse Decl.), Exhibit (Ex.) A. 2

On September 1, 2006, the holders of the Series A, Series B, and Series C

preferred stock entered the Second Amended and Restated Right of First Refusal

and Co-Sale Agreement (ROFR and Co-Sale Agreement or the Agreement)

with the Company and the Founders. Id. 38; Nefouse Decl. Ex. B.

Right of First Refusal and Co-Sale Agreement

Under the ROFR and Co-Sale Agreement, before any common stock can be

sold by a Founder, the Company has a right of first refusal to purchase those

shares. Id. 39; Nefouse Decl. Ex. B at 1.1. The Agreement provides that if the

Company does not exercise its right to purchase shares from the Founder, each

preferred investor has the right to purchase its pro rata share, or a lesser amount, of

those shares not purchased by the Company. Cmpl. 40; Nefouse Decl. Ex. B at 1.7.

If the right of first refusal to purchase shares from the Founders is not

exercised by the Company and the purchase right is not exercised by the preferred

investors, the Agreement provides a co-sale right where each preferred investor

2 Under the incorporation by reference doctrine, the Court may consider on amotion to dismiss documents that a plaintiff relies upon in its Complaint andwhose authenticity is not questioned. See Branch v. Tunnell , 14 F.3d 449, 453-54(9th Cir. 1994) (holding that documents whose contents are alleged in a complaintand whose authenticity no party questions, but which are not physically attached tothe pleading, may be considered in ruling on a Rule 12(b)(6) motion to dismiss),overruled in part on other grounds by Galbraith v. County of Santa Clara , 307F.3d 1119 (9th Cir. 2002).


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shall have the right to participate in any sale on the same terms and conditions.

Cmpl. 41; Nefouse Decl. Ex. B at 2.1.

Importantly, the ROFR and Co-Sale Agreement also contains a proviso that

states the holders of sixty percent (60%) of the Shares held by the Investorsvoting together may waive, discharge, terminate, modify or amend, on behalf of

all Investors , any provisions hereof . Cmpl. 44 (emphasis added); Nefouse

Decl. Ex. B 3.9. Added together, Battery and Index hold more than sixty percent

(60%) of the shares held by preferred investors, and they have the right to waive

any provision in the Agreement on behalf of all the preferred investors. Cmpl.

26.

WPPs May 2007 Stock Purchase

In April 2007, Spot Runner sent WPP a letter offering WPP the opportunity

to purchase stock from the Company on the same terms as a recent institutional

investor. Cmpl. 63. Approximately a month later, on May 10, 2007, Spot

Runner sent WPP a second letter informing WPP that the institutional investor

desired to purchase additional common stock and giving WPP a separate

opportunity to sell stock to this institutional investor. Cmpl. 66; Nefouse Decl.Ex. C. The letter informed WPP that the investor has expressed a desire to

purchase additional shares of common stock. The Company currently does not

need additional capital but has offered to help facilitate sales of common stock by

existing stockholders (if possible). Id. The letter went on to state that, we are

notifying all preferred stockholders and the founders of the Investors desire to

purchase additional shares. Cmpl. 67 (emphasis added). The letter further

added that [i]n order to ensure an orderly and efficient process, we will facilitate

by allocating, on a pro rata basis, the Investors demand among the notified

stockholders who have indicated an interest to sell . Id. (emphasis added). WPP

chose not to participate in this separate secondary sale opportunity. The sales by


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existing stockholders related to this separate secondary offering closed in June

2007.

Following WPPs decision and commitment to purchase stock as part of the

Companys offering, Alexander Barry, counsel for WPP, emailed Mr. Huie onMay 21, 2007 asking questions about the logistics of WPPs share purchase. Id.

70; Nefouse Decl. Ex. D. The two were discussing WPPs purchase of stock from

the Company, as supported by the subject line of Mr. Barrys email, WPP Share

Purchase. Nefouse Decl. Ex. D. Mr. Barry then asked what WPPs ownership

percentage would be after these purchases, and also asked is there an existing

investor and/or founder selling existing shares related to this offering? If so, who

is selling shares and how many shares are they selling? Id. Because this purchase

was directly from the Company , wholly separate from the opportunity to sell

shares, and thus did not involve secondary shares, Mr. Huie appropriately and

accurately responded that [t]his offering does not involve the sale of any existing

shares. It is an entirely new issuance by the Company. Cmpl. 71. On May 24,

2007, WPP purchased approximately 383,111 shares of common stock, as part of

the offering outlined in the April 17, 2007 offering letter, for a total investment of approximately $1.7 million. Id. 73. This purchase was wholly unrelated to the

separate offering to participate in a secondary sale of shares that was outlined in

the May 10, 2007 letter. Id. 66; Nefouse Decl. Ex. C.

Summary of the Allegations

On April 9, 2009, WPP filed this purported derivative and direct lawsuit

against Spot Runner, the Board Defendants, Mr. Huie, Battery and Index. The

Complaint alleges nine causes of action, five of which are directed against Spot

Runner. WPP asserts direct claims for violation of the Securities Exchange Act

Section 10(b) and rule 10b-5 (Count One), violation of California Corporations

Code Sections 25401 and 25501 (Count Two), and purported derivative and direct

claims against Spot Runner itself for breach of fiduciary duty to itself and breach


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of fiduciary duty to WPP (Counts Five and Six). Lastly, plaintiff seeks a

constructive trust under California Civil Code Section 2224 (Count Seven).

The crux of the Complaints allegations under Section 10(b) and the state

securities claim relates to WPPs May 2007 purchase of additional Spot Runner shares for approximately $1.7 million. WPP alleges Mr. Huie misrepresented that

there were no secondary sales occurring by the Founders or existing investors. 3

Cmpl . 53. As set out in the Motion to Dismiss filed on behalf of Messrs. Grouf,

Waxman, and Huie (Management Motion), which the Company joins, WPP has

not sufficiently alleged a misrepresentation by the Defendants. See Management

Motion at 4-12. As such, the securities claims fail because Mr. Huies email

contained no misrepresentation, as the title of the email itself makes clear that he

was discussing WPP[s] Share Purchase from the Company . Moreover, WPP

has not and cannot allege that this email caused its supposed loss. In fact, Spot

Runners stock price went up through the relevant period. For this additional

reason, the Section 10(b) claim also fails.

The remaining direct and derivative allegations against Spot Runner concern

stock sales by individual defendants that took place at various times from 2006-2008. The allegations include sales from the period before WPP had even invested

in Spot Runner, and center around claims that the Founders, Battery and Index sold

certain of their holdings in the Company without notice to WPP. Id. 47. The

Complaint acknowledges Defendants waived certain notice rights concerning these

sales and other rights of investors pursuant to the ROFR and Co-Sale Agreement.

Id. 47-48. Plaintiff alleges that these waivers of rights breached fiduciary

obligations to the Company, despite being permissible by the plain language of the

Agreement. Id. 47. Indeed, the Complaint acknowledges that Battery and Index

3 WPP acknowledges it was informed of secondary sales that occurred inMarch 2008. Id. 58.


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collectively held more than requisite number shares to waive any provision under

the ROFR and Co-Sale Agreement. Id. 55; see also Nefouse Decl. Ex. B at 3.9.

The Complaint fails to state a claim against Spot Runner.

ARGUMENTI. APPLICABLE LEGAL STANDARDS

To survive a Rule 12(b)(6) motion to dismiss, a plaintiff must provide more

than labels and conclusions, and a formulaic recitation of the elements of a cause of

action; rather, a plaintiff must provide the grounds upon which its claim rests

through factual allegations sufficient to raise a right to relief above the speculative

level. Bell Atl. Corp. v. Twombly , 550 U.S. 544, 555,127 S. Ct. 1955, 1964-65,

167 L.Ed.2d 929 (2007). A 12(b)(6) motion to dismiss should be granted if the

complaint fails to proffer enough facts to state a claim for relief that is plausible

on its face. Id. at 556-561, 570-572.

Recently, the United States Supreme Court reaffirmed its discussion in

Twombly of the pleading requirements under Rule 8, and removed any doubt that

those requirements apply to all civil actions. See Ashcroft v. Iqbal , 129 S. Ct. 1937,

1944, 1949-52 (2009). The Court in Iqbal emphasized that the plausibilitystandard is not akin to a probability requirement, but asks for more than a sheer

possibility that defendant has acted unlawfully, and requires the pleading of facts

that would make a claim plausible and not just conceivable. Id. at 1949. While all

allegations of material fact are taken as true, mere legal conclusions couched as

factual allegations are insufficient and are disentitle[d] . . . to the presumption of

truth. Id. at 1951 ([T]he Federal Rules do not require courts to credit a

complaints conclusory statements without reference to its factual context.). See

also Sprewell v. Golden State Warriors , 266 F.3d 979, 988 (9th Cir. 2001) (holding

that a Court is not required to accept as true allegations that are merely conclusory,

unwarranted deductions of fact, or unreasonable inferences.).


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To assess plausibility, courts reject labels and plaintiffs conclusions that

parrot the elements of the claims. Twombly , 550 U.S. at 556-561; Iqbal , 129 S. Ct.

at 1950. This is especially true where such allegations are contradicted by

documents referenced in the complaint or in other information that may be judicially noticed. See, e.g. , In re Stac Elecs. Sec. Litig ., 89 F.3d 1399, 1403-1405

(9th Cir. 1996); In re Infonet Servs. Corp. Sec. Litig. , 310 F. Supp. 2d 1080, 1088

(C.D. Cal. 2003). The Complaint fails to state a claim that is plausible on its face.

A. State Law Claims

Spot Runner is incorporated in Delaware. Cmpl. 5. Under the internal

affairs doctrine, a corporations internal affairs are governed by the law of the state

of incorporation. See First Natl City Bank v. Banco Para El Comercio Exterior

de Cuba , 462 U.S. 611, 621, 103 S. Ct. 2591, 77 L.Ed.2d 46 (1983). A

corporations internal affairs are those matters peculiar to the relationships among

or between the corporation and its current officers, directors, and shareholders.

Edgar v. MITE Corp. , 457 U.S. 624, 645, 102 S. Ct. 2629, 2643, 73 L.Ed.2d 269

(1982). Because Spot Runner is a Delaware corporation, plaintiffs claims for

breach of fiduciary duty, constructive trust, and breach of contract are evaluatedunder Delaware law. See In re Sagent Tech ., Inc . Derivative Litig. , 278 F. Supp.

2d 1079, 1086-87 (N.D. Cal. 2003) (In general, courts in California follow this

rule and apply the law of the state of incorporation in considering claims relating to

internal corporate affairs.); In re Verisign, Inc. Derivative Litig ., 531 F. Supp. 2d

1173, 1214-15 (N.D. Cal. 2007) (Thus, Delaware law, the law of the state of

VeriSigns incorporation, applies to all causes of action that implicate the

Companys internal affairs, including the claims for breach of fiduciary duty,

accounting, unjust enrichment, rescission, constructive fraud, corporate waste,

breach of contract, gross mismanagement, and restitution.).

Both federal and state courts in California routinely follow this maxim . See

Batchelder v. Kawamoto , 147 F.3d 915, 920 (9th Cir. 1998) (in a derivative suit,


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the jurisdiction of incorporation determines issues relating to the internal affairs of

the corporation); Sagent , 278 F. Supp. 2d at 1090-92 (applying Delaware law to

claims of breach of fiduciary duty and insider trading asserted against directors of a

Delaware corporation headquartered in California);State Farm Mut. Auto. Ins. Co.

v. Superior Court , 114 Cal. App. 4th 434, 446, 8 Cal. Rptr. 3d 56, 67 (2003)

(applying Illinois law to claims by policy holders challenging Board decision about

dividends, finding that such claims of breach of contract and breach of the

covenant of good faith and fair dealing involve matters peculiar to the

relationships among or between the corporation and its current officers, directors,

and shareholders.) (citation omitted).

Moreover, as WPPs complaint sounds in fraud, its claims must also be

pleaded with particularity under Federal Rule of Civil Procedure 9(b). See Vess v.

Ciba-Geigy Corp. USA , 317 F.3d 1097, 1106-1107 (9th Cir. 2003) (holding that to

the extent a plaintiff relies upon allegations of fraudulent conduct to support state

law claims, a plaintiff must plead particularized facts detailing the who, what,

when, where and how required by Rule 9(b)); Kearns v. Ford Motor Co. , 567

F.3d 1120, 1125 (9th Cir. 2009) (applying Rule 9(b) to California state lawclaims); see also In re Daou Systems, Inc. , 411 F.3d 1006, 1027 (9th Cir. 2005).

The Complaint fails to plead the fraud allegations with particularity. See, e.g.

45-49, 53, 55, 65, 79, 91.

II. WPPS SECTION 10(B) AND RULE 10B-5 CLAIM SHOULD BEDISMISSED (COUNT ONE)

In the interest of avoiding duplication of arguments, Spot Runner joins in the

Management Motion to the extent it argues that the Complaint fails to plead a false

statement, fails to create a strong inference of scienter and fails to adequately plead

reliance under Section 10(b) of the Securities Exchange Act. Management Motion


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at 4-18. 4 The Complaint fails to state a Section 10(b) claim for the additional

reason that plaintiff has not pleaded loss causation.

A. The Complaint Fails to Adequately Plead Loss Causation.

WPP has not alleged and cannot establish that the alleged fraud caused anyloss. The Complaint does not allege any decline in the value of Spot Runner

common stock that WPP purchased in May 2007. In fact, WPP sold a portion of

this stock for a substantial profit less than a year later. This is a separate and

independent basis for dismissal of the Section 10(b) claim against Spot Runner. A

securities fraud plaintiff must prove both reliance (also known as transaction

causation) and loss causation. Dura Pharms., Inc. v. Broudo, 544 U.S. 336,

341-42, 125 S. Ct. 1627, 161 L.Ed.2d 577 (2005). Loss causation is akin to

proximate causation, and requires the complaint to provide a causal connection

between a loss and the alleged misrepresentation. Id. at 342; see also Lentell v.

Merrill Lynch & Co., 396 F.3d 161,171 (2d Cir. 2005).

Under Dura , the misrepresentation that allegedly caused the inflated

purchase price must also have caused the economic loss, not just the potential for

one. Dura , 544 U.S. at 345-46 (finding the complaint must provide defendantswith notice of what the relevant economic loss might be or what the causal

connection might be between that loss and the [alleged] misrepresentation); see

also Metzler Inv. GMBH v. Corinthian Colls., Inc. , 540 F.3d 1049, 1062-63 (9th

Cir. 2008) (affirming dismissal of securities case holding that loss causation

requires more than an allegation that a stock was purchased at an inflated price, the

complaint must allege that the companys stock price fell significantly after the

truth became known).

4 Plaintiffs Section 10(b) claim is subject to the stringent requirements of thePrivate Securities Litigation Reform Act of 1995 (PSLRA), which was enactedto deter opportunistic private plaintiffs from filing abusive securities fraud claims,in part, by raising the pleading standards for private securities fraud plaintiffs. Inre Silicon Graphics, Inc. Sec. Litig. , 183 F.3d 970, 973 (9th Cir. 1999).


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Indeed, the price of a company stock can decline for a number of reasons,

including, changed economic circumstances, changed investor expectations, new

industry-specific or firm specific facts, conditions or other events, which taken

separately or together account for some or all of that lower price. Dura

, 544 U.S.at 343. The Complaint fails to allege, as it must, that the alleged misrepresentation

caused a loss. The Supreme Court reaffirmed in Dura that the securities laws

operate not to provide investors with broad insurance against market losses, but to

protect them against those economic losses that misrepresentations actually cause.

Dura , 544 U.S. at 345. WPP has failed to plead loss causation.

The Section 10(b) claim solely hinges on an email from May 2007, where

Mr. Huie allegedly misrepresented that there were no secondary sales occurring by

the Founders, Battery, Index or existing investors prior to the purchase of common

stock by WPP. Cmpl. 53, 88-89. Specifically, the Complaint alleges that on

May 21, 2007, Alexander Barry, counsel to WPP, emailed Mr. Huie following

WPPs decision to purchase additional shares of Spot Runner. Id. 70. Mr. Barry

asked, [i]s there an existing investor and/or founder selling existing shares related

to this offering? If so, who is selling shares and how many shares are theyselling? Id. Mr. Huie responded stating, among other things, [t]his offering does

not involve the sale of any existing shares. It is an entirely new issuance by the

Company. Id. 71. As explained in the Management Motion at 4-12, Mr. Huies

email response was in response to WPPs question regarding its purchase of stock

from the Company, and was wholly separate and distinct from secondary sales that

occurred in June 2007.

The Complaint bases its entire loss causation theory on this one email.

According to the Complaint, [i]n purchasing an additional 383,111 shares of Spot

Runner stock in May 2007, WPP reasonably relied on Defendants representations

that Grouf, Waxman, Battery and Index were not selling their shares of the

Company, and WPP would not have acquired the additional Company stock had


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they known of these sales. Id. 90. WPP then claims that as a result of the email,

it has suffered damages under Section 10(b), no less than the total purchase price

of the stock it purchased in May 2007. Id. 92.

The Complaint entirely misses the point of loss causation. The securitieslaws are not intended to provide insurance against losses, but to protect them

against those economic losses that misrepresentations actually cause. Dura , 544

U.S. at 345. WPP has not and cannot allege that Mr. Huies email caused it any

loss. The allegations in the Complaint refute this claim. There is not a single

allegation that once the fact that the Founders, Battery and Index sold stock had

supposedly been revealed, Spot Runners stock price dropped. Indeed, WPP

cannot allege this.

WPP alleges that it purchased common stock in May 2007, for a per share

price of $4.66. Cmpl. 73. Later, in March 2008, WPP was given yet another

opportunity to sell a portion of its stake in Spot Runner. Id. 77. This time WPP

sold approximately 150,000 of its common shares in Spot Runner at $6.00 a share,

or $1.34 higher than the common stock it had purchased in May 2007 when it was

supposedly misled. Id. 82. Moreover, the allegations in the Complaint establishthat for the entire period at issue, the price of Spot Runner stock went up , not

down. Id. 59, 61, 64, 76. Nowhere in the Complaint does WPP point to a

revelation that the Defendants were selling stock, coupled with a decline in share

price. This alone defeats loss causation . Metzler, 540 F.3d at 1062-63. Because

the Complaint on its face establishes that there is no plausible basis to establish

loss causation, the Complaint should be dismissed on this further ground. Iqbal ,

129 S. Ct. at 1949-50; Twombly , 550 U.S. at 555-556.

III. WPP FAILS TO STATE A CLAIM FOR VIOLATIONS OFCALIFORNIA CORPORATION CODE SECTIONS 25401 AND 25501(COUNT TWO)

Similar to the Section 10(b) claim, WPPs claim under Sections 25401 and

25501 solely hinges on Mr. Huies email from May 21, 2007, which exclusively


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deals with WPPs purchase of common stock in May 2007. Id. 53, 88-89, 93-

95. As explained more fully in the Management Motion at 4-12, Defendants did

not misrepresent that the individual defendants were not selling their shares. See

alsoCmpl. 91, 93-95. Read in context, the May 21, 2007 email clearly

concerns WPPs purchase of common stock from the primary offering and cannot

be construed to mean that there was not a secondary offering involving the

opportunity to sell by existing shareholders. Id. ; see also supra at 6, 12-13. In

addition, the response by Mr. Huie to Mr. Barry was true the shares WPP

committed to purchase were from the Company. Id. Given that the email said that

the offering round was an entirely new issuance of shares, WPP could not have

reasonably interpreted that statement to have meant that no existing shareholders

were selling in the secondary round. Id.

Moreover, to have a valid cause of action under Section 25401, a plaintiff

must allege that there was a sale or purchase of stock in California by fraudulent

untrue statements or by omitting material facts that would by omission make the

statements misleading. See Cal. Corp. Code 25401. Such claims must also be

pleaded with particularity under Rule 9(b) when the cause of action is based on analleged fraud or misrepresentation. Vess , 317 F.3d at 1103-04; Kearns , 567 F.3d at

1125; see also MTC Elec. Tech. Co. v. Leung , 876 F. Supp. 1143, 1147 (C.D. Cal.

1995); Kainos Lab., Inc. v. Beacon Diagnostics, Inc. , No. C-97-4618 MHP, 1998

WL 2016634, at *16 (N.D. Cal. Sept. 14, 1998). Lastly, a plaintiff must

demonstrate it suffered actual damages from the alleged misrepresentation or

omission in order to sustain a claim under Section 25401. Malik v. Universal Res.

Corp. , 425 F. Supp. 350, 361 (S.D. Cal. 1976).

WPP alleges that Defendants engaged in acts of fraud and deceit because

they misrepresented that Grouf, Waxman, Battery and Index were not selling

stock. See Cmpl. 91, 93-95. However, as noted supra at 6 and 12-13, and

explained more fully in the Management Motion at 4-12, plaintiff has failed to


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demonstrate how Defendants made a misrepresentation concerning stock sales by

the Founders, Battery and Index. In contrast to WPPs allegation that Defendants

represented that the Founders, Battery and Index were not selling shares, the

Defendantsnever

made such a representation to WPP.Compare

Cmpl. 70-71(Is there an existing investor and/or founder selling existing shares related to this

offering? If so, who is selling shares and how many shares are they selling? . . .

[T]his offering does not involve the sale of any existing shares. It is an entirely

new issuance by the Company .) with 89-91 (WPP reasonably relied on

Defendants representations that Grouf, Waxman, Battery and Index were not

selling their shares of the Company . . . .) (emphasis added); see also

Management Motion at 4-12. To the contrary, as stated in the Complaint, Spot

Runner informed WPP that the Founders, Battery and Index would have the

opportunity to sell. See Cmpl. 67; Nefouse Decl. Ex. C (Please note that we are

notifying all preferred stockholders and the founders of the Investors desire to

purchase additional shares of common stock. In order to ensure an orderly and

efficient process, we will facilitate by allocating, on a pro rata basis, the Invetsors

demand among the notified stockholders, who have indicated an interest to sell .)(emphasis added). As such, WPP has failed to plead with particularity let alone

any factual basis how any alleged untrue statement of material fact by

Defendants misled them into purchasing additional shares of Spot Runner. See

Vess , 317 F.3d at 1103-04; see also Iqbal , 129 S. Ct. at 1949-50; Twombly , 550

U.S. at 555-556.

WPP has also failed to demonstrate how it suffered actual damages from any

alleged misrepresentation. See also supra at 11-13. The absence of evidence

demonstrating actual damages is fatal to WPPs claims under Sections 25401 and

25501. See Malik , 425 F. Supp at 361 ([T]he complete absence of competent

evidence demonstrating actual damage to plaintiffs from the debenture conversions

prevents any recovery with respect [to claims under Section 25401].). In sum,


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other grounds by Tooley v. Donaldson, Lufkin, & Jenrette, Inc ., 845 A.2d 1031

(Del. 2004). 5

Here, under Count Five, plaintiff has asserted a Derivative Suit Against All

Defendants for breach of fiduciary dutyto Spot Runner

. Cmpl. at 20. Despitethis attempt to include Spot Runner as a defendant, WPP is precluded from

asserting this particular derivative claim and all derivative claims against Spot

Runner itself, the very same company on whose behalf plaintiff brings the

derivative action. Rose Hall , 494 F. Supp. at 1151; Aronson v. Lewis , 473 A.2d

805, 812 (Del. 1984), overruled on other grounds by Brehm v. Eisner , 746 A.2d

244 (Del. 2000); Bokat , 262 A.2d at 249. Accordingly, the Court should dismiss

Count Five as to Spot Runner, as well as the remaining derivative allegations

brought against Spot Runner itself.

V. WPPS INDIVIDUAL CLAIM FOR BREACH OF FIDUCIARY DUTYAGAINST SPOT RUNNER FAILS AS A MATTER OF LAW (COUNTSIX)

In addition to the derivative claim brought against All Defendants for

breach of fiduciary duty to Spot Runner, plaintiff has also asserted an individual

claim for breach of fiduciary duty to WPP against All Defendants. Cmpl. at 20.As demonstrated below, WPP is precluded from asserting a breach of fiduciary

duty claim directly against Spot Runner. 6

5 Courts in California also hold that a plaintiff cannot bring derivative claims

against the same company on whose behalf the claims are brought for in the first place. See Patrick v. Alacer Corp., 167 Cal. App. 4th 995, 1004, 84 Cal. Rptr. 3d642, 651 (2008) (The complaint in a derivative action is filed on the corporations

behalf; not against it.) (citing Jones v. H.F. Ahmanson & Co ., 1 Cal. 3d 93, 106,81 Cal. Rptr. 592 (1969)).

6 To the extent WPP relies on allegations of stock sales prior to WPPs initialinvestment in Spot Runner on August 29, 2006 in support of its claims for breachfiduciary duty, such claims must be dismissed for failure to meet Federal Rules of Civil Procedure, Rule 23.1s continuous ownership requirement. See Fed. R. Civ.P. 23.1; Lewis v. Chiles, 719 F. 2d 1044, 1047 (9th Cir. 1983); Kona Enter. Inc. v.

Estate of Bishop , 179 F.3d 767, 769-70 (9th Cir. 1999); Cmpl. 31; 59-60; 106-107; 111-112.


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A. WPP Is Precluded From Asserting An Individual Breach of

Fiduciary Duty Claim Against Spot Runner.

Spot Runner owes no fiduciary duty to WPP as an investor in Spot Runner.

Delaware law holds that fiduciary duties are not owed by a corporation to itsstockholders. See Arnold v. Society for Savings Bancorp, Inc. , 678 A.2d 533, 539

(Del. 1996) (Plaintiff has not cited a single case in which Delaware courts have

held a corporation directly liable for breach of the fiduciary duty of disclosure);

Gaffin v. Teledyne, Inc. , 611 A.2d 467, 472 (Del. 1992) (The only defendant is the

corporate entity, Teledyne, so there are no fiduciary duty claims.); Alessi v.

Beracha , 849 A.2d 939, 950 (Del. Ch. 2004) (holding that [f]iduciary duties are

owed by the directors and officers to the corporation and its stockholders. In other

words, [the company] owes no fiduciary duty to [the stockholder]. I will not

require [the company] to remedy [the stockholders] injury without a valid legal

theory for holding [the company] liable .) (emphasis added) (citation omitted).

The Delaware Supreme Courts holding in Arnold is instructive. In that

matter, following a merger, a company stockholder brought suit against the former-

company (that became a subsidiary of the surviving parent corporation), thesurviving parent corporation, and directors, alleging damages arising out of

claimed disclosure violations in the merger proxy statement. Arnold , 678 A.2d at

534-35. Included in the claims brought against the former-company was a breach

fiduciary duty claim for failure to disclose. Id. at 539. In recognizing that a

corporation does not have a fiduciary disclosure duty to shareholders in Delaware,

the Court held:

Plaintiff has not cited a single case in which Delaware courts have held

a corporation directly liable for breach of the fiduciary duty of

disclosure . . . This Court has stated: The only defendant is the

corporate entity . . . so there are no fiduciary duty claims. . . . We see

no legitimate basis to create a new cause of action.


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Id. (citation omitted).

Similarly, Spot Runner does not owe a fiduciary duty to WPP, as no such

fiduciary relationship exists between the Company and its investors. See Gaffin ,

611 A.2d at 472; Arnold

, 678 A.2d at 539; Alessi

, 849 A.2d at 950. Moreover, plaintiffs own allegations undermine any argument that Spot Runner owes WPP a

fiduciary duty under Delaware law. See Cmpl. 111 (As directors and majority

shareholders of Spot Runner, Defendants are fiduciaries toward Spot Runner and

its stockholders and owe to them the duty . . . As fiduciaries, they are bound to act

toward and deal with Spot Runner and its other stockholders with the utmost

fidelity. . . .) (emphasis added). For these reasons, this cause of action should be

dismissed against Spot Runner as a matter of law.

B. In The Alternative, WPPs Direct Claim For Breach of Fiduciary

Duty Is A Derivative Claim And Fails As A Matter of Law.

Even if WPP may bring a cause of action against Spot Runner for breach of

fiduciary duty to WPP and it cannot as it stands, Count Six is a derivative

claim. WPP attempts to bring this claim as a direct cause of action under the

erroneous presumption that its interests as a minority shareholder have allegedly been damaged. Cmpl. 113. WPP is incorrect. The Complaint alleges that

Defendants should not have allowed Messrs. Grouf, Waxman and Pittman, along

with Battery and Index, to sell stock directly to investors through secondary sales,

and instead should have allowed continued dilution of Spot Runner by issuing and

selling stock directly from the Company. Id. 79, 112-13. Even taking its

allegations as true, WPP has only alleged harm to the Company, as the damages

WPP discusses relate to a supposed missed opportunity for the Company to have

sold additional shares to investors. As such, merely alleging that its interests as a

minority shareholder have been affected will not convert a quintessentially

derivative claim into a direct one, as the alleged lost opportunity belonged to Spot

Runner, not WPP.


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Delaware law is clear: a claim is not direct simply because it is pleaded

that way. Dieterich v. Harrer , 857 A.2d 1017, 1027 (Del. Ch. 2004). Rather,

[i]n determining the nature of the wrong alleged, a court must look to the body of

the complaint, not to the plaintiffs designation or stated intention.Kramer

, 546

A.2d at 352. Whether a stockholders claim is derivative or direct turn[s] solely

on the following questions: (1) who suffered the alleged harm (the corporation or

the suing stockholders individually); and (2) who would receive the benefit of any

recovery or other remedy (the corporation or the stockholders, individually)?

Tooley , 845 A.2d at 1033 (emphasis in original); see also Agostino, 845 A.2d at

1122-23.

In analyzing these questions, courts look to the nature of the injury alleged

and who would receive the benefit of the remedy. Tooley , 845 A.2d at 1033. To

maintain a direct action, the stockholder must be able to show an injury

independent of any alleged injury to the corporation. Id . at 1039; see also LaSala

v. Bordier et cie , 519 F.3d 121, 130 n.9 (3d Cir. 2008) (holding that Delaware law

generally does not allow shareholders to assert breach-of-fiduciary-duty claims

directly, unless the shareholders can show damage distinct from the damage to thecorporation) (citing Tooley , 845 A.2d at 1034). The stockholder must also

demonstrate that it suffered a unique harm, not suffered by all stockholders. See

Feldman v. Cutaia , 951 A.2d 727, 733 (Del. 2008). If the stockholder does not

meet both prongs of this test, then its claim even if characterized as direct

cannot survive as a direct claim. Tooley , 845 A.2d at 1039.

In particular, when analyzing whether a breach of fiduciary duty claim is a

derivative or direct action, the test may be stated as follows: Looking at the body

of the complaint and considering the nature of the wrong alleged and the relief

requested, has the plaintiff demonstrated that he or she can prevail without

showing an injury to the corporation? Agostino , 845 A.2d at 1122. Moreover,

[s]ince the fiduciary duty of officers and directors runs to the corporation and the


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shareholder . . . the shareholder will always be able to assert a breach of duty owed

to it, but plainly not all fiduciary duty claims are individual claims. As such, in the

context of fiduciary duty claims, the focus should be on the nature of the injury.

Id.at 1122 n.54.

The allegations in Count Six (Breach of Fiduciary Duty to WPP) essentially

mirror the claims set out in Count Five (Breach of Fiduciary Duty to Spot Runner).

Compare Cmpl. 104-109 with 110-114. Moreover, in looking at both the

language of Count Six and the Complaint as a whole, the cause of action is clearly

a derivative claim describing a lost opportunity for Spot Runner as opposed to a

direct claim on behalf of WPP. In reading the language of Count Six together with

the remainder of the Complaint, as mandated by the Delaware Supreme Court in

Kramer , 546 A.2d at 352, WPP essentially contends that [t]he Board had secretly

permitted the Founders and the favored Defendant Investors to sell their shares

even though the Company would have greatly benefited from additional capital .

Id. 79 (emphasis added); see also Cmpl. 113. Any argument that WPP suffered

any harm by an alleged breach of fiduciary duty is contradicted by plaintiffs own

allegations, which explicitly state that [t]he Defendants, as members of the Boardand majority Investors, breached their fiduciary duties to the Company by taking

this opportunity to raise capital away from the Company so that they could profit

from the sales of their own shares . Id. 80 (emphasis added); see also Agostino ,

845 A.2d at 1122 (Looking at the body of the complaint and considering the

nature of the wrong alleged and the relief requested, has the plaintiff demonstrated

that he or she can prevail without showing an injury to the corporation?).

As demonstrated above, the nature of the alleged breach of fiduciary duty

injury described by WPP throughout its Complaint relates solely to an alleged lost

opportunity to Spot Runner. Any recovery from this claim would go directly to the

Company because WPP contends that the Defendants should not have profited

from their secondary sales, but instead that the investment should have gone to the


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Company. See also Cmpl. 115-118. WPP offers no facts to show how it

individually suffered any direct injury due to an alleged breach of fiduciary duty by

the Defendants. As Count Six is a derivative claim, the Court should dismiss

Count Six against Spot Runner for the same reasons demonstratedsupra

at 16-17; Bokat , 262 A.2d at 249.

C. Spot Runner Did Not Violate the ROFR and Co-Sale Agreement

Should the Court determine that WPP may bring a direct breach of fiduciary

duty claim against Spot Runner and that the claim is not a derivative cause of

action, Spot Runner did not breach any fiduciary duty owed to WPP because Spot

Runner did not violate the ROFR and Co-Sale Agreement. As the Complaint

acknowledges, section 3.9 of the ROFR and Co-Sale Agreement contains a proviso

that the holders of sixty percent (60%) of the Shares held by the Investors voting

together may waive, discharge, terminate, modify or amend, on behalf of all

Investors, any provisions hereof. Cmpl. 44; Nefouse Decl. Ex. B at 3.9. As

demonstrated in more detail in the Management Motion, the Defendants fully

abided by the terms of the ROFR and Co-Sale Agreement. See Management

Motion at 23-24.Moreover, as WPP bases its breach of fiduciary duty claim on allegations

that the Defendants allegedly were engaging in a scheme, conspiring and

acting with other deliberate misconduct ( see supra at 10), WPPs breach of

fiduciary duty claim sounds in fraud and must satisfy the stringent pleading

requirements of Federal Rule of Civil Procedure 9(b). WPPs Complaint,

however, includes nothing more than conclusory allegations that fall far short of

satisfying Rule 9(b). See Cmpl. 113 (Defendants have done so for self-serving,

improper and bad-faith reasons . . . [t]he Defendants have acted willfully, wantonly

and with reckless disregard); see also id. 79-80 ([t]he Board had secretly

permitted the Founders and the favored Defendant Investors to sell their shares


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even though the Company would have greatly benefited from additional capital.)

(emphasis added); Vess , 317 F.3d at 1103-04.

Furthermore, WPP fails to plead any particularized facts regarding how or

when the Company perpetrated the alleged scheme through the secondary sales bythe Founders, Battery and Index. Additionally, nowhere in Count Six does WPP

specify let alone mention how the Company breached any fiduciary duty to

WPP. To the contrary, WPP recognizes and claims that Spot Runner is in fact

owed a fiduciary duty. See Cmpl. 111. WPPs conclusory allegations thus fail to

provide the who, what, when, where, and how required by Rule 9(b). See Vess ,

317 F.3d at 1106 (citation omitted). The Complaints failure to plead facts

regarding the Companys alleged misconduct is insufficient to satisfy the

requirements of Federal Rule of Civil Procedure 8, much less Rule 9(b). See

Twombly , 550 U.S. at 556-561; Iqbal , 129 S. Ct. at 1949-50. In sum, WPP has

failed to plead any facts, much less particularized facts, demonstrating that the

Company breached any fiduciary duties to WPP.

VI. WPPS CLAIM FOR CONSTRUCTIVE TRUST AGAINST SPOTRUNNER FAILS AS A MATTER OF LAW (COUNT SEVEN)

In support of its constructive trust claim under California Civil Code Section

2224, WPP contends that Defendants violated their fiduciary duties to the

Company by misappropriating those opportunities for themselves. Cmpl. 117.

However, under both Delaware and California law, a constructive trust is an

equitable remedy, not a cause of action. See McKee v. McKee , No. Civ. A. 17773-

VCN, 2007 WL 1378349, at *3 (Del. Ch. May 3, 2007) (Constructive and

resulting trusts are not causes of action; they are equitable remedies);

Crescent/Mach I Partners, L.P. v. Turner , 846 A.2d 963, 991 (Del. Ch. 2000) (A

constructive trust is simply one of many conceivable alternative remedies which

might be available after trial should plaintiffs prevail on one or more of their

theories of recovery.); Communist Party v. 522 Valencia, Inc ., 35 Cal. App. 4th


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980, 990, 41 Cal. Rptr. 2d 618 (1995) (holding that a constructive trust is an

equitable remedy, not a substantive claim for relief). Accordingly, WPPs claim

for constructive trust should be dismissed as a matter of law for failure to state a

claim. Id.

CONCLUSION

For the foregoing reasons, Spot Runner, Inc. respectfully requests that the

Court grant its motion to dismiss with prejudice.

Dated: July 15, 2009 WILSON SONSINI GOODRICH & ROSATIProfessional Corporation

By: /s/ Boris Feldman

BORIS FELDMANAttorneys for DefendantSPOT RUNNER INC.

SR Motion to Dismiss

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