UNLIMITED CIVIL JURISDICTION

MARK HADFIELD Plaintiff, vs. nSCALED, INC., PETER LOUKIANOFF, RUPEN DOLASIA, AND DOES 1-25, INCLUSIVE, Defendants.

Case No.:

COMPLAINT FOR DAMAGES AND INJUNCTIVE RELIEF

1) BREACH OF EMPLOYMENT CONTRACT;

2) FRAUD/MISREPRESENTATION;

3) BREACH OF THE IMPLIED COVENANT OF GOOD

FAITH AND FAIR DEALING;

4) BREACH OF FIDUCIARY DUTY; AND,

5) BREACH OF CONTRACT (UNPAID ATTORNEYS’

FEES AND COSTS).

FACTUAL ALLEGATIONS COMMON TO ALL CLAIMS

1. MARK HADFIELD (hereinafter, “HADFIELD” or “Plaintiff”), at all relevant times mentioned herein, was, and is, a resident of the State of California. HADFIELD was the founder of nSCALED, INC. HADFIELD is a member of nSCALED, INC.’s Board of Directors (“Board”). HADFIELD is also a minority shareholder of nSCALED, INC., and served as the Chief Executive Officer of nSCALED, INC. since the inception of the company until May 16, 2012 when he was demoted from CEO to an unidentified position with no responsibilities and subsequently, his employment was terminated.
2. nSCALED, INC. (hereinafter, “nSCALED,” “the company,” “Defendant” or included in “Defendants”) was founded by Plaintiff in 2008 and is in the business of providing IT Disaster Recovery-as-a-Service to enterprise customers worldwide. nSCALED is registered to do business in the State of California and is headquartered in the City and County of San Francisco, State of California.
3. At all times relevant herein, Defendant PETER LOUKIANOFF (hereinafter, “LOUKIANOFF” and included in “Defendant Directors”) representing Almaz Capital, a venture firm that invested in the company, has been, and now is, one of three members of nSCALED’s Board of Directors. Based on information and belief, LOUKIANOFF is, and at all relevant times herein mentioned was, a resident of the City of Oakland, County of Alameda, State of California.
4. At all times relevant herein, Defendant RUPEN DOLASIA (hereinafter, “DOLASIA” and included in “Defendant Directors”), representing a group of investors, has been, and now is, one of three members of nSCALED’s Board of Directors. Based on information and belief, DOLASIA is, and at all relevant times herein mentioned was, a resident of the County of Marin, State of California.
1. Defendants DOES 1-25 are sued herein under fictitious names. Their true names and capacities are unknown to Plaintiff. Plaintiff is informed and believes and thereon alleges that each of these fictitiously named Defendants is responsible in some way for the occurrences
2. herein alleged and Plaintiff’s damages as herein alleged were caused by Defendants. Plaintiff will seek leave of court to provide the true identities of DOES 1-25 when they become known.
5. nSCALED was founded in December 2008.
6. At the founding of the company, Plaintiff became the Chief Executive Officer (“CEO”) of nSCALED and a Member of the company’s Board of Directors.
7. Under the guidance of HADFIELD as CEO, nSCALED has flourished. For example, despite a difficult economy, the company has added 26 full time employees and approximately tripled its sales each successive year. Anticipating further growth in 2012, nSCALED completed a Series A Preferred Stock Financing in February 2012.
8. At the time of the financing it was agreed that Venture Capital investors Almaz Capital, represented by Defendant LOUKIANOFF, and Doughty Hanson & Co., represented by Board Observer George Powlick, would invest a total of $5,000,000 in new capital in the business.
9. One effect of the investment, among other things, was to dilute Plaintiff’s ownership stake in the company from approximately 36% to approximately 18.2% of the outstanding shares in the company in exchange for other terms described below.
10. At the time of the financing, it was specifically agreed that: a) the Board of Directors would approve a detailed budget of financial performance metrics against which Plaintiff’s performance as CEO would be measured; b) Plaintiff would have the opportunity to earn an additional 1% ownership stake in the company for achievement of the same performance metrics in 2012 and 2013(for a total of 2% additional shares); and, c) in order to ensure Plaintiff’s ongoing commitment to the company, Plaintiff’s existing ownership stake of 18.2% would be held to a vesting schedule for completion in July 2013.
11. After the vesting schedule, and upon attainment of the Board approved financial goals for 2012 and 2013, HADFIELD’s ownership stake in the company would have been approximately 20.2%. // //
12. After the financing, at a meeting of the Board of Directors, the Board approved a detailed financial budget for 2012, including goals for cash, renewals, revenues and bookings against which Plaintiff’s performance as CEO, and performance stock awards for the CEO and other executives, would be measured.
13. In or about March 2012, HADFIELD asked the Board of Directors for a Vice President of Sales to be hired. In response to Plaintiff’s request, the Defendant Directors presented Plaintiff with a “seasoned CEO,” who was a long standing associate and friend of Defendant DOLASIA, to be hired as the new Chief Operating Officer (“new COO”) of the company.
14. HADFIELD asked both Defendant Directors directly and separately if they were planning on hiring the new COO to replace him as the top executive of nSCALED. Both Defendant Directors told Plaintiff, with words to the effect, that he was “absolutely not going to be replaced” by the new COO. Further, Defendant Directors assured Plaintiff that there were no plans to remove him as CEO of nSCALED.
15. The Defendant Directors explained to Plaintiff, with words to the effect, that there was a “unique paring between the seasoned CEO and the talented founder.” Plaintiff was assured by Defendant LOUKIANOFF, with words to the effect: “I invested in you and believe that you are the right person to deliver the results we are looking for.”
16. Based on information and belief, the Defendant Directors’ statements to Plaintiff about not being replaced by the new COO were false and the Defendant Directors knew their statements to be false.
17. Based on information and belief, the new COO was hired by the Defendant Directors with the express intent of replacing Plaintiff as the top executive of nSCALED and forcing Plaintiff to forfeit a substantial portion of his approximately 20.2% vested ownership in the company.
18. At the insistence of the Defendant Directors and in reliance on Defendant Directors assurances that Plaintiff was not going to be removed as the top executive, Plaintiff, on behalf of nSCALED, consented to the hiring of the new COO.
19. Then approximately eight weeks later, on May 16, 2012, without prior warning and without cause, and in direct contradiction of the assurances provided to Plaintiff regarding not being replaced as the top executive of nSCALED, HADFIELD was removed as CEO. All of Plaintiff’s CEO responsibilities were removed from him and transferred to the COO. HADFIELD was instructed by the Defendant Directors not to return to the office, and was not provided with any assignments or work.
20. At the time of Plaintiff’s removal as CEO, the company was ahead of all measurable performance metrics (cash, revenue, renewals, and bookings) as provided for in the Board approved budget for 2012, including being approximately 30% ahead of sales targets from the previous financial quarter. Despite the fact that the “measurables” were “on target,” Defendant Directors refused to allow the full vesting of Plaintiff’s ownership interest.
21. Over the following five weeks, Plaintiff made multiple attempts to engage Defendants in the formulation of a new role for himself within the company (thus preserving his ownership stake) including providing a detailed schedule of work assignments he would deliver for the company. The only offer received from the company in response was a request that Plaintiff resign as an employee and director, and become a consultant with no commitment beyond 80 hours of work thus forfeiting his ongoing stock vesting stake in the company.
22. The same day that Plaintiff was removed as CEO, May 16, 2012, the new COO was elevated to the position of President of nSCALED, the highest named executive and officer of the company.
23. Plaintiff was told that he was removed as CEO due to performance issues. However, the reasons given for removing Plaintiff as CEO were false. The company was ahead of its Board approved financial targets for the year 2012 and there were no metrics to support an accusation of poor performance or any other quantifiable performance deficits.
24. As a result of Plaintiff being replaced as the top executive at the company he founded, without good cause and without any other legitimate business reason, Plaintiff has suffered economic loss as well as damage to his professional reputation.
25. On June 25, 2012, after Plaintiff refused to resign from the company, he received a letter from the company stating incorrectly that he was “assumed to have resigned” along with final payment of salary. Plaintiff had not resigned despite Defendants’ efforts to force a resignation.
26. Since May 16, 2012, Plaintiff, a member of the Board of Directors, had received no communications regarding his role, duties and obligations as a member of the Board. The previous schedule of Board activity included a monthly Board meeting, semi-monthly conference calls and additional telephone calls as necessary to conduct the business of the company. Further, Plaintiff has not received any communications from Board members regarding the latest Quarterly Financial Report, which are generally distributed within five (5) days of the end of the quarter, which most recently, for Q2, was June 30, 2012. This exclusion of Plaintiff from participation on the Board not only denies and prevents Plaintiff from carrying out his duties and obligations as a Board member, but also constitutes breach of the duty to inform him of matters before the Board so that he can participate in the Board’s decision-making process.
27. Based on information and belief, Defendants have insisted that Plaintiff has resigned his employment at nSCALED in order to force Plaintiff to forego his vesting of ownership in the company and to forfeit his right to achieve the 20.2% ownership in the company. Instead, Plaintiff has only 13.65% ownership interest thereby causing him to forfeit 6.55% of the promised ownership interest which, over time, could be valued as well in excess of $1,000,000.
28. Plaintiff in good faith performed all of the obligations of his employment and the obligations of his role as CEO, except to the extent that he has been prevented from doing so by Defendants.
29. As a direct and proximate result of Defendants’ unlawful conduct as herein alleged, Plaintiff has suffered, and continues to suffer, general and special damages, including the loss of ownership interest in the company he founded totaling approximately 6.55% of the fully diluted shares, the loss of reputation and lost career opportunities, all of which are in an amount not yet fully ascertained, but in excess of the jurisdictional minimum of this Court and subject to proof at trial.
30. As a further consequence of Defendants’ actions, Plaintiff has suffered and continues to suffer extreme anguish, humiliation, and emotional distress, in an amount not yet fully ascertained, but in excess of the jurisdictional minimum of this Court and subject to proof at trial.

WHEREFORE, Plaintiff prays for judgment against Defendants as hereinafter set forth. FIRST CAUSE OF ACTION (Breach of Employment Contract) (Against nSCALED Only)

1. By this reference, Plaintiff hereby incorporates paragraphs 1 through 31, inclusive, of this Complaint as if set forth herein.
2. Plaintiff was employed under a contract of employment that was partly orally, partly written and partly implied-in-fact.
3. Through the actions and communications of nSCALED, its officers and directors, nSCALED promised not to remove Plaintiff from his position as CEO without just cause, not to suspend Plaintiff’s employment without just cause, and to treat Plaintiff fairly in all matters.
4. Plaintiff was given verbal assurances by the Defendant Directors that Plaintiff would not be replaced by the new COO and that he would have continued employment as the CEO of nSCALED as long as the company was achieving its financial goals.
5. Further, it was the company’s policy and practice not to remove individuals from executive level positions without good cause.
6. Plaintiff fulfilled all conditions to be performed in his employment contract with Defendants in his capacity as CEO of nSCALED.
1. Defendants breached their employment contract with Plaintiff by their conduct including, but not limited to, the following:
1. Removing Plaintiff from the position of CEO without good cause;
2. Removing Plaintiff from the position of CEO in breach of the promise that Plaintiff would have continued employment as the CEO as long as the company was achieving its financial goals;
3. Not providing Plaintiff with any work assignments, thereby suspending Plaintiff’s

employment without good cause; -7-

d.

Failing to provide Plaintiff with advanced notice of the removal of him from the position of CEO so as to avoid damaging his reputation and status in his community;

e.

Denying Plaintiff the benefits already offered to him in terms of salary, benefits and vesting of stock;

f.

Failing to provide Plaintiff with advanced notice of the suspension of his employment so as to avoid damaging his reputation and status in his community;

g.

Falsely asserting that Plaintiff resigned when Defendants terminated his employment without good or just cause; and,

h.

Acting in bad faith toward Plaintiff by failing to treat him fairly and shifting his losses to inure to their own benefit.

1. As a direct and proximate result of Defendant’s breach, Plaintiff has suffered, and continues to suffer, general and special damages, including loss of reputation, loss of ownership interest, loss of compensation and related employee benefits, in an amount exceeding the jurisdictional minimum of this Court, the precise amount to be proven at trial.
2. WHEREFORE, Plaintiff prays for judgment against Defendants as hereinafter set forth. SECOND CAUSE OF ACTION (Fraud) (Against ALL Defendants)
1. By this reference, Plaintiff hereby incorporates paragraphs 1 through 39, inclusive, of this Complaint as if set forth herein.
2. In February 2012, Defendant Directors represented to Plaintiff that he would have continued employment as the CEO of nSCALED as long as the company was achieving its financial goals.
3. In or about March or April 2012, Defendant Directors represented to Plaintiff that he was not going to be replaced as the top executive of the company by the newly hired COO.
4. Defendant Directors’ representations were false.
5. The same day that Plaintiff was removed from the position of CEO, the new COO was elevated to the position of President, and assumed the top leadership role in regards to the company, assuming all responsibilities previously held by the CEO.
6. Further, Plaintiff was not removed from the position of CEO for good cause or because the company was not achieving its financial goals. At the time Plaintiff was removed as CEO, the company was ahead of its Board approved financial targets for the year 2012.
7. Because Plaintiff was replaced as CEO at the company he founded, without good cause and without any other legitimate business reason, Plaintiff’s professional reputation has been damaged.
8. Defendant Directors knew that their representations to Plaintiff were false when they made them. Based on information and belief, the new COO was hired for the exact reason to replace Plaintiff as the top executive in the company and to reduce Plaintiff’s ownership stake in the company to the benefit of others.
9. The Defendant Directors intended that Plaintiff rely on their false representations so that Plaintiff would participate in the recruiting of the new COO, consent to the hiring of the new COO, would spend time training him and transitioning him into the culture and operations of the company.
10. Plaintiff reasonably relied on Defendant Directors’ false representations in approving the hiring of the new COO instead of a Vice President of Sales as he had requested from the Defendant Directors. Had Plaintiff known that the Defendant Directors’ intention was to replace him as the top executive, Plaintiff would not have approved the hiring.
11. As a direct and proximate result of Defendants’ wrongful conduct herein alleged, and Plaintiff’s reliance thereon, Plaintiff has suffered, and will continue to suffer, general and special damages, including a reduction in his ownership interest in the company, loss of reputation and lost career opportunities, in an amount not yet fully ascertained, but in excess of the jurisdictional minimum of this Court and subject to proof at trial.
1. As a further, direct and proximate result of Defendants’ wrongful conduct herein alleged, and Plaintiff’s reliance thereon, Plaintiff has suffered and continues to suffer severe emotional
2. distress, including but not limited to, humiliation, embarrassment, and mental anguish, all to Plaintiff's damage in an amount in excess of the jurisdictional minimum of this Court. The precise amount of said damages is not presently known, but will be proven at trial.
12. The conduct of Defendants as described herein was oppressive, fraudulent, and malicious, thereby entitling Plaintiff to an award of punitive damages against Defendants in an amount appropriate to punish and make an example of Defendants.

WHEREFORE, Plaintiff prays for judgment against Defendants as hereinafter set forth. THIRD CAUSE OF ACTION (Breach of the Implied Covenant of Good Faith and Fair Dealing) (Against nSCALED Only)

1. By this reference, Plaintiff hereby incorporates paragraphs 1 through 52, inclusive, of this Complaint as if set forth herein.
2. In every contract with employees in the State of California, there exists a covenant of good faith and fair dealing, requiring the employer not to take any action in bad faith to deny the employee compensation to which he is reasonably entitled.
3. As a result of the employment relationship which existed between Plaintiff and nSCALED, the express and implied contracts made in connection therewith, the acts, conduct, promises and communications which resulted in said contract, and by operation of the law of the State of California, nSCALED covenanted and promised to act in good faith towards and deal fairly with Plaintiff.
4. Plaintiff performed all the duties and conditions of the employment agreement that were required by him. Defendants knew that Plaintiff had fulfilled all his duties and conditions under the employment agreement.
5. Without misconduct on the part of Plaintiff and without good, just or legitimate cause, Defendants breached the implied covenant of good faith and fair dealing by engaging in conduct separate and apart from performance of obligations under the agreement, without good faith and in contravention of the implied agreement not to remove Plaintiff from the position of CEO except for good cause.
1. Defendants further breached the covenant of good faith and fair dealing, by their conduct including, but not limited to, the following:
1. Willfully and falsely denying to Plaintiff that the new COO was being hired to replace him;
2. Hiring the new COO with the intent of removing Plaintiff as CEO and denying Plaintiff compensation and other benefits to which he was entitled under his employment agreement with nSCALED; and,
3. Failing to act in good faith toward Plaintiff and failing to treat him fairly.
6. Defendants’ breach of the covenant of good faith and fair dealing was a substantial factor in causing damage and injury to the Plaintiff. As a direct and proximate result of Defendants’ wrongful conduct herein alleged, Plaintiff has suffered, and will continue to suffer, damages in an amount not yet fully ascertained, but in excess of the jurisdictional minimum of this Court and subject to proof at trial.

WHEREFORE, Plaintiff prays for judgment against Defendants as hereinafter set forth.

FOURTH CAUSE OF ACTION (Breach of Fiduciary Duties) (Against DEFENDANT DIRECTORS and DOES 1-25)

1. By this reference, Plaintiff hereby incorporates paragraphs 1 through 59, inclusive, of this Complaint as if set forth herein.
2. This cause of action is brought pursuant to the common law of the State of California and California Corporations Code Section 309.
3. Defendant Directors, Defendant LOUKIANOFF and Defendant DOLASIA, as officers and directors of nSCALED, stand in a fiduciary relationship to the company and to the company’s shareholders as beneficiaries thereof.
1. Based on information and belief, Defendant Directors, Defendant LOUKIANOFF and Defendant DOLASIA, and Does 1-25 have engaged, and are engaging, in bad faith in a concerted course of conduct to force Plaintiff out of his leadership role in the company and replace him with less capable leadership, to deny Plaintiff his ownership rights, to preclude his
2. participation on the Board of Directors as a Board Member, and to convert his losses to their own benefit, all to the detriment of Plaintiff, the company and its shareholders. //
4. As a direct and proximate result of the actions of the Defendant Directors, Defendant LOUKIANOFF and Defendant DOLASIA, and Does 1-25 as herein alleged, Plaintiff has suffered, and continues to suffer, both general and special damages, in an amount not yet fully ascertained, but in excess of the jurisdictional minimum of this Court and subject to proof at trial.
5. The conduct of Defendants as described herein was oppressive, fraudulent, and malicious, thereby entitling Plaintiff to an award of punitive damages against Defendants in an amount appropriate to punish and make an example of Defendants.

WHEREFORE, Plaintiff prays for judgment against Defendants as hereinafter set forth. FIFTH CAUSE OF ACTION (Breach of Contract: Unpaid Attorneys’ Fees and Costs) (Against DEFENDANT DIRECTORS and DOES 1-25)

1. By this reference, Plaintiff hereby incorporates paragraphs 1 through 65, inclusive, of this Complaint as if set forth herein.
2. On or about June 10, 2011, Plaintiff and nSCALED entered into an agreement whereby Plaintiff loaned nSCALED a significant sum of money. The terms of the Loan were memorialized in a Promissory Note (the “Note”) that was approved by the Board of Directors.
3. The terms of the Note provided that the Borrower (i.e. nSCALED) “shall pay all costs of collection when incurred, including, without limitation, reasonable attorneys’ fees, costs and other expenses.”
4. The Note was amended on or about February 12, 2012 to state that in the event that Plaintiff was no longer an employee, officer or consultant of nSCALED that the outstanding principal amount of the Loan plus interest would become due and payable immediately. Plaintiff understood this to mean that if he was no longer performing any work for nSCALED that the Note would become due and payable immediately.
5. Despite being removed from his position of CEO on May 16, 2012 and not having any work to perform, Defendants maintained that Plaintiff was an employee of nSCALED and refused to pay HADFIELD the monies owed to him pursuant to the Note.
6. Defendants breached the Note agreement by failing and refusing to immediately pay Plaintiff the sums owning to him upon being removed as CEO of nSCALED and having no work to perform for nSCALED.
7. As a consequence of Defendants’ refusal and failure to act in accordance with their obligations under the Note, Plaintiff was forced to hire legal counsel to assist him with collecting the sums that were owed to him pursuant to the Note.
8. On June 25, 2012, when Plaintiff received the letter from the company stating incorrectly that he was “assumed to have resigned,” finally, after more than a month of engaging legal counsel to collect the monies owed to him, Plaintiff received full payment on the Note, but no payment for attorneys’ fees and costs which were approximately $15,000.
9. As a direct and proximate result of the wrongful actions of Defendants as herein alleged, Plaintiff incurred attorneys’ fees and costs in collecting the monies owed to him pursuant to the terms of the Note, plus interest and the costs of this collection action.

PRAYER FOR RELIEF WHEREFORE, Plaintiff MARK HADFIELD prays for judgment against Defendants, and nSCALED and Defendant Directors, in particular, as follows:

1. For a judgment awarding general and compensatory damages in excess of the jurisdictional minimum of this Court and according to proof pursuant to Plaintiff’s First, Second, Third, and Fourth Causes of Action;
2. For a judgment awarding damages for emotional distress pursuant to Plaintiff’s Second Cause of Action according to proof at trial;
3. For a judgment awarding punitive damages pursuant to Plaintiff’s Second and Fourth Causes of Action according to proof at trial;

4. For injunctive relief awarding Plaintiff his full 20.2% ownership in the company,

reinstating him as CEO and denying Defendant Directors and their beneficiaries any increase in

their ownership position in the company;

1. For attorneys’ fees and costs pursuant to Plaintiff’s Fifth Cause of Action;
2. For prejudgment interest pursuant to California Civil Code §§ 3287, 3288 and 3291 on all

amounts claimed pursuant to all causes of action; and,

7. For such other and further relief as the Court shall deem just and proper.

Date: July 10, 2012 THE LUCAS LAW FIRM

_______________________ KATHLEEN M. LUCAS SHAWNA B. CASEBIER Attorneys for Plaintiff MARK HADFIELD

PLAINTIFF HEREBY DEMANDS A TRIAL BY JURY

As to all claims allowing for trial by jury, Plaintiff hereby demands a trial by jury.

Date: July 10, 2012 THE LUCAS LAW FIRM

_______________________ KATHLEEN M. LUCAS SHAWNA B. CASEBIER Attorneys for Plaintiff MARK HADFIELD