Ten years ago, Hovik Nazaryan sued Femtometrix, Inc. claiming that the company had issued shares to him than it had promised. The parties settled the lawsuit. The settlement agreement provided that the stock issued to Mr. Nazaryan "is not ‘compensation,’ ‘salary,’ or ‘income’ for services performed by [Nazaryan]." The settlement agreement further provided "The Settlement Stock, and any other stock issued by way of this Agreement, is being provided to [plaintiff] as ‘Founder’s Stock’ for his capital/equitable contributions to Femtometrix as alleged by [Nazaryan] in the Action, and the Parties will classify it as such, for all purposes to the extent permitted by law." When Femtometrix later issued 1099 forms, Mr. Nazaryan sued. The action was removed to federal court but U.S. District Court Judge James V. Selna remanded the case to the Superior Court. Nazaryan v. FemtoMetrix, Inc., 2019 WL 3545452 (C.D. Cal. Aug. 5, 2019) based on a forum selection clause in the settlement agreement.

The trial court held that Femtometrix had breached the settlement agreement and had issued fraudulent information returns under Internal Revenue Code section 7434. Yesterday, the Court of Appeal affirmed. Notably, the Court of Appeal, while acknowledging a split of authority in the federal courts, upheld the trial court's decision to hold Femtometrix's chief executive and financial officers jointly and severally liable.