1 2 3 4 UNITED STATES DISTRICT COURT 5 NORTHERN DISTRICT OF CALIFORNIA 6 7 VAGARO, INC., et al., Case No. 23-cv-02591-TSH

8 Plaintiffs,

ORDER DENYING MOTION TO

9 v. DISMISS

10 ANNIE MILLER, et al., Re: Dkt. No. 9 11 Defendants.

12 13 I. INTRODUCTION 14 Pending before the Court is Defendants Annie and Gregory Miller’s Motion to Dismiss 15 pursuant to Federal Rule of Civil Procedure 12(b)(6). ECF No. 9. Plaintiffs Vagaro, Inc. and 77 16 West & Co LLC filed an Opposition (ECF No. 16), and Defendants filed a Reply (ECF No. 19). 17 The Court finds this matter suitable for disposition without oral argument and VACATES the 18 August 3, 2023 hearing. See Civ. L.R. 7-1(b). For the reasons stated below, the Court DENIES 19 the motion.1 20 II. BACKGROUND 21 A. Plaintiffs’ Complaint Allegations 22 Vagaro, Inc. (“Vagaro”) and 77 West & Co LLC (“77 West”) are California-based 23 corporations. ECF No. 1 ¶¶ 6, 7. Annie Miller and Gregory Miller (the “Millers”) are married 24 and currently reside in Brentwood, Tennessee. Id. ¶¶ 8, 9. 25 In or around March 2021, Annie Miller and her company, West & Co., Inc., entered into 26 an asset purchase agreement (“APA”) with 77 West. Id. ¶ 13. 27 1 Under the APA, 77 West agreed to purchase from Ms. Miller and her company three 2 salons. Id. ¶ 14. 3 Ms. Miller and 77 West agreed as part of the APA that 77 West’s affiliate Vagaro would 4 hire Ms. Miller pursuant to an offer letter (the “Offer Letter”). Id. ¶ 15. 5 During the negotiations, the Millers represented and warranted to Plaintiffs during 6 negotiations of the APA and Offer Letter that certain tangible personal property included in the 7 purchased asserts was in good condition and adequate for the uses needed. Id. ¶ 16. 8 The Millers also represented and warranted to Plaintiffs during negotiations of the APA 9 and Offer Letter that financial disclosures showing income, expenses, and profits for the salons 10 were true and accurate. Id. ¶ 17. 11 As part of the financial disclosures, the Millers represented and warranted that the salon in 12 Danville (“Danville Salon”) had $144,200.00 in total yearly profit. Id. ¶ 22. In fact, the Danville 13 Salon was not profitable. Id. 14 The Millers knew they were using the wrong profit numbers for the Danville Salon and 15 used the erroneous profit numbers to induce 77 West to enter into the APA and to induce Vagaro 16 to hire Miller. Id. ¶¶ 24, 25. 17 Plaintiffs relied on the Millers’ misrepresentations in entering into the APA and hiring Ms. 18 Miller. 77 West would not have entered into the APA, and Vagaro would not have hired Ms. 19 Miller but for these misrepresentations. Id. ¶¶ 26, 27. 20 B. State Court Litigation 21 Some time after the negotiation of the Offer Letter and APA, Vagaro allegedly terminated 22 Ms. Miller’s employment for using the signature of Vagaro’s Vice President of Finance without 23 permission to forge a document. Id. ¶ 3. 24 On or around December 8, 2022, Annie Miller commenced an action in Contra Costa 25 County Superior Court against Vagaro related to the termination of her employment. See ECF No. 26 10-1, Hubins Decl. Ex. 1. Ms. Miller alleged: 1) breach of contract; 2) implied covenant of good 27 faith and fair dealing; 3) retaliation/wrongful termination; 4) disability harassment; 5) negligent 1 prospective economic advantage. Id. In essence, Ms. Miller alleged that Vagaro fabricated the 2 forgery rationale to terminate her employment “for cause,” but in actuality terminated her 3 employment to avoid paying her salary, prevent her equity shares from vesting, and in retaliation 4 for Ms. Miller’s protest of disability harassment. Id. ¶¶ 16, 17. 5 According to the parties, Vagaro answered the state court complaint on February 17, 2023. 6 See ECF Nos. 9 at 4; 16 at 7. Plaintiffs allege that Vagaro deposed Ms. Miller in the state court 7 action on April 19, 2023. ECF No. 16 at 7-8. Vagaro alleges it learned for the first time at this 8 deposition that the Millers provided fraudulent financial documents to Plaintiffs in the 9 negotiations to purchase the salons and hire Ms. Miller. Id. 10 C. Federal Court Litigation 11 On May 25, 2023, Plaintiffs Vagaro and 77 West filed a complaint (“Complaint”) against 12 Annie Miller and Gregory Miller alleging the following: 1) fraud (against all Defendants); and 2) 13 breach of contract (against Annie Miller). The Millers filed this Motion to Dismiss pursuant to 14 Rule 12(b)(6) on June 28, 2023. ECF No. 9. On July 12, 2023, Defendants filed an Opposition 15 (ECF No. 16), and on July 19, 2023, the Millers filed a Reply (ECF No. 19). 16 III. LEGAL STANDARD 17 A motion to dismiss under Federal Rule of Civil Procedure 12(b)(6) “tests the legal 18 sufficiency of a claim. A claim may be dismissed only if it appears beyond doubt that the plaintiff 19 can prove no set of facts in support of his claim which would entitle him to relief.” Cook v. 20 Brewer, 637 F.3d 1002, 1004 (9th Cir. 2011) (citation and quotation marks omitted). Rule 8 21 provides that a complaint must contain a “short and plain statement of the claim showing that the 22 pleader is entitled to relief.” Fed. R. Civ. P. 8(a)(2). Thus, a complaint must plead “enough facts 23 to state a claim to relief that is plausible on its face.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 24 570 (2007). Plausibility does not mean probability, but it requires “more than a sheer possibility 25 that a defendant has acted unlawfully.” Ashcroft v. Iqbal, 556 U.S. 662, 687 (2009). A complaint 26 must therefore provide a defendant with “fair notice” of the claims against it and the grounds for 27 relief. Twombly, 550 U.S. at 555 (quotations and citation omitted). 1 true and construes the pleadings in the light most favorable to the nonmoving party. Manzarek v. 2 St. Paul Fire & Marine Ins. Co., 519 F.3d 1025, 1031 (9th Cir. 2008); Erickson v. Pardus, 551 3 U.S. 89, 93-94 (2007). However, “the tenet that a court must accept a complaint’s allegations as 4 true is inapplicable to threadbare recitals of a cause of action’s elements, supported by mere 5 conclusory statements.” Iqbal, 556 U.S. at 678. 6 If a Rule 12(b)(6) motion is granted, the “court should grant leave to amend even if no 7 request to amend the pleading was made, unless it determines that the pleading could not possibly 8 be cured by the allegation of other facts.” Lopez v. Smith, 203 F.3d 1122, 1127 (9th Cir. 2000) (en 9 banc) (citations and quotations omitted). A court “may exercise its discretion to deny leave to 10 amend due to ‘undue delay, bad faith or dilatory motive on part of the movant, repeated failure to 11 cure deficiencies by amendments previously allowed, undue prejudice to the opposing party . . ., 12 [and] futility of amendment.’” Carvalho v. Equifax Info. Servs., LLC, 629 F.3d 876, 892-93 (9th 13 Cir. 2010) (alterations in original) (quoting Foman v. Davis, 371 U.S. 178, 182 (1962)). 14 IV. DISCUSSION 15 The Millers argue this federal court action must be dismissed because Plaintiffs’ claims 16 should have been brought as compulsory counterclaims in the state court action commenced by 17 Ms. Miller. ECF No. 9 at 5-8. Plaintiffs argue they were not required to raise the present claims 18 in the state court action because the state and federal court claims do not arise out of the same 19 transaction or occurrence. ECF No. 16 at 9-11. Further, Plaintiffs argue they were not required to 20 raise the federal court claims in the state court action because Plaintiffs did not discover the 21 existence of the claims until after Vagaro filed its state court answer. Id. at 11-12. 22 “Federal courts will not permit an action to be maintained where the claims asserted should 23 have been brought as a compulsory counterclaim in an earlier action.” In re Crown Vantage, Inc., 24 421 F.3d 963, 973 n.7 (9th Cir. 2005). “The question whether the [Plaintiffs’] claims are 25 compulsory counterclaims which should have been pleaded in the earlier [Defendant] state court 26 action is a question of state law.” Pochiro v. Prudential Ins. Co. of Am., 827 F.2d 1246, 1249 (9th 27 Cir. 1987). Under the California Code of Civil Procedure § 426.30, “if a party against whom a 1 which (at the time of serving his answer to the complaint) he has against the plaintiff, such party 2 may not thereafter in any other action assert against the plaintiff the related cause of action not 3 pleaded.” Cal. Civ. Proc. Code § 426.30. “‘Related cause of action’ means a cause of action 4 which arises out of the same transaction, occurrence, or series of transactions or occurrences as the 5 cause of action which the plaintiff alleges in his complaint.” Cal. Civ. Proc. Code § 426.10(c). 6 “[T]he relatedness standard ‘requires “not an absolute identity of factual backgrounds for the two 7 claims, but only a logical relationship between them.”’” ZF Micro Devices, Inc. v. TAT Cap. 8 Partners, Ltd., 5 Cal. App. 5th 69, 82 (2016), as modified (Nov. 30, 2016) (quoting Currie Med. 9 Specialties, Inc. v. Bowen, 136 Cal. App. 3d 774, 777 (1982)). This “logical relationship” analysis 10 is utilized under both federal and California law, and California state courts have looked to federal 11 caselaw in interpreting § 426.30. See, e.g., Align Tech., Inc. v. Tran, 179 Cal. App. 4th 949, 962 12 (2009) (assessing § 426.30 “based upon both case law construing California’s compulsory cross- 13 complaint statute and federal cases interpreting the analogous Rule 13(a).”). 14 The purpose of the compulsory cross-complaint statute is to prevent “piecemeal litigation.” 15 Carroll v. Imp. Motors, Inc., 33 Cal. App. 4th 1429, 1436 (1995). “[T]he law abhors a 16 multiplicity of actions . . . the obvious intent of the Legislature . . . was to provide for the 17 settlement, in a single action, of all conflicting claims between the parties arising out of the same 18 transaction. Thus, a party cannot by negligence or design withhold issues and litigate them in 19 successive actions; he may not split his demands or defenses; he may not submit his case in 20 piecemeal fashion.” Align Tech., 179 Cal. App. 4th at 959 (cleaned up) (quoting Flickinger v. 21 Swedlow Eng’g Co., 45 Cal. 2d 388, 393 (1955)). “The statute is to be liberally construed to 22 advance its purpose.” Heshejin v. Rostami, 54 Cal. App. 5th 984, 993 (2020). 23 As an initial matter, Defendants attach to Jeff Hubins’s declaration Ms. Miller’s Contra 24 Costa Superior Court complaint, and both parties refer to the document in their arguments. 25 Hubins Decl. Ex. 1; see, e.g., ECF Nos. 9 at 4; 16 at 5. “Generally, district courts may not 26 consider material outside the pleadings when assessing the sufficiency of a complaint under Rule 27 12(b)(6) of the Federal Rules of Civil Procedure.” Khoja v. Orexigen Therapeutics, Inc., 899 F.3d 1 known within the trial court’s territorial jurisdiction or (2) capable of accurate and ready 2 determination by resort to sources whose accuracy cannot reasonably be questioned. Fed. R. Evid. 3 201(b). The Court “may take notice of proceedings in other courts, both within and without the 4 federal judicial system, if those proceedings have a direct relation to matters at issue.” U.S. ex rel. 5 Robinson Rancheria Citizens Council v. Borneo, Inc., 971 F.2d 244, 248 (9th Cir. 1992) (quoting 6 St. Louis Baptist Temple, Inc. v. FDIC, 605 F.2d 1169, 1172 (10th Cir. 1979)). The Court 7 considers the state court complaint highly relevant to the dispute herein, where the parties debate 8 whether Plaintiffs’ pending claims in this federal court action arise from the same series of 9 transactions or occurrences as the claims brought by Ms. Miller in the state court action. While 10 neither party requests the Court take judicial notice of the state court complaint, the Court may 11 take judicial notice on its own. Fed. R. Evid. 201(c). The Court determines it appropriate to take 12 judicial notice of this state court complaint, attached as Exhibit 1 to Mr. Hubins’ declaration, 13 containing Annie Miller’s allegations, although not the truth of the allegations. See Richter v. 14 Oracle Am., Inc., No. 22-CV-04795-BLF, 2023 WL 1420722, at *3 (N.D. Cal. Jan. 31, 2023) 15 (taking judicial notice of state court complaint); cf. Lee v. City of Los Angeles, 250 F.3d 668, 690 16 (9th Cir. 2001) (finding district court make take judicial notice of the existence of court opinion 17 but not the truth of the facts recited therein). 18 Plaintiffs allege in their Complaint that they relied on the Millers’ fraudulent 19 representations in both entering into the APA and hiring Ms. Miller. ECF No. 1 ¶ 38. If not for 20 the fraudulent representations, Vagaro alleges it would not have hired Ms. Miller and that the 21 Millers acted with malice in “tricking” Vagaro into hiring her. Id. ¶¶ 39, 41, 42. Plaintiffs’ 22 allegations that they would never have entered into the APA or an employment relationship with 23 Ms. Miller but for her fraudulent conduct are allegations pertaining to the contractual relationship 24 between the parties, and therefore are allegations involving similar questions of fact and law as 25 Ms. Miller’s claims regarding violation of the employment contract. Cf. Align Tech., 179 Cal. 26 App. 4th at 962 (“The spirit and intent of Rule 13(a) requires that the entire contractual 27 relationship be deemed to be included within the word ‘transaction’ in cases sounding in 1 (S.D.N.Y. 1962)). Further, Vagaro’s allegation that it was fraudulently induced into entering into 2 an employment agreement with Ms. Miller would seem to operate as a defense to the state action 3 accusing Vagaro of violating said employment agreement. See id. at 962 (“[T]he matters Align 4 asserted here are those that one would anticipate an employer might raise—either as defenses, by 5 cross-complaint, or both—in responding to an employee’s claim for wrongful termination such as 6 the one raised in the Tran cross-complaint.”); compare Automated Datatron, Inc. v. Woodcock, 84 7 F.R.D. 408, 412 (D.D.C.1979) (analyzing action where employer sued former employee for 8 diversion of customers and employee counterclaimed for money owed under a stock agreement, 9 finding counterclaim compulsory where the propriety or impropriety of the employee’s actions 10 were intertwined with the claims and counterclaims); Currie, 136 Cal. App. 3d at 777 (finding 11 counterclaims compulsory where the nature of the contractual relationship between the parties was 12 central to plaintiff’s claim, noting that plaintiff’s answer in the prior action argued estoppel based 13 on defendant’s prior conduct, which was the same conduct as that upon which the current 14 complaint was based). As such, the Court finds such claims are logically related to Ms. Miller’s 15 state court claims and therefore compulsory as it pertains to Ms. Miller. 16 As to Mr. Miller, the Court disagrees with Defendants’ assertion that Plaintiffs should have 17 filed a cross-complaint against him in the state court action, as he was not a party in the state court 18 case. ECF No. 9 at 7-8. “Section 426.30 requires a defendant in a state court action in California 19 to raise any related causes of action which he has against the plaintiff in that action.” Maldonado 20 v. Harris, 370 F.3d 945, 951 (9th Cir. 2004) (emphasis in original). “Except as between plaintiffs 21 and defendants, there is no compulsory cross-complaint in California procedure. Rather, a cross- 22 complaint is permissive as between co-parties and between parties and nonparties.” Banerian v. 23 O’Malley, 42 Cal. App. 3d 604, 612 (Cal. Ct. App. 1974) (citing Cal. Civ. Code § 426.30). Mr. 24 Miller is not a party in the state court action and thus Plaintiffs were not required to raise these 25 claims there. 26 Even though Plaintiffs’ claims are logically related to Ms. Miller’s claims, the Court finds 27 that Plaintiffs raise a valid argument as to whether the claims pending in this federal case existed 1 in existence at the time of service of the answer (§ 426.30, subd. (a)); otherwise, the failure to 2 assert it in prior litigation is not a bar under the statute.” Heshejin, 54 Cal. App. 5th at 993 3 (quoting Align Tech., 179 Cal. App. 4th at 960). Plaintiffs here allege that they did not find out 4 the factual underpinnings of their fraud and breach of contract claims, namely that the Millers 5 provided fraudulent financial documents to Plaintiffs in the purchase of the salons, until deposing 6 Ms. Miller in the state action two months after filing the state court answer. ECF No. 16 at 11-12. 7 If Plaintiffs’ allegations prove true, Plaintiffs’ causes of actions would not have been in existence 8 at the time of service of the answer in the state action. See New England Country Foods, LLC v. 9 VanLaw Food Prod., Inc., No. SACV2101060DOCADS, 2021 WL 6751898, at *4 (C.D. Cal. 10 Nov. 23, 2021) (finding claim was not compulsory where plaintiff alleged it did not discover the 11 facts underlying the current claims until discovery in the state action); Kuschner v. Nationwide 12 Credit, Inc., 256 F.R.D. 684, 690 (E.D. Cal. 2009) (applying Rule 13(a) and finding counterclaim 13 had not matured at the time the answer was due in the other action where party was not aware of 14 underlying facts and statute of limitations for the particular cause of action did not begin running 15 until discovery). The Millers argue that the events occurred prior to the answer, but a cause of 16 action based on fraud does not accrue under California law until the party discovers the facts 17 constituting the fraud, and the claim for breach of contract is premised on the fraud and Ms. 18 Miller’s failure thereafter to indemnify 77 West. See Krolikowski v. San Diego City Employees’ 19 Ret. Sys., 24 Cal. App. 5th 537, 561 (2018) (“[C]ause of action ‘for relief on the ground of fraud or 20 mistake’ is ‘not deemed to have accrued until the discovery, by the aggrieved party . . . of the facts 21 constituting the fraud or mistake.’”) (quoting Code Civ. Proc. § 338(d)). It would be illogical to 22 determine Plaintiffs’ causes of action existed prior to the statute of limitations beginning to run. 23 V. CONCLUSION 24 For the reasons stated above, the Court DENIES Defendants’ Motion to Dismiss. The 25 Court shall conduct a case management conference on August 31, 2023 at 10:00 a.m. by Zoom 26 video conference. The webinar link and instructions are located at 27 https://cand.uscourts.gov/judges/hixson-thomas-s-tsh/. This conference shall be attended by lead 1 By August 24, 2023, the parties shall file a joint case management statement containing the 2 information in the Standing Order for All Judges in the Northern District of California, available 3 at: http://cand.uscourts.gov/tshorders. The Joint Case Management Statement form may be 4 || obtained at: http://cand.uscourts.gov/civilforms. If the statement is e-filed, no chambers copy is 5 || required. 6 IT IS SO ORDERED. 7 8 Dated: July 27, 2023 9 TAA. |e

THOMAS S. HIXSON

10 United States Magistrate Judge 11

14 Sey

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