Unreported / Non-Citable
Background
Julius Lipp, a German citizen and software engineer, co-founded Mixedbread AI, Inc. — an AI research and engineering company that builds large-scale retrieval systems — with Aamir Shakir in October 2023. Lipp became Chief Technology Officer and a director, and his German holding company, Julius Lipp Holding, UG, purchased 4,500,000 shares of Mixedbread common stock under a Restricted Stock Purchase Agreement (RSPA) with a vesting schedule that progressively released shares from a company repurchase option.
Lipp alleges that beginning in early June 2025, Shakir and another board member, Max Claussen, engaged in “a pattern of bad faith conduct designed to isolate and improperly oust Lipp” from the company and to keep his unvested shares from continuing to vest. According to the complaint, they pressured him to leave, threatened to revoke his U.S. immigration visa, scheduled an emergency board meeting when he asked for time to consult counsel, and terminated his employment despite admitting he had not engaged in the “Cause” conduct his employment agreement required for termination. They allegedly stated outright that the motivation was to stop the ongoing release of Lipp Holding’s shares from the repurchase option.
Plaintiffs filed five claims: (1) breach of the employment agreement (Lipp); (2) breach of the RSPA (Lipp Holding); (3) conversion (Lipp Holding); (4) violation of California Penal Code § 496 (Lipp Holding); and (5) declaratory relief (Lipp Holding). Mixedbread moved for judgment on the pleadings as to the conversion and § 496 claims under Rule 12(c).
The Court’s Holding
Magistrate Judge Thomas S. Hixson granted the motion as to both targeted claims, with leave to amend, and left the contract and declaratory-relief counts standing.
On conversion, the court applied the California economic loss rule as articulated in Robinson Helicopter Co. v. Dana Corp. and recently restated by the California Supreme Court in Rattagan v. Uber Technologies. To bring a tort claim alongside a contract claim, the plaintiff must show both an independent tort duty (one that exists outside the contract) and an injury that was not reasonably contemplated when the contract was formed. The Ninth Circuit cases applying the rule to conversion — Markowitz v. JPMorgan Chase, GMC Semitech v. Capital Asset Exchange, Tsai v. Wang, and others — focus on whether the property right that supports the conversion claim preexists the contract or arises from it. Where the property interest is contract-created, the conversion claim is barred.
Here, Lipp Holding’s ownership interest in the disputed shares was entirely a creature of the RSPA. The alleged converting conduct — Mixedbread’s assertion that Lipp Holding’s unvested shares remained subject to the repurchase option after Lipp’s allegedly wrongful termination — was simply a contested interpretation of the RSPA. The damages sought were the value of the shares, which were squarely within the parties’ reasonable contemplation when they signed the RSPA. Bad-faith motive does not change the analysis: under Robinson Helicopter, “the law eschews inquiry into a breaching party’s motives.” Conversion was dismissed with leave to amend if Plaintiffs can plead an independent tort duty and an injury outside the parties’ reasonable contemplation.
On the California Penal Code § 496 claim, which provides treble damages and attorney’s fees for receiving stolen property, the court likewise dismissed. Section 496 requires property that has been stolen or obtained by theft or extortion. The complaint did not plausibly allege that Mixedbread received stolen property or property obtained by theft or extortion in the criminal sense; the dispute is over the contractual operation of the RSPA’s repurchase option. The court also noted the doctrinal concern about converting ordinary commercial disputes into § 496 trebled-damages cases. The claim was dismissed with leave to amend.
The two breach-of-contract claims and the declaratory-relief claim were not challenged and remain.
Key Takeaways
- The California economic loss rule remains a significant barrier to tort claims layered onto contract disputes. After Rattagan, plaintiffs must plead both an independent tort duty and an injury outside the parties’ reasonable contemplation when the contract was formed.
- For Ninth Circuit conversion claims, the controlling question is whether the disputed property interest preexisted the contract or arose from it. Stock issued under an RSPA is contract-created, so a conversion claim attacking the operation of the repurchase option will generally fail.
- Bad-faith or self-dealing motive does not transform a breach of a stock-purchase or employment agreement into a tort under California law. Damages for the breach are limited to contract remedies.
- California Penal Code § 496’s civil treble-damages remedy is not a generic upgrade for ordinary commercial disputes. Plaintiffs must plausibly plead criminal-theft conduct, not simply contractual non-performance.
- Co-founder departures involving immigration leverage and termination-for-vesting-purposes allegations remain viable as breach-of-contract and (with the right pleading) breach-of-fiduciary-duty cases — but not as conversion or Penal Code § 496 cases.
Why It Matters
Co-founder disputes at venture-backed Bay Area AI startups are an increasingly common docket item, and they often turn on whether departing founders can keep unvested or partially vested equity. This opinion is a careful application of the post-Rattagan economic loss rule to a textbook fact pattern: an alleged pretextual termination designed to interrupt vesting. The breach-of-contract claims survive, but plaintiffs cannot turn the dispute into a tort to enlarge their damages or attorney-fee exposure.
The opinion is also a useful warning about the limits of California Penal Code § 496 in commercial litigation. Plaintiffs and their counsel have, in recent years, been quick to plead § 496 alongside breach-of-contract counts in pursuit of treble damages and attorney fees. Northern District magistrate judges are increasingly skeptical of that move when the underlying conduct is contractual in nature. For drafters of co-founder, RSPA, and employment agreements, the practical lesson is that the contract instruments — and their dispute-resolution and damages structures — are doing the real work; tort overlays are unlikely to expand the recovery.