Post on 23-Aug-2020
No. 17-15668
UNITED STATES COURT OF APPEALS FOR THE NINTH CIRCUIT
TOTAL RECALL TECHNOLOGIES,
Plaintiff-Appellant
v.
PALMER LUCKEY; OCULUS VR, LLC,
Defendants-Appellees.
Appeal from the United States District Court for the Northern District
of California, No. 3:15-cv-02281-WHA
OPENING BRIEF OF PLAINTIFF-APPELLANT
QUINN EMANUEL URQUHART
& SULLIVAN, LLP
Dated: July 17, 2017
Robert W. Stone
Brian C. Cannon
555 Twin Dolphin Drive, 5th Floor
Redwood City, CA 94065
650.801.5000
briancannon@quinnemanuel.com
Counsel for Total Recall
Technologies
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RULE 26.1 CORPORATE DISCLOSURE STATEMENT
Pursuant to Fed. R. App. P. 26.1, Plaintiff-Appellant Total Recall
Technologies states that it is a general partnership formed under the laws of the
State of Hawaii.
Total Recall Technologies has no parent corporation and there is no publicly
held corporation that owns 10% or more of its stock.
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TABLE OF CONTENTS
Page
PRELIMINARY STATEMENT ............................................................................... 1
JURISDICTIONAL STATEMENT .......................................................................... 3
ISSUES PRESENTED ............................................................................................... 3
STATEMENT OF THE CASE .................................................................................. 4
A. Igra and Seidl’s Formation of Total Recall ........................................... 4
B. Total Recall’s Contract With Palmer Luckey ....................................... 5
C. Luckey’s Breach Of The Agreement .................................................... 6
D. Igra and Seidl’s Agreement To Sue Luckey ......................................... 8
E. The District Court Proceedings ............................................................. 9
SUMMARY OF THE ARGUMENT ...................................................................... 10
STANDARD OF REVIEW ..................................................................................... 12
ARGUMENT ........................................................................................................... 12
I. THE DISTRICT COURT ERRED IN RULING ON SUMMARY
JUDGMENT THAT TOTAL RECALL WAS WITHOUT
AUTHORITY TO FILE THE LAWSUIT .................................................... 12
A. Defendants Lacked Standing To Assert The Veto Rights Of
One Partner To The Partnership Agreement ....................................... 13
1. The District Court Erroneously Allowed Defendants To
Challenge Whether the Underlying Lawsuit Was
Authorized ................................................................................. 13
a. The Only Caselaw On Point Found No Standing In
Similar Circumstances .................................................... 15
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b. The Authority Cited By The District Court Is
Inapposite ........................................................................ 17
B. Even If Defendants Had Standing To Challenge Authority, The
District Court Erred In Concluding That The Lawsuit Was Not
Authorized ........................................................................................... 20
1. Seidl and Igra Agreed In January 2015 To File This
Lawsuit ...................................................................................... 20
2. The District Court’s Reasons For Finding A Lack Of
Agreement Are Not Supported ................................................. 27
II. THE DISTRICT COURT ERRED IN RULING THAT TOTAL
RECALL WAS WITHOUT AUTHORITY TO MAINTAIN THE
LAWSUIT EVEN THOUGH TOTAL RECALL NOW CONSISTS
OF ONE MANAGING AND GENERAL PARTNER WHO HAS
AUTHORIZED THE LAWSUIT .................................................................. 31
A. Total Recall’s Suit Is Fully Authorized And Meets All The
Court’s Concerns About Authorization .............................................. 33
B. The New Structure Renders The District Court’s Requirements
Illogical ................................................................................................ 34
C. To The Extent Necessary, This Lawsuit Is Fully Ratified .................. 35
III. THE DISTRICT COURT ERRED IN DISMISSING TWO OF
TOTAL RECALL’S CLAIMS UNDER RULE 12 ...................................... 37
A. The District Court Erred In Dismissing Total Recall’s Claim
For Conversion .................................................................................... 37
B. The District Court Erred In Dismissing Total Recall’s Claim
For Breach Of The Duty Of Good Faith And Fair Dealing ................ 44
CONCLUSION ........................................................................................................ 47
REQUEST FOR ORAL ARGUMENT ................................................................... 48
STATEMENT OF RELATED CASES ................................................................... 49
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CERTIFICATE OF COMPLIANCE WITH FRAP 32(A)(7)(C) &
CIRCUIT RULE 32-1.................................................................................... 50
CERTIFICATE OF SERVICE ................................................................................ 51
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TABLE OF AUTHORITIES
Cases
Anderson v. Liberty Lobby, Inc.,
477 U.S. 242 (1986) ..................................................................................... 20, 27
Anmaco, Inc. v. Bohlken,
13 Cal. App. 4th 891 (1992) ...............................................................................18
Arizona Students’ Ass’n v. Arizona Bd. of Regents,
824 F.3d 858 (9th Cir. 2016) ..............................................................................12
Ass’n of Apartment Owners of Newtown Meadows v. Venture 15, Inc.,
167 P.3d 225 (Haw. Sup. Ct. 2007) ....................................................................14
Boucher v. Shaw,
572 F.3d 1087 (9th Cir. 2009) ..................................................................... 42, 43
Breslin v. City & Cty. of San Francisco,
146 Cal. App. 4th 1064 (2007) .................................................................... 25, 38
Careau & Co. v. Sec. Pac. Bus. Credit, Inc., 222 Cal. App. 3d 1371 (1990) ..................................................................... 45, 46
Davis v. Apperience Corp., 2014 WL 5528232 (N.D. Cal. Oct. 31, 2014) ....................................................46
Delbon Radiology v. Turlock Diagnostic Center,
839 F. Supp. 1388 (E.D. Cal. 1993) .......................................... 15, 16, 17, 19, 31
Estate of Garcia-Vasquez v. County of San Diego,
No 06-1322, 2008 WL 4183913 (S.D. Cal. Sept. 9, 2008) .................................19
Foley v. Interactive Data Corp., 47 Cal. 3d 654 (1988) ............................................................................ 43, 44, 46
Fresno Motors, LLC v. Mercedes Benz USA, LLC
771 F.3d 1119 (9th Cir. 2014) ............................................................................27
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G.S. Rasmussen & Assoc. v. Kalitta Flying Serv., Inc., 958 F.2d 896 (9th Cir. 1992) ..............................................................................40
Hager v. Gibson,
108 F.3d 35 (4th Cir. 1997) ................................................................................36
Hatchwell v. Blue Shield of Cal., 198 Cal. App. 3d 1027 (1988) ............................................................................14
Lowry v. City of San Diego,
858 F.3d 1248 (9th Cir. 2017) ............................................................................12
Masson v. New Yorker Magazine, Inc., 501 U.S. 496 (1991) ............................................................................................29
Mier v. S. California Ice Co., 56 Cal. App. 512 (Cal. Ct. App. 1922) ...............................................................41
Milne Emps. Ass’n v. Sun Carriers,
960 F.2d 1401 (9th Cir. 1991) ............................................................................45
Pillsbury v. Karmgard,
22 Cal. App. 4th 743 (1994) ...............................................................................17
Puri v. Khalsa,
844 F.3d 1152 (9th Cir. 2017) ............................................................................12
Tolan v. Cotton,
134 S. Ct. 1861 (2014) ........................................................................................29
V&P Trading Co. v. United Charter, LLC,
212 Cal. App. 4th 126 (2012) ...................................................................... 18, 19
Weinberg v. Dayton Storage Co., 50 Cal. App. 2d 750 (1942) ................................................................................41
Wendell v. GlaxoSmithKline LLC,
858 F.3d 1227 (9th Cir. 2017) ............................................................................12
William O. Gilley Enters., Inc. v. Atl. Richfield Co., 588 F.3d 659 (9th Cir. 2009) ..............................................................................37
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Statutory Authorities
28 U.S.C. § 1291 ........................................................................................................ 3
28 U.S.C. § 1332 ........................................................................................................ 3
Cal. Civ. Code § 2310 ..............................................................................................36
Cal. Civ. Proc. Code § 350 ......................................................................................25
Cal. Civ. Proc. Code § 369.5 ...................................................................................19
Haw. Rev. Stat. § 425-120 .......................................................................................31
Haw. Rev. Stat. § 425-130 .......................................................................................32
Haw. Rev. Stat. § 425-139 .......................................................................................35
Haw. Rev. Stat. § 425-140 .......................................................................................35
Rules and Regulations
Fed. R. App. P. 32(a)(7)(C) .....................................................................................50
Fed. R. Civ. P. 12(b)(6) ............................................................................................12
Fed. R. Civ. P. 17(b) ................................................................................................18
Fed. R. Civ. P. 56 ....................................................................................................... 2
Additional Authorities
Alan Bromberg, Enforcement of Partnership Rights – Who Sues For The Partnership?, 70 Neb. L. Rev 1 (1991) ...............................................................19
1 Alan Bromberg & Larry Ribstein, Bromberg & Ribstein on Partnership
§5.03(c) (1st ed. 1991) .........................................................................................31
Prosser, Law of Torts (4th ed. 1971) .......................................................................43
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PRELIMINARY STATEMENT
This case involves an individual, Palmer Luckey, who contracted with a
Hawaii partnership – the plaintiff Total Recall Technologies (“Total Recall”) – to
build a head mounted display for virtual reality according to Total Recall’s
specifications and using Total Recall’s money. Despite his agreement, however,
Luckey—while simultaneously breaching his promise of exclusivity and
defrauding Total Recall—took Total Recall’s head mounted display, passed it off
as his own, and formed a company – Defendant Oculus VR – to commercialize it.
The district court below wrongly dismissed Total Recall’s case against
Luckey and Oculus VR on summary judgment because, according to the district
court, the two partners who comprised Total Recall did not properly agree to
pursue this lawsuit— thus rendering the entire lawsuit unauthorized. The district
court conceded there was no binding law that dictated this result.
The threshold error committed by the district court was allowing the
Defendants to step into the shoes of one partner and assert that partner’s veto rights.
Simply put, there was no standing for Defendants to do so. Any partnership
dispute was a matter for the partners to work out themselves—as they did in a co-
pending Hawaii state court action that is now settled.
Second, even if there was standing for Defendants to assert a lack of
authority based on Total Recall’s partnership agreement to which they were not
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parties, it was error for the district court to conclude that one of the partners
exercised a veto over the lawsuit. In fact, the opposite is true: in the co-pending
Hawaii state court action the allegedly disagreeing partner denied in his Answer
that he exercised any veto, and he never amended that pleading. Moreover, the
allegedly disagreeing partner never intervened in this lawsuit nor did he make any
legal objection to the lawsuit. Nonetheless, the district court, in violation of Fed. R.
Civ. P. 56, drew every inference in favor of the Defendants in finding that the
lawsuit was unauthorized when the facts demonstrate that the partners of Total
Recall agreed in January 2015 to file this suit to preserve the rights of the
partnership, which were violated by Luckey and Oculus.
Third, not only was this lawsuit authorized when it was filed, but that
authority was recently confirmed when, as a result of a court-supervised mediation
in Hawaii, one partner withdrew from the partnership, leaving a single partner who
has submitted declarations confirming his authority and ratification of all prior
partnership actions. Compounding its errors, however, the district court dismissed
the case even in light of these declarations.
As a result of its dismissal, the district court deprived Total Recall and its
partners of any remedy from Defendants—who have made hundreds of millions of
dollars exploiting Total Recall’s vision and equipment. The district court’s rulings
should now be reversed, the claims of conversion and breach of the duty of good
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faith and fair dealing should be reinstated, and the case remanded to address the
merits of Total Recall’s claims.
JURISDICTIONAL STATEMENT
The district court had jurisdiction under 28 U.S.C. § 1332. This Court has
jurisdiction under 28 U.S.C. § 1291. Total Recall filed a timely notice of appeal on
April 7, 2017 (ER1) from the district court’s March 9, 2017 entry of judgment.
ER6.
ISSUES PRESENTED
1. Whether the district court erred in allowing Defendants to assert a
lack of authority and ruling on summary judgment that Total Recall lacked
authority when (a) the Defendants are not parties to the partnership agreement and
(b) the two partners agreed to the action, and (c) the filing was ratified by the
partnership as a whole by the lack of any intervention in the lawsuit by any
potentially disagreeing partner.
2. Whether the district court erred in ruling that Total Recall lacked
authority to maintain the lawsuit after the Hawaii settlement agreement gave all
partnership authority to one partner to pursue the partnership’s interests against
Luckey and Oculus.
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3. Whether the district court erred in dismissing Total Recall’s claims for
(a) breach of the implied covenant of good faith and fair dealing and (b)
conversion.
STATEMENT OF THE CASE
A. Igra And Seidl’s Formation of Total Recall
Ron Igra and Thomas Seidl are inventors and entrepreneurs based in Maui,
Hawaii. In 2010, Igra and Seidl began their partnership with the aim of developing
immersive 3D technology for use in virtual reality, including cameras and head
mounted displays. ER226, ¶ 9. Igra and Seidl recognized that as of 2010, there
were no head mounted displays in the market with a price point attractive to
consumers that provided immersive stereoscopic 3D rendering and a wide field of
view such that the user could not see the edges of the screen. ER226, ¶ 10.
On March 28, 2011, Seidl and Igra entered into a written partnership
agreement to form Total Recall Technologies. ER198. In that regard, Igra agreed
to provide at least $19,000 of capital towards the partnership, and the two partners
agreed to share profits and losses. ER155-156, ¶¶ 4, 5.
After formalizing their partnership agreement, on May 27, 2011, Seidl and
Igra together filed a provisional patent application for their inventions, which the
United States Patent & Trademark Office ultimately granted as Patent No.
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9,007,430 (“System and method for creating a navigable three-dimensional virtual
reality environment having ultra-wide field of view”). ER172.
In pursuit of the partnership’s business, Seidl posted in an online forum
looking for someone to build a head mounted display to his specifications. ER162.
Defendant Palmer Luckey responded, stating “I am interested in working with you
to bring a commercial HMD to market.” ER111.
B. Total Recall’s Contract With Palmer Luckey
In early 2011, Seidl requested that Luckey build a prototype to Total
Recall’s specifications with parts paid for by the partnership. ER226, ¶ 14. Seidl
explained to Luckey that with the partnership’s initial payment to Luckey, he
expected exclusive rights to the design. Id. Luckey confirmed they were on the
“same page.” ER227, ¶ 15. Thereafter, Igra transferred money via PayPal to
Luckey for the parts for the Head Mounted Display. Id., ¶ 16.
Ron Igra requested that Seidl enter a contract with Luckey, “which would
give [Total Recall] exclusive rights to the design.” ER186. To that end, Seidl sent
a “Nondisclosure, exclusivity and payments agreement” to Luckey, which Luckey
executed on August 1, 2011 (the “Exclusivity Agreement”). The Exclusivity
Agreement required, among other things, that Luckey “keep all details including
drawings and part suppliers of the Head Mounted Display confidential and shall
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not aid any other person or entity in the design of a Head Mounted Display other
than the disclosing party.” ER204, ¶ 9.
On August 23, 2011, Luckey shipped a Head Mounted Display to Seidl
pursuant to the Exclusivity Agreement. ER228, ¶ 20. That model was later
returned to Luckey for further improvement. Id.
C. Luckey’s Breach Of The Agreement
Despite his promise of confidentiality and design exclusivity, Luckey
breached his contract and pursued the development of Total Recall’s head mounted
display designs as his own. ER228, ¶ 20. To that end, in April 2012, Luckey
registered the domain name oculusvr.com, and posted that he was developing a
head mounted display that he dubbed the “Oculus Rift,” which offered immersive
stereoscopic 3D rendering and a wide field of view all at a consumer price point—
the exact same characteristics as Total Recall’s specifications. Id., ¶¶ 23, 24.
Luckey made similar posts on an online forum that ultimately came to the attention
of noted videogame developer, John Carmack of ZeniMax. Id., ¶¶ 25, 26.
On May 17, 2012, in violation of the Exclusivity Agreement, and without
Total Recall’s knowledge or permission, Luckey provided the Oculus Rift head
mounted display to Carmack. Id., ¶ 26. At the June 5-7, 2012 Electronic
Entertainment Expo (“E3”) held in Los Angeles, California, Carmack used the Rift
to showcase a specially configured version of ZeniMax’s award winning
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videogame Doom 3. ER230, ¶ 30. Thereafter, on June 12, 2012, in another breach
of the Exclusivity Agreement with Total Recall, Luckey formed Oculus LLC to
commercialize the Rift. Id., ¶ 31.
Total Recall first became aware of Luckey’s possible breach of contract
shortly after Oculus’ Kickstarter campaign raised approximately $2.4 million
(ER0243, ¶ 35) in September 2012. ER187-188; ER199. When confronted by
Seidl about his breach in September 2012, Luckey acknowledged his obligations
under the Exclusivity Agreement but denied that he was in breach, falsely claiming:
“I should not be in breach of contract, I kept all details … of my HMD [head
mounted display] designs to myself until mid-July, which is also when I filed my
LLC. The exclusivity only lasted until July 1st I was free to design something for
myself after that exclusivity ended.” ER99; ER230,¶ 34. Seidl disagreed:
Following the letter of the contract, it was not just an
NDA but also prevented you from working on another
HMD and I know starting a company, producing a
prototype and getting a feature at E3 in June can’t mean
you started later than July 1st unless time travel is another
project you looking to fund soon on kickstarter….
Also don’t forget the first HMD you sent me did use a
single same panel and optics looked very similar to the
one I see around. Me pushing you to do wide FOV from
day one surely got you inspired on that design.
ER98. Seidl informed Igra of this confrontation. ER188.
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Seidl confronted Luckey again in December 2012: “Look cmon lets cut the
BS. Though you formed Oculus a few days after the contract ended, putting the
team together shooting the video for it, etc. etc. All happened when the contract
was happening.” ER87. At this point, Seidl believed he could have sued Luckey
“very easily.” ER202.
D. Igra And Seidl’s Agreement To Sue Luckey
In 2013 and 2014, Igra and Seidl discussed how to approach Luckey to
remedy his breach of the Exclusivity Agreement. Luckey offered to help Seidl
demonstrate Total Recall’s 3D immersive technology at the 2013 Consumer
Electronics Show (“CES”) in Las Vegas. ER91; ER202. That demonstration did
not ultimately take place. ER201. Later, in 2013, Luckey suggested that he might
help Seidl with a Kickstarter video to promote Total Recall’s 360 3D camera.
ER94. Igra believed that Luckey was stringing Total Recall along and that
“[Luckey] didn’t really have any intention of investing in a 3D 360 camera.”
ER191.
After Seidl indicated he might not cooperate with a lawsuit against Luckey
or Oculus, Igra filed suit against Seidl in the Second Circuit Court of the State of
Hawaii on December 5, 2014, No. 14-1-0699(2) (the “Hawaii Action”). ER141.
Igra alleged in paragraph 31 of his complaint that “SEIDL asserted his right to
‘veto’ any legal action by the Partnership to pursue claims against Luckey” and
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alleged in paragraph 37 of his complaint that “SEIDL has and continues to refuse
to authorize IGRA, or any other person or entity, to pursue the Partnership’s legal
claims.” ER145-146, ¶¶ 31, 37. In his Hawaii Answer, Seidl specifically denied
exercising a veto over any lawsuit against Luckey. ER132. Shortly thereafter, in
January 2015, Igra and Seidl reached agreement about their strategy to approach
Luckey, and then to file a lawsuit in order to preserve Total Recall’s rights. ER206;
ER127.
E. The District Court Proceedings
On May 20, 2015, Total Recall filed suit against Palmer Luckey and Oculus
VR, asserting inter alia, claims for breach of contract, breach of the duty of good
faith and fair dealing, and conversion. ER271 at Dkt. 1.
On January 16, 2016, on Defendants’ Rule 12 motion, the district court
dismissed (1) Total Recall’s claims for conversion with respect to the head
mounted display that Luckey kept from Total Recall, and (2) Total Recall’s claim
that Luckey breached the duty of good faith and fair dealing inherent in every
contract. ER31.
On June 16, 2016, the district court ruled on summary judgment that the
partners Seidl and Igra did not agree to the original filing of the lawsuit and
therefore the suit was unauthorized. ER29. The district court rejected Total
Recall’s argument that the Defendants did not have standing to insert themselves
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into an alleged intra-partnership dispute and that any veto rights over the lawsuit
belonged to the partners, not the Defendants. The district court stayed the lawsuit
for six months to give counsel time to cure what the district court termed “the
authorization problem.” ER29.
On October 24, 2016, Igra and Seidl settled their Hawaii state court action
with Seidl withdrawing from the partnership, declaring that all contract rights
remain with Total Recall, and confirming that he has no individual rights in the
case against Luckey and Oculus. ER49.
Despite Igra and Seidl’s settlement, on March 9, 2017, the district court
denied Total Recall’s motion to lift the stay. ER7.
SUMMARY OF THE ARGUMENT
Under the terms of their partnership agreement, Igra and Seidl agreed that
each partner would have the right to veto certain partnership actions. Relying on
this provision, the district court made a series of errors which led to the dismissal
of the lawsuit below.
1. The district court erroneously concluded that the Defendants had
standing to assert that this lawsuit was not authorized. As a result, the district court
permitted Luckey and Oculus — strangers to the contract between Igra and
Seidl — essentially to exercise Seidl’s right to veto partnership action. That right,
which Seidl did not exercise, belonged only to the partners. Whether that veto was
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exercised, what it means, and how it may be rescinded, ratified, breached or
waived was solely a matter of internal governance of the partnership. Defendants,
as third parties to the partnership agreement, had no enforceable “veto” rights.
2. The district court compounded its legal error by wrongly concluding
that Seidl had not authorized this lawsuit to proceed despite: (1) evidence of the
partners’ agreement in January 2015 to file the underlying lawsuit so as to avoid
any statute of limitations issues, (2) no record evidence that the partners had
unanimously agreed to undo that agreement, (3) the undisputed fact that Seidl
failed to intervene in this lawsuit, and (4) Seidl’s unequivocal denial in the Hawaii
Action that he exercised any veto right. Here, the evidence of agreement to pursue
this lawsuit was overwhelming, and the district court’s failure to view that
evidence in the light most favorable to Total Recall, the non-moving party, was
error.
3. Before dismissing the entire action for lack of authority, the district
court erred under Rule 12 in narrowing Total Recall’s case by dismissing the
claims for conversion and breach of the duty of good faith and fair dealing. Total
Recall fully set forth each of the elements for these torts. The district court erred in
mandating elements that exceed what is required to prove the claims.
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STANDARD OF REVIEW
A district court’s grant of summary judgment is reviewed de novo. Wendell
v. GlaxoSmithKline LLC, 858 F.3d 1227, 1231 (9th Cir. 2017). In evaluating the
motion for summary judgment, the court “must determine whether taking the
evidence and all reasonable inferences drawn therefrom in the light most favorable
to the non-moving party, there are no genuine issues of material fact.” Lowry v.
City of San Diego, 858 F.3d 1248, 1254 (9th Cir. 2017) (internal quotation marks
and citation omitted).
A district court’s dismissal under Federal Rule of Civil Procedure 12(b)(6) is
reviewed de novo. In evaluating the motion to dismiss, the court must accept the
plaintiff’s factual allegations as true, Puri v. Khalsa, 844 F.3d 1152, 1155 (9th Cir.
2017), and “construe all inferences in the plaintiff’s favor,” Arizona Students’
Ass’n v. Arizona Bd. of Regents, 824 F.3d 858, 864 (9th Cir. 2016).
ARGUMENT
I. THE DISTRICT COURT ERRED IN RULING ON SUMMARY
JUDGMENT THAT TOTAL RECALL WAS WITHOUT
AUTHORITY TO FILE THE LAWSUIT
Under the terms of their partnership agreement, Igra and Seidl agreed that
each partner would have the right to veto certain partnership actions. In particular,
the partners agreed:
Thomas Seidl and Ron Igra has the right to Vito [sic]. This means that for
any decision regarding the company Ron Igra and Thomas Seidl have to
agree on any action with the exception of an event laid out in point 20.
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ER160, ¶ 19.1 Defendants relied on this provision of the agreement between Igra
and Seidl to argue that Total Recall’s lawsuit was unauthorized. The district court
erred in agreeing with Defendants.
A. Defendants Lacked Standing To Assert The Veto Rights Of One
Partner To The Partnership Agreement
1. The District Court Erroneously Allowed Defendants To
Challenge Whether The Underlying Lawsuit Was
Authorized
Although acknowledging that “[n]o decision from our court of appeals or
any California appellate court has directly addressed” the issue of whether a
defendant has standing to rely upon lack of authority as a defense, the district court
held that a partnership must have “one authoritative voice” and that the alleged
lack of internal agreement between the partners was “fatal” to the lawsuit. ER29.
This was error.
Any right to veto the lawsuit and challenge the authority of Total Recall to
pursue the lawsuit belonged to Igra and Seidl, the contracting parties, not to
Defendants Luckey and Oculus. If, for example, Seidl wanted to exercise a veto
right, he should have done so by intervention in this lawsuit or in a separate action
1 As referenced in the quoted Paragraph 19, Paragraph 20 of the agreement
is a buy-out provision governing what happens in the event of certain sums of
money being offered for a controlling share of the partnership. ER160, ¶ 20.
Paragraph 20 is not at issue in this lawsuit.
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such as the Hawaii Action in which he was represented by counsel. The
Defendants, by contrast, lack standing to assert such a veto.
In Hawaii,2 as in California and elsewhere, “third parties do not have
enforceable contract rights.” Ass’n of Apartment Owners of Newtown Meadows v.
Venture 15, Inc., 167 P.3d 225, 262-63 (Haw. Sup. Ct. 2007) (affirming summary
judgment that third party did not have rights to enforce a contract provision);
Hatchwell v. Blue Shield of Cal., 198 Cal. App. 3d 1027, 1034 (1988) (“Someone
who is not a party to the contract has no standing to enforce the contract or to
recover extra-contract damages for wrongful withholding of benefits to the
contracting party.”).3 Indeed, the district court acknowledged that it could locate
no authority giving Defendants standing to assert lack of authority in these
circumstances. ER26. The lack of case law is telling: it is generally presumed
that third parties do not have the right to step into the shoes of one partner and
assert his or her rights.
2 The district court correctly ruled that Hawaii law governs the partnership
agreement and internal governance, ER25, but that California law governs any
effect of that law on this case, which was filed in the Northern District of
California. Id.
3 “The exception to the general rule involves intended third-party
beneficiaries.” Ass’n of Apartment Owners, 167 P.3d at 262 (quoting Pancakes of
Hawai`i, Inc. v. Pomare Props. Corp., 85 Hawai`i 300, 309 (App. 1997))
(emphasis in original). There is no allegation that Palmer Luckey and Oculus were
ever intended to be a third party beneficiaries of the partnership agreement
between Seidl and Igra.
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a. The Only Caselaw On Point Found No Standing In
Similar Circumstances
The closest case involving an alleged intra-partnership dispute is Delbon
Radiology v. Turlock Diagnostic Center, 839 F. Supp. 1388 (E.D. Cal. 1993).
There, defendants brought a summary judgment motion on the grounds that
plaintiff, one of two general partners, did not have the management authority to
cause the partnership to bring suit under the partnership agreement. Id. at 1391.
Plaintiff challenged defendants’ standing to argue that the lawsuit was
unauthorized. Id. at 1392. The court agreed:
Third-party defendants are naturally concerned with avoiding liability, but
their only properly cognizable concern is avoiding multiple suits on the same
claims. This concern is satisfied if the first suit has preclusive effect.
Consequently there will be little or no justification for recognizing a third-
party defendant’s objection that fewer than all the partners are trying to
enforce the partnership’s claim.
Id. (citing Bromberg & Ribstein, Bromberg and Ribstein on Partnership, § 5.01(d),
at 5:7 (1st ed. 1991)).
The logic in Delbon is compelling and should control here. Defendants’
only cognizable concern is avoiding multiple suits, and here, as in Delbon, that risk
does not exist. First, Total Recall’s lawsuit precludes other suits on the same claim
under the general principle of res judicata. As a result, there is no way for
Defendants to face multiple lawsuits on the same claim because only Total Recall
may pursue that claim. Second, Seidl has withdrawn from the Total Recall
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partnership, sworn that all “rights and interests that relate to the lawsuit” remain
with Total Recall, and confirmed that he has “no individual claims related” to the
lawsuit. ER84.
Despite the parallels between Delbon and the instant action, the district court
failed to follow its logic: that failure was error. First, the district court noted that
the partnership agreement in Delbon did not include a “veto clause” but merely
“provided that each partner had an ‘equal voice’ in the management of the
partnership.” ER27-28. This is a distinction without a difference. For both Total
Recall and the partnership in Delbon, the internal governance obligations required
agreement between the partners. The court in Delbon correctly ruled that the right
to object to a partner’s action belonged only to the disagreeing partner, not to a
third party stranger to the contract. Delbon, 839 F. Supp. at 1392.
Second, the district court attempted to distinguish Delbon by pointing out
that in Delbon there was no risk of multiple lawsuits on the same claim because the
disagreeing partner had released his claims against the defendant. ER28. That
rationale does not hold water because res judicata precludes multiple lawsuits.
Moreover, Seidl has confirmed that he has no individual claims against Defendants
as part of the settlement of the Hawaii Action. ER84. Seidl is no longer a partner
of Total Recall and has no control of this litigation against Defendants. As such,
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Total Recall’s case is on all fours with Delbon, and it was error for the district
court to find otherwise.
b. The Authority Cited By The District Court Is
Inapposite
Although the district court found that there was “no decision” that directly
addressed the issue before it, it relied upon several cases (none of which were cited
by the parties4) to support its conclusion that Defendants could challenge Total
Recall’s authority to bring suit based on an intra-partnership dispute. ER26-27.
All of the cases, however, are inapposite, and, if anything, they demonstrate that
Defendants lacked standing to challenge Total Recall’s authority to bring suit.
For example, in Pillsbury v. Karmgard, 22 Cal. App. 4th 743 (1994), cited at
ER26, a third party (Karmgard) sued a trust administered by Wells Fargo related to
the sale of real property, and the trust prevailed at trial. Wells Fargo, as trustee,
declined to sue the third party for malicious prosecution of the failed lawsuit. The
beneficiary of the trust then sued the third party for maliciously prosecuting the
claim against the trust. The court of appeal ruled that the beneficiary lacked
standing to assert the claim that belonged to the trust and its trustee Wells Fargo.
Id. at 757. The issue in Pillsbury had nothing to do with contractual relations
between partners; instead, it addressed the question of who was the “real party in
4 Compare ER27-28 with Defendants’ briefs, ER285 at Dkt. 135 and
ER286 at Dkt. 158.
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interest” and the question of standing with respect to the specific obligations of a
trustee in situations where it declined to file a lawsuit.
In Anmaco, Inc. v. Bohlken, 13 Cal. App. 4th 891 (1992), cited at ER26, a
50% shareholder of a company sued the other 50% shareholder in the name of the
company. The 50% shareholder defendant — who was also the CEO of the
company — did not consent to be sued by his own company. Id. at 896. The
Anmaco decision supports Total Recall’s position that the partner (or in Anmaco’s
case, the shareholder) was the only entity with the right to challenge authority. In
Anmaco, no third party attempted to step into the shoes of the shareholder
defendant; it was the defendant himself who challenged authority.
In V&P Trading Co. v. United Charter, LLC, 212 Cal. App. 4th 126, 135-36
(2012), cited at ER27, a company failed to pay its taxes, and, by statute, the
California Franchise Tax Board suspended its rights and privileges as a corporation.
Thus, when the suspended corporation filed a lawsuit, the lawsuit was void.
V&P— unlike the present case — concerns “capacity”5 to sue. There, the plaintiff,
5 Although the district court decision is directed to the question of authority,
at various times in its opinion, the court refers to both “authority” and “capacity.”
ER16. The concepts, however, are distinct and should not be conflated. “Capacity”
to sue relates to whether a plaintiff has the power to litigate in a certain court, for
example, the power to bring suit. A minor, for instance, may lack capacity. The
issue of capacity to sue is analyzed under the law of the state in which the case is
pending. Fed. R. Civ. P. 17(b). Here, there is no question that Total Recall has
capacity to sue. It is hornbook law that a partnership may sue or be sued in the
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due to its suspended status, lacked legal capacity to bring a lawsuit. Like the other
inapposite cases cited by the district court, V&P did not involve a third party
challenging authority.
Finally, the district court relied upon Estate of Garcia-Vasquez v. County of
San Diego, No 06-1322, 2008 WL 4183913 (S.D. Cal. Sept. 9, 2008) (ER27),
another case like V&P concerning capacity not authority. In Estate of Garica-
Vasquez, the court confirmed that the plaintiff was not a legal entity with the
capacity to sue. Id.; see also, supra, note 5. This case does not support the district
court’s decision concerning standing; in fact, it does not address standing in any
way.
Accordingly, because Defendants do not have enforceable contract rights
and lack standing under the logic of Delbon — the closest case to the instant
matter— the district court erred in allowing Defendants to challenge Total Recall’s
authority to sue.
name of the partnership. Cal. Civ. Proc. Code § 369.5; see also Alan Bromberg,
Enforcement of Partnership Rights – Who Sues For The Partnership?, 70 Neb. L.
Rev 1, 29 (1991) (“Common name provisions [i.e., statutes authorizing that
partnerships may sue in the partnership name] eliminate any basis for a defendant’s
objection that the plaintiff partnership lacks capacity to sue.”). The district court's
decision, however, was directed to the “authorization problem” (ER29) and the
dismissal was based on Total Recall's alleged failure to cure its “authorization
problem.” ER7.
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B. Even If Defendants Had Standing To Challenge Authority, The
District Court Erred In Concluding That The Lawsuit Was Not
Authorized
Even assuming, arguendo, that the Defendants had standing to challenge
Total Recall’s authority to bring the instant action, the evidence submitted in
opposition to Defendant’s Motion for Summary Judgment demonstrated that Igra
and Seidl agreed to file this lawsuit to protect Total Recall’s rights. At a minimum,
since a district court at summary judgment must view the evidence presented in the
light most favorable to the non-moving party and must draw all reasonable
inferences in its favor, Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255 (1986),
it was error for the district court to conclude that it was “undisputed” that there was
no such agreement. ER16.
1. Seidl And Igra Agreed In January 2015 To File This
Lawsuit
Total Recall first became aware of Luckey’s potential breach of contract
shortly after Oculus’ Kickstarter campaign raised approximately $2.4 million
(ER262-263, ¶ 35) in September 2012. ER187-188; ER199. In that regard, Seidl
confronted Luckey on September 7, 2012, accusing him of breaching the
Exclusivity Agreement by commercializing the Oculus Rift. ER98-99.
After Luckey falsely denied that he worked on the Rift during his period of
exclusivity with Total Recall, the partners of Total Recall had to decide how to
proceed. Admittedly, the Seidl and Igra relationship was not without its ups and
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downs. That discord was reflected in a number of emails — many of them critical
and profanity-laced — as the partners debated how best to confront Luckey in
2013 and 2014 concerning his breach and fraud (a situation made more
complicated by Luckey’s new found celebrity due to his success using Total
Recall’s technology and Oculus’s acquisition by Facebook). The partners’ internal
disputes delayed Total Recall from taking action against Luckey and Oculus.
ER189. In that vein, Igra believed that “Luckey was dragging [Seidl] along just so
that [Total Recall] wouldn’t sue and [Total Recall] would cross the statute of
limitations. . . .” ER191.
In late 2014, with Seidl continuing to express concerns about filing a lawsuit
against Luckey or Oculus, Igra filed suit against Seidl in the Second Circuit Court
of the State of Hawaii on December 5, 2014, No. 14-1-0699(2) (the “Hawaii
Action”). ER141. Igra alleged in paragraph 31 of his complaint that “SEIDL
asserted his right to ‘veto’ any legal action by the Partnership to pursue claims
against Luckey” and alleged in paragraph 37 of his complaint that “SEIDL has and
continues to refuse to authorize IGRA, or any other person or entity, to pursue the
Partnership’s legal claims.” ER146 , ¶¶ 35, 37.
On January 16, 2015, Seidl filed his Answer to Igra’s Complaint in the
Hawaii Action, denying that he had asserted his right to “veto” and denying that
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he refused to “authorize” Igra to pursue claims against Luckey. ER136-137, ¶¶ 20,
25.
The following day, on January 17, 2015 (ER191), Igra and Seidl met and
agreed to the timeline for initiating Total Recall’s lawsuit against Luckey and
Oculus:
Q: You believe that Mr. Seidl agreed that TRT should file the lawsuit when
it did on May 20th, 2015?
A: I do.
Q: What is your basis for believing that?
A: [Seidl] and I had a meeting; we discussed it. I don’t remember exactly the
date, but it was several months before that.
And he said to me – I said to him, look, the statute of limitations on this is
coming up. And he said to me, I need another couple weeks. I’m going to
try to sell this to Facebook. I think I can make – I think they’ll want to buy it
for $600 million, and I need two weeks. Just give me two weeks before your
file.
I said, okay, and we shook hands. I gave him, I think it was, 12 weeks.
He couldn’t – he couldn’t get any offer from Facebook or Oculus or Palmer
Luckey or anything.
ER190.
Examination of the contemporaneous communications between Igra and
Seidl demonstrates their agreement and execution on that agreement— they would
contact Luckey in an effort to make a deal, and they would make sure to file any
lawsuit in time to preserve their rights.
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On January 18, 2015, the day after their meeting, Seidl confirmed that he
would “make a letter that will cover us against [Luckey] to insure we lose no legal
rights on the case.” ER130. On January 19, 2015, Igra also summarized their
“meeting minutes” including that the partners agreed “to give Palmer 2 weeks to
provide us with his highest and best offer” and “if there is no offer from Palmer on
the table we will proceed to file our complaint as soon as possible.” ER129.
Seidl responded later that day confirming that it was imperative that they file
before any statute of limitations ran: “About the 2 weeks, lets see how fast we get
to [Z]uckerberg. If we are having one to one dialogue with Zuckerberg in 3 weeks
of video to palmer. Then we should extend to 6 weeks that gives us enough time
before statute of limitations don’t you think? . . . We can play by ear. But I
assure you. If we get nothing from Palmer prior to the end date to file. I will
file. I cant believe that you think I am that stupid.” ER128 (emphasis added).
Igra responded clarifying that the partners “agreed to wait 2 weeks for a
response and there will be no extensions unless there is an offer or a very positive
sign of getting one.” ER128. Seidl confirmed his agreement to the 2 week time
period that same day stating: “Happy with that. If no positive signs in 2 weeks of
contacting him.” ER127 (emphasis added). This agreement between the partners
was never mutually rescinded. ER206. Thereafter, the parties reached out to
Luckey as they had agreed.
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Igra contacted Luckey first, by telephone, on February 11, 2015, and they
had a two-hour conversation. ER192. Seidl contacted Luckey next on February 24,
2015, by sending a letter (and copying Igra), stating that his “company would like
to demonstrate the footage and system to you and your company and you have
expressed an interest in the past in seeing the system and the images that it is
capable of capturing for later display.” ER125. Seidl further requested that
Luckey acknowledge certain conditions before such a demonstration could take
place:
First, I and my company have and continue to reserve all
rights that I and it have concerning claims arising from
the breach of your agreement with me dated [August 1,
2011]. While I do not expect you to agree that a breach
occurred, I and my company do expect you and your
company to agree that should I and my company can
meet with you about the camera system, such meeting
will be without waiver of any rights and claims that I
and it have against you and/or your company, all of
which rights and claims are being reserved.
Id. (emphasis added). Seidl asked Luckey to sign and return the letter agreeing to
its terms. Id. Luckey replied on February 25, 2015 stating that he could not “sign
that document” and instead sent Seidl and Igra “the standard Oculus VR NDA.”
ER117.
On February 27, 2015, Igra replied (copying Seidl) that before Total Recall
would sign the Oculus NDA, “we need you [Luckey] to sign the attached letter as
well before the demo can be presented.” ER114. That letter asked that Luckey
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“countersign below confirming that neither the NDA nor the proposed
demonstration waives or limits Total Recall, Ron Igra, and/or Thomas Seidl’s
rights to make any claim against you or any other party, expressly including but
not limited to, any claims Total Recall may have for breach of the agreement you
entered into with the Partnership.” ER115.
On March 9, 2015, Luckey replied that “[t]he NDA I sent over should be
clear cut. I cannot sign any other amending agreements outside of it.” ER112.
Subsequently, as the Court correctly concluded, neither Luckey nor Oculus made
any proposal (or even effort) to resolve their dispute with Total Recall. ER22.
(“On March 9, Luckey refused. No further communication about the
demonstration occurred before Igra commenced this action in TRT’s name.”)
(internal cites omitted). Given Luckey’s refusal to acknowledge Total Recall’s
rights, and since much more than two weeks had passed since the partners’ January
2015 agreement, Total Recall filed suit against Luckey and Oculus on May 20,
2015. ER274.6
In his Answer filed in the Hawaii Action, Seidl denied that he vetoed this
lawsuit against Luckey and Oculus, and following his Answer, the record before
6 Any statutes of limitation were tolled when Total Recall filed this case on
May 20, 2015. See Cal. Civ. Proc. Code § 350; Breslin v. City & Cty. of San
Francisco, 146 Cal. App. 4th 1064, 1082 n.18 (2007) (“An action is commenced
for statute of limitations purposes when a complaint is filed.”).
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the district court demonstrated that he exercised no such veto. ER206. Seidl never
amended his Answer nor did he file any counterclaims against Igra in the Hawaii
Action seeking to enjoin Total Recall’s lawsuit or otherwise. ER132. Nor did
Seidl seek to intervene in this lawsuit.
In sum, when viewed in the light most favorable to the non-moving party,
the evidence demonstrated that: (1) Seidl denied in the Hawaii Action that he had
ever vetoed any action against Luckey and Oculus, (2) Igra and Seidl agreed in
January 2015 to file this lawsuit so as to avoid any statute of limitations issues, (3)
the partners never agreed to rescind that agreement, (4) Seidl asserted no veto after
the January 2015 agreement, (5) Luckey and Oculus failed to reach any resolution
with Total Recall before the lawsuit was filed, (6) Seidl never intervened in this
lawsuit, and (7) Seidl never sought to amend his Answer nor did he counterclaim
for any relief in the Hawaii Action. The evidence submitted in opposition to
Defendants’ Motion for Summary Judgment demonstrated conclusively that the
parties agreed to pursue this lawsuit to protect Total Recall’s rights and that Seidl
took no steps to stop the lawsuit. If Seidl had wanted to stop the lawsuit, it was his
burden to do so— but he did nothing.7 Accordingly, based on the foregoing, the
district court should have denied Defendants’ Motion for Summary Judgment.
7 As discussed further in Section II.C., infra, under well-settled law, Seidl’s
inaction amounts to ratification of the actions of the partnership.
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2. The District Court’s Reasons For Finding A Lack Of
Agreement Are Not Supported
Despite substantial and compelling evidence of Igra and Seidl’s January
2015 agreement that Total Recall would pursue this lawsuit to preserve its claims,
the district court found that it was “undisputed” that there was no such agreement.
This conclusion was error.
The district court’s finding demonstrates that it did not view the evidence
presented in the light most favorable to the opposing party as is required by
controlling Supreme Court and Ninth Circuit authority. As has long been the law,
“[t]he evidence of the non-movant is to be believed, and all justifiable inferences
are to be drawn in his favor.” Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255
(1986). And even when the basic facts are undisputed, if reasonable minds could
differ on the inferences to be drawn from those facts, summary judgment should be
denied. Fresno Motors, LLC v. Mercedes Benz USA, LLC, 771 F.3d 1119, 1125
(9th Cir. 2014) (summary judgment improper “where divergent ultimate inferences
may reasonably be drawn from the undisputed facts”).
Instead, contrary to law, the district court drew inference after inference in
favor of Defendants — the moving parties. The record is replete with examples.
For instance, the district court appears to have ignored Seidl’s Answer in the
Hawaii Action where he expressly denied exercising a veto over the lawsuit
against Luckey and Oculus, and Igra’s declaration in which he claimed that Seidl
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asserted no veto after the date of his Answer. ER205. Seidl’s Answer (and his
failure to amend same) should have been considered the definitive statement from
Seidl concerning his legal position about this lawsuit.
Similarly, although the district court acknowledged that Igra and Seidl
agreed on a strategy to reach out to Luckey (ER24) the district court found that the
partners’ “email exchange remained subject to certain conditions,” one of which
was that the lawsuit would commence if discussions with Luckey produced “no
positive signs.” Id. According to the district court, there were such “positive signs”
from Luckey, and, therefore, the lawsuit was unauthorized. Id. But the district
court inferred what it believed to be “positive signs” when in fact Luckey refused
to acknowledge Total Recall’s potential claims, rejected the partners’ proposed
non-disclosure agreement and reservation of rights, and neither Luckey nor Oculus
made any efforts to resolve their dispute with Total Recall before this lawsuit was
initiated.
A reasonable juror could just as easily infer that Luckey was continuing his
strategy of stringing Total Recall along until any statute of limitations expired. In
this vein, the district court appears to have all but ignored Seidl’s email
admonishing Igra that “[i]f we getting nothing from Palmer prior to the end date to
file. I will file. I cant believe you think I am that stupid.” ER128 (emphasis
added).
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A reasonable inference from this exchange is that Seidl’s ultimate goal —
the meeting of the minds between him and Igra — was that no matter what strategy
steps may be contemplated, the ultimate goal was to avoid losing Total Recall’s
rights. It was error for the district court to draw inferences in Defendants’ favor
and to rule that Seidl’s statements reflected an ongoing objection to the lawsuit and
somehow reflected an agreement to let Total Recall’s rights lapse — the latter
conclusion being completely unsupported by any evidence in the record. Where,
as here, words or conduct may be interpreted in several ways, one supporting the
motion for summary judgment and one controverting it, summary judgment must
be denied. Tolan v. Cotton, 134 S. Ct. 1861, 1866 (2014) (holding that by “failing
to credit evidence that contradicted some of its key factual conclusions, the [lower]
court improperly ‘weigh[ed] the evidence’ and resolved disputed issues in favor of
the moving party . . . .”); Masson v. New Yorker Magazine, Inc., 501 U.S. 496,
520-21 (1991).
The district court once again impermissibly drew inferences in favor of
Defendants when it considered a February 2015 email from Seidl to Igra
suggesting that he delay filing suit in order to give Total Recall more time to make
a deal. ER21. Nothing in this exchange suggested that Seidl was saying that the
lawsuit should not be filed before the possible running of the statute of limitations.
That ultimate deadline and agreement remained in place. There is absolutely no
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evidence that Seidl intended to abandon Total Recall’s claims against Defendants.
And even if the email exchange in February can be construed as an objection to
filing the suit — it was not — the partners’ January 2015 agreement to file suit was
made unanimously and needed to be rescinded unanimously pursuant to the terms
of the partnership agreement.
Finally, the district court relied on the April 5, 2016 deposition testimony of
Seidl, in which Seidl stated that he did not consider Quinn Emanuel, Total Recall’s
attorneys, to be “his” attorneys, (ER198), and that he did not agree that Total
Recall could file the complaint against Luckey. ER154; see ER22. This after-the-
fact deposition testimony, which contradicts the contemporaneous exchanges
between Seidl and Igra, Seidl’s judicial admissions and litigation conduct (or lack
thereof), as well as Igra’s deposition and declaration, occurred more than 11
months after the complaint was filed and is open to interpretation, for example,
Seidl may have been referring to the specific contents of the complaint against
Luckey, not the filing of a complaint to preserve the partnership’s rights. It simply
cannot be disputed that Seidl took no steps prior (or after) the deposition to halt
this lawsuit.8
8 Palmer Luckey attended Seidl’s deposition (ER195) and statements made
after-the-fact ought to be considered in that light.
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When viewed in the light most favorable to Total Recall and where all
reasonable inferences are drawn in its favor— rather than Defendants’— (as they
must be), the district court’s error in finding that it was undisputed as a matter of
law that there was no agreement to file the instant lawsuit is manifest. The district
court erred in not focusing on the parties’ January 2015 agreement; by not
acknowledging that Igra and Seidl unambiguously agreed that a filing was
necessary before any statute of limitations might expire; and by ignoring Seidl’s
failure to intervene in favor of his testimony nearly a year after the fact that
contradicted his contemporaneous statements. Instead, by drawing all inferences
in favor of the moving party, the district court committed error. Accordingly, its
decision should be overturned.
II. THE DISTRICT COURT ERRED IN RULING THAT TOTAL
RECALL WAS WITHOUT AUTHORITY TO MAINTAIN THE
LAWSUIT EVEN THOUGH TOTAL RECALL NOW CONSISTS OF
ONE MANAGING AND GENERAL PARTNER WHO HAS
AUTHORIZED THE LAWSUIT
This lawsuit was authorized when it was first filed — both by agreement of
the partners and because each general partner has the right to enforce contract
rights as “ordinary” matters.9 ER206. As part of its summary judgment order,
however, the district court ordered that Total Recall had six months to cure the
9 See Haw. Rev. Stat. § 425-120; Delbon, 839 F.Supp. at 1392 (citing 1
Alan Bromberg & Larry Ribstein, Bromberg & Ribstein on Partnership §5.03(c) at
5:20-21 (1st ed. 1991)).
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problem of the partnership not speaking with “one authoritative voice” by setting
forth a series of conditions that Total Recall must satisfy. The district court
requested declarations from each of the two Total Recall partners (1) “stating that
both authorize and agree to the maintenance” of this lawsuit, (2) that “both ratify
all actions taken herein so far on behalf of Total Recall” and (3) that “both consent
to continued prosecution of the case by the law firm of Quinn Emanuel,” or a final
order from the Hawaii court to the same effect. ER29-30. As set forth above,
these conditions should not have been imposed on Total Recall. Nonetheless, Igra
and Seidl resolved the Hawaii Action in a way that exceeded the conditions set out
by the district court.
On October 14, 2016, Igra and Seidl engaged in a court-ordered mediation
before Second Circuit (Maui) Judge Rhonda Loo and reached a comprehensive
settlement that divided their partnership assets. Judge Loo’s resolution was a
creative and effective resolution of the issues, and it was error for the district court
below to reject it and insist upon dismissing the Total Recall lawsuit.
In particular, under Judge Loo’s supervision, the parties agreed, inter alia,
that: (1) Seidl withdrew from the partnership pursuant to Haw. Rev. Stat. § 425-
130, effective October 14, 2016 (ER50); (2) all rights or other interests that relate
to the instant lawsuit remained the property of Total Recall, and Igra, through Total
Recall, retained control thereof (ER50-51); (3) Seidl agreed to receive thirty (30)
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percent of any net monetary award, monetary settlement, or other recovery
resulting from this lawsuit, if any (ER51); and (4) Igra agreed to indemnify Seidl
for any fees and costs arising out of this lawsuit (ER53).
Following the settlement, Total Recall submitted declarations to the district
court confirming the settlement, explaining that Igra has complete authority and
control to prosecute this lawsuit, and confirming that Seidl has no individual
claims in the case relating to Total Recall’s exclusivity contract with Luckey.
Seidl expressly acknowledged: “I have no right to control any aspect of the
California Lawsuit and no right to veto the California Lawsuit.” ER84.
A. Total Recall’s Suit Is Fully Authorized And Meets All The
Court’s Concerns About Authorization
There can be no dispute that Total Recall is fully authorized to maintain this
lawsuit. There is one managing partner — Ron Igra — and he authorizes the
lawsuit. Seidl has withdrawn and has no veto power. The district court was
simply without legal basis to dismiss the lawsuit after Total Recall reorganized
itself. Thus, even if Defendants had standing to challenge Total Recall’s authority
to file suit, and even if an intra-partnership dispute deprived Total Recall of
authority, there is no longer any impediment to this lawsuit proceeding. Indeed,
the partners’ settlement of the Second Hawaii Action should have eliminated all of
the issues raised by the district court.
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In particular, the district court stated that “the partnership must have one
authoritative voice.” ER29. That is now without question: only Ron Igra speaks
for the partnership. Seidl has confirmed that he has “no individual claims related
to the California Lawsuit and no right to seek judicial supervision or control over
the California Lawsuit.” ER84. Similarly, the district court expressed concern that
“[t]hose outside the partnership have a legitimate need to be able to know who can
act for and bind the partnership” and “a legitimate need to know as well who has
authority to settle a case.” ER26-27. That concern has also been addressed
because only Igra can speak for the partnership regarding this lawsuit.
B. The New Structure Renders The District Court’s Requirements
Illogical
The district court, however, was not satisfied with Total Recall’s state court
supervised reorganization. ER7. The district court dismissed the lawsuit because
Total Recall had not followed the exact conditions set by the district court —
namely, declarations and ratifications from each of the partners. Id. However,
those conditions presumed that the partnership would remain in the same form as
before. Now that Total Recall has a new structure, the district court’s request for
two mirror declarations from Igra and Seidl is neither logical nor appropriate.
Because Seidl is no longer a partner, he cannot authorize the continued
prosecution of this lawsuit. That power belongs to Igra alone, and Igra has
exercised it. The district court’s position dismissing the case is tantamount to a
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claim that it can order Total Recall remain as a two person partnership, thereby
necessitating declarations from both partners.
There is no such law: Hawaii partnership law explicitly allows the sole
remaining partner to continue the partnership in order to wind up the business. See
Haw. Rev. Stat. §§ 425-139, 425-140. Ron Igra, the sole remaining partner, has
fully authorized Total Recall to prosecute this lawsuit, has agreed to the
maintenance of the action, has agreed to Quinn Emanuel serving as counsel, and
has ratified all actions of the partnership regarding this lawsuit. ER82, ¶¶ 5-8.
Seidl, for his part as the withdrawn partner, confirms that he has no control over
the lawsuit, no right to veto, no individual claims related to the lawsuit, and
understands that Igra intends to continue to pursue the lawsuit through Total Recall.
ER84. There can be no question that this lawsuit is therefore fully authorized—
exactly the subject of the original summary judgment motion.
C. To The Extent Necessary, This Lawsuit Is Fully Ratified
To the extent that the district court dismissed the case because Seidl failed to
ratify the lawsuit by declaration following settlement, that decision also constituted
error. ER12. As a threshold matter, Total Recall and its sole remaining partner
have ratified the case and — through agreement with the former partner — taken
on full responsibility for all aspects of this lawsuit. For all practical purposes, that
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ratification establishes that the plaintiff has authority to prosecute this action, the
only respect in which ratification would be germane to this case.
“Ratification” is not something Defendants have prayed for or otherwise
sought. Put differently, no case law or other legal authority has been cited that
would give Defendants or the court a right to ratification from a former partner,
particularly where the remaining partner has expressly authorized and ratified the
prosecution of the action.
The foregoing is sufficient to resolve the “ratification” issue such that the
Court need not decide whether Seidl’s conduct during the pendency of this case
amounted to ratification. However, should that be considered, the record is
unambiguous: with full knowledge of the existence of the lawsuit, Seidl took no
action to stop it. That is classic ratification and under principles of ratification, he
is bound by this case. See, e.g., Hager v. Gibson, 108 F.3d 35 (4th Cir. 1997)
(failure of non-consenting shareholder properly to object or otherwise intervene in
proceedings results in ratification of proceedings); Cal. Civ. Code § 2310 (“A
ratification can be made . . . by accepting or retaining the benefit of the act, with
notice thereof.”).
Ratification is a different issue from authority as the case law establishes.
Here, there can be no question that Seidl had notice of the lawsuit and that he never
intervened in this case, nor filed any motion in Hawaii to stop this action, nor any
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counterclaims. See ER80. Accordingly, this lawsuit was properly filed at the
outset, and continued to be properly filed after Seidl withdrew as a partner. By
dismissing Total Recall’s case even in light of the reorganization, the district court
deprived both Total Recall and its remaining partner Ron Igra of their day in court
to prove Luckey’s and Oculus’ breach and liability.
III. THE DISTRICT COURT ERRED IN DISMISSING TWO OF TOTAL
RECALL’S CLAIMS UNDER RULE 12
Before dismissing the entire action for lack of authority, the district court
erred under Rule 12 in narrowing Total Recall’s case by dismissing the claims that
(1) Luckey committed conversion with respect to Total Recall’s Head Mounted
Display and (2) Luckey breached the implied duty of good faith and fair dealing.
See ER40-41, ER43. At the pleading stage, plaintiff’s allegations must be accepted
as true, William O. Gilley Enters., Inc. v. Atl. Richfield Co., 588 F.3d 659, 662 (9th
Cir. 2009), —and in this case Total Recall more than made out a claim for
conversion and a breach of the covenant of good faith and fair dealing.
A. The District Court Erred In Dismissing Total Recall’s Claim For
Conversion
Total Recall’s conversion claim is based upon Palmer Luckey’s misuse of
tangible personal property — the Head Mounted Display that belonged to Total
Recall, which Luckey renamed the Rift and sent to third party videogame
developer, John Carmack. The district court erred in requiring as an element of
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conversion that Total Recall formally demand the return of its head mounted
display. ER43. Such a formality is not an element of the tort, and the district court
did not cite any case law supporting its requirement. It is inconsistent with the tort
to place a burden on the party dispossessed of its property to—in all instances—
take a futile step to demand return of its property when that property has already
been misused.
Total Recall’s First Amended Complaint (ER236) and Proposed Second
Amended Complaint (ER207)10 alleged that on “August 23, 2011, Luckey shipped
a Head Mounted Display to Seidl pursuant to the Agreement.” ER211, ¶ 20. “The
Head Mounted Display was later returned to Luckey for further improvement” but
“was never returned to the Partnership.” Id. Furthermore, Total Recall alleged
that “Luckey passed off the Head Mounted Display as his own” and “Luckey
called the Partnership’s Head Mounted Display the Oculus Rift.” Id., ¶ 22. As
10 Defendants filed a Rule 12 motion to dismiss the First Amended
Complaint, including the claims for conversion and breach of the implied duty of
good faith and fair dealing. ER278, Dkt. 48. After Total Recall filed a motion
seeking relief from Defendants' discovery abuses, the district court held in
abeyance the motion to dismiss. ER279, Dkt. 60. Based upon initial discovery
then provided by Defendants, Total Recall moved to add additional details in a
second amended complaint. Id., Dkt. 69. The district court disposed of the motion
to dismiss and motion to amend in a single order. ER31. The claims for
conversion and breach of the duty of good faith and fair dealing were properly pled
in both the First Amended Complaint (ER236) and the proposed Second Amended
Complaint. ER224.
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alleged, in violation of the Exclusivity Agreement, on May 17, 2012, Luckey
proceeded to send the Rift to videogame developer John Carmack of ZeniMax.
ER213, ¶ 28. As set forth in Total Recall’s proposed Second Amended Complaint,
even though Luckey had already sent the Rift to the John Carmack and begun the
process of forming his own company, “[o]n May 21, 2012, Luckey told Seidl that
he was ‘going to open-source’ the Rift design because ‘[a] few VR nerds want to
make it their own’ and it ‘seem[ed] like good karma points.” ER213, ¶ 31. There
was no “open source” and no “VR nerds” — Luckey was taking the Head Mounted
Display and converting it for his own purposes to coopt an opportunity that should
have been Total Recall’s.
In June 2012, Luckey and others — still within the one year period of
exclusivity — formed Oculus VR in order to commercialize the Rift. ER214, ¶¶
35-36. Thereafter, “[i]n September 2012, Seidl wrote to Luckey claiming that
Luckey was in breach of the parties’ Agreement.” Id., ¶ 38. Accordingly, Total
Recall set forth a claim for conversion as against all Defendants. ER216-217, ¶¶
49-54. Total Recall alleged that Defendants knowingly converted to Defendants’
own use the tangible property owned by Total Recall, namely “at least one
prototype virtual reality Head Mounted Display (and associated components and
materials) built for and in conjunction with TRT.” ER216, ¶ 50. It was error for
the district court to dismiss this claim under Rule 12(b)(6).
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This Court has set forth the elements for conversion: Total Recall must
allege that (1) it owned or had a right to possess a specific item of property; (2)
Defendants wrongfully dispossessed Total Recall of that property; and (3) Total
Recall was damaged as a result. G.S. Rasmussen & Assoc. v. Kalitta Flying Serv.,
Inc., 958 F.2d 896, 906 (9th Cir. 1992). Total Recall has met each of those
elements in its pleading: First, Total Recall owned the Head Mounted Display; it
was built with its money to its specifications. Second, Luckey wrongfully
dispossessed Total Recall of its HMD by claiming it as his own, lying to Seidl by
saying he wanted to open source the design for “VR nerds” and secretly sending
the HMD to a videogame developer and allowing him to present it at a trade
show—all of which led to the formation of Oculus VR to commercialize the Rift.
Third, Total Recall was damaged (ER217) both by the loss of its physical property
and the loss of opportunity the property represented; the Head Mounted Display
was worth more than the sum of its parts — it was the right device at the right time
and the result of Total Recall’s vision that the world was ready for virtual reality.
The district court, however, dismissed Total Recall’s conversion claim
pursuant to Defendants’ Rule 12 motion. ER43. This was error. The district court
conceded that “[a] ‘request for return’ is not an element of a conversion claim” (id.)
yet nevertheless ruled that the lack of such a request “is fatal to Total Recall’s
claim here, inasmuch as it defeats the second element — wrongful dispossession.”
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Id. Thus, the district court has inserted into the tort of conversion an additional
element that wrongful possession requires a formal request for return of property,
even if futile. This is error for several reasons.
First, the tort simply does not place a burden on the aggrieved party to
formally request the return of the property. The Head Mounted Display was
misused — Luckey knew it was misused and that he was dispossessing Total
Recall because he lied about open sourcing the design when in fact he was sending
it to a videogame developer and forming his own company to commercialize it.
The focus of the tort is on the wrongful behavior of the defendant — not on any
formal steps the plaintiff must conduct.11
It may be that Defendants could argue on the merits that the lack of a formal
request for return of property demonstrates that the possession was not wrongful or
11 “The rule is that, where there has been an actual conversion, a demand
upon the defendant before the institution of the action of trover is not necessary.
For, since demand and refusal do not of themselves constitute conversion, but are
only evidence from which conversion in certain cases may be found (Steele v.
Mariscano, 102 Cal. 666 (1894)), the conversion may be established by proof of
other acts on the part of the defendant, such, for instance, as selling and delivering
the property to some third person in defiance of the rights of the true owner.” Mier
v. S. California Ice Co., 56 Cal. App. 512, 518 (Cal. Ct. App. 1922). “It is well-
settled in this state that there is no necessity for a demand where the acts of the
defendant in relation to the property show a conversion, or where, under the facts,
a demand would be futile. . . . Each case must turn upon its own facts.” Weinberg v.
Dayton Storage Co., 50 Cal. App. 2d 750, 757–58 (1942) (collecting authority).
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that there was some form of consent, but that is a question for the fact finder to
decide. Indeed, factual disputes are “not properly resolved on a motion to dismiss.”
Boucher v. Shaw, 572 F.3d 1087, 1092 (9th Cir. 2009). A request to return is not
an element of the tort, nor should it be.
Second, the facts of this case underscore that a formal request should not be
part of the tort. Here, a formal request would have been futile — by the time Total
Recall realized that the Head Mounted Display had been misused it had already
been shipped to Carmack and presented at the trade show as belonging to Palmer
Luckey. The property was gone — in one sense, consumed like a bottle of wine or
cashed in like a lottery ticket. The timing was critical: Total Recall saw the
market opportunity, knew what could be built using off the shelf components, and
funded the Head Mounted Display. When Palmer Luckey took Total Recall’s
Head Mounted Display and used it for his own purposes, he misused that property
and converted it for himself. This case ought to represent the prototypical case for
conversion.
The district court did not cite any case law for its conclusion that the tort
requires a formal request for return. ER43. However, in support of its conclusion,
the district court pointed to a clause in Paragraph 3 the Exclusivity Agreement that,
according to the district court in selective quotation, provided that “Seidl’s
agreement Luckey only entitled him to the return of ‘tangible items in [Luckey’s]
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possession . . . if Disclosing Party requests it in writing.” Id. It was error for the
district court to point to the parties’ contract as proof that conversion requires a
formal request for return. As a threshold matter, the portion of the contract cited
by the district court has to do with “Confidential Information” and the request is
only for material related to Confidential Information as the full quote provides:
Receiving Party shall return to Disclosing Party any and all records, notes,
and other written, printed, or tangible materials in its possession pertaining
to Confidential Information immediately if Disclosing Party requests it in
writing.
ER203, ¶ 3 The provision simply has nothing to do with the conversion of
personal property. The provision does not provide that a party can misuse or
convert personal property as long as the aggrieved party does not ask for it back in
writing. The opposite is true: the provision is a protection governing confidential
information and obligates a return of confidential information should one party
request.
Not only is the contract clause governing confidential information inapposite
for conversion, but the obligation is contractual in nature. Conversion is a tort.
California distinguishes the two: “Whereas contract actions are created to enforce
the intentions of the parties to the agreement, tort law is primarily designed to
vindicate ‘social policy.’” Foley v. Interactive Data Corp., 47 Cal. 3d 654, 683
(1988) (quoting (Prosser, Law of Torts (4th ed. 1971) p. 613.)). Thus, Total Recall
has properly pled that Luckey committed the tort of conversion by wrongfully
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misusing and converting Total Recall’s Head Mounted Display for his own
purposes and thereby damaging Total Recall.
B. The District Court Erred In Dismissing Total Recall’s Claim For
Breach Of The Duty Of Good Faith And Fair Dealing
In its First Amended Complaint (ER236) and proposed Second Amended
Complaint (ER207) Total Recall alleged a breach of the duty of good faith and fair
dealing. ER244, ¶¶ 42-44; ER216, ¶¶ 46-48. Total Recall alleged this claim in
addition to a claim for breach of contract. The district court, however, dismissed
this claim as “duplicative of” and “subsumed into” the claim for breach of contract.
ER40-41.
The district court erred because the duty of good faith and fair dealing exists
as a separate cause of action. In a case involving both contract breach and breach
of the duty of good faith and fair dealing, the California Supreme Court recognized:
“Every contract imposes upon each party a duty of good faith and fair dealing in its
performance and its enforcement.” Foley, 47 Cal. 3d at 683 (quoting (Rest. 2d
Contracts, § 205)). The covenant acts as a sort of “safety valve” and “[t]he precise
nature and extent of the duty imposed by such an implied promise will depend on
the contractual purposes.” Foley, 47 Cal. 3d at 684 (citation omitted).
A claim for breach of the implied covenant is “based on the existence of an
underlying contractual relationship, and the essence of the covenant is that neither
party to the contract will do anything which would deprive the other of the benefits
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of the contract.” Milne Emps. Ass’n v. Sun Carriers, 960 F.2d 1401, 1411 (9th Cir.
1991). Here, the express terms of the Exclusivity Agreement required that Luckey
refrain from disclosing any details concerning Total Recall’s Head Mounted
Display and refrain from aiding anyone other than Total Recall in designing a head
mounted display. ER239-240, ¶ 19. Total Recall alleges that Luckey breached the
implied duty of good faith and fair dealing by intentionally frustrating those two
purposes of the Agreement. ER244, ¶ 43.
The claim is not superfluous to the contract claims. The breach of contract
claim is, of course, based on breach of a specific contractual obligation. By
contrast, in support of the implied covenant claim, the First Amended Complaint
(and proposed Second Amended Complaint) alleges that Luckey refused to
discharge contractual responsibilities—not by honest mistake, but by deliberate
act. Whether or not Luckey also breached the contract, his refusal to comply
disappointed Total Recall’s reasonable expectations under the Agreement and
deprived Total Recall of the benefits of the Agreement.
This distinction was drawn in Careau & Co. v. Sec. Pac. Bus. Credit, Inc.,
222 Cal. App. 3d 1371, 1394-95 (1990). There, the Court found that a claim for
breach of implied covenant is not duplicative of a contract claim when the
complaint alleges that:
the conduct of the defendant, whether or not it also constitutes a breach of a
consensual contract term, demonstrates a failure or refusal to discharge
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contractual responsibilities, prompted not by an honest mistake, bad
judgment or negligence but rather by a conscious and deliberate act, which
unfairly frustrates the agreed common purposes and disappoints the
reasonable expectations of the other party thereby depriving that party of the
benefits of the agreement.
Id. at 1395. Another case reiterated that distinction in Davis v. Apperience Corp.,
2014 WL 5528232 (N.D. Cal. Oct. 31, 2014), stating that “the allegations in a
breach of implied covenant claim” must “go beyond the statement of a mere
contract breach.” Id. at *6 (quoting Careau, 222 Cal. App. 3d at 1395).
The First Amended Complaint and Proposed Second Amended Complaint
go beyond the contract claim and allege that Luckey frustrated the purpose of the
Agreement by falsely promising to “discharge [his] contractual” responsibilities.
Careau, 222 Cal. App. 3d at 1395. This includes, for instance, “refrain[ing] from
aiding any other person or entity in the design of a Head Mounted Display other
than the Partnership.” ER244, ¶ 43. Indeed, Total Recall explicitly pled that
Luckey falsely promised to do so. ER245, ¶ 43.
The district court erred in rejecting the claim for breach of the implied
covenant because the district court asserted that the purpose of the claim was to
“obtain a tort recovery.” ER40. But breach of the covenant leads to contract
damages, not tort damages. Foley, 47 Cal. 3d. at 684. Thus, the premise of the
district court’s position was error. Total Recall was entitled to allege that Luckey
breached the contract he had with Total Recall, and also that Luckey breached the
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implied covenant of good faith and fair dealing by frustrating the purpose of the
contract. These are separate claims, and Total Recall should be allowed to proceed
under both theories.
CONCLUSION
For the foregoing reasons, judgment should be reversed and the case
remanded for further proceedings.
DATED: July 17, 2017 Respectfully submitted,
By: s/ Brian C. Cannon
BRIAN C. CANNON
Counsel for Appellant
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REQUEST FOR ORAL ARGUMENT
Plaintiff-Appellant respectfully requests that this Court hear oral argument in
this case.
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STATEMENT OF RELATED CASES
Pursuant to Circuit Rule 28-2.6, Plaintiff-Appellant states that it is not aware
of any related cases pending in this Court.
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CERTIFICATE OF SERVICE
I, Brian C. Cannon, a member of the Bar of this Court, hereby certify that on
July 17, 2017, I electronically filed the foregoing “Opening Brief of Plaintiff-
Appellant” with the Clerk of the Court for the United States Court of Appeals for
the Ninth Circuit by using the appellate CM/ECF system. I certify that all
participants in the case are registered CM/ECF users and that service will be
accomplished by the appellate CM/ECF system.
s/ Brian C. Cannon
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