Opinion
No. CIV-02-1954-PHX-MHM.
December 16, 2005
ORDER
Currently before the Court are: Defendant Nelcela's Motion to Dismiss Post's Crossclaim, (Dkt. #113); Third-party Defendant Clothier's Motion to Dismiss Third Party Claims Against Gene Clothier and Toni Clothier, (Dkt. #128); Movant Charles Anderson's Motion to Dismiss State Fraud Claim, (Dkt. #211); Defendant Post's Motion for Sanctions Against Nelcela Regarding: Spoliation of Evidence, which Plaintiff and the Clothier's have joined, (Dkt. #243); Movant Charles Anderson's Motion to Strike Response, (Dkt. #246); Plaintiff's Motion for Reconsideration of Order Denying Stipulation to Extend Time to File Response to Charles Anderson's Motion to Dismiss, (Dkt. #256); Defendant Post's Motion to Strike Defendant Nelcela's Supplemental Response to Post's Motion for Sanctions Re: Spoliation of Evidence or for Leave to Reply to Same, (Dkt. #274); and Defendant Post's Motion for Leave to Submit Post-Hearing Memorandum Regarding Issues Raised at Spoilation Hearing. (Dkt. #296). After reviewing the motions and after hearing oral argument on November 8, 2005, the Court issues the following Order:
I. Factual Procedural Background
Plaintiff filed a Complaint in United States District Court on October 3, 2003, asserting jurisdiction under 28 U.S.C. § 1338(a), for a civil action relating to copyright infringement and under 28 U.S.C. § 1332(a), diversity jurisdiction. Plaintiff alleges that Defendant Alec Dollarhide developed credit card processing software when he worked for the predecessor corporation of Plaintiff, a company called Credit Card Services, Ltd. ("CCS, Ltd."), sometime in 1995 or 1996. Complaint at ¶¶ 18-21. Plaintiff further alleges that Defendant Dollarhide signed an agreement stating that the work he was performing was confidential and proprietary to his employer, which stayed in effect when CCS, Inc., transferred ownership of the software developed by Defendant Dollarhide to Plaintiff Merchant Transaction Systems, Inc. ("MTSI") on June 1, 1999. See Id. at ¶¶ 19,23.
Plaintiff maintains that on August 1, 1999, Defendant Dollarhide's status was converted to independent contractor, and payment for his work was directed to the corporation of his designation, Defendant Nelcela, Inc., which Defendant Dollarhide formed with Defendant Leonard Campagna ("Nelcela Defendants").See Id. at ¶ 24. Plaintiff alleges that thereafter the Nelcela Defendants and each of its employees, officers, and directors owed fiduciary duties to MTSI. See Id. Plaintiff maintains Nelcela Defendants breached their duties of confidentiality and revealed and sold Plaintiff's software to third parties, Defendants Ebocom, Inc. Post Integrations, Inc., Mary Gerdts, founder and President of Post Integrations Inc., and Douglas McKinney ("Post"). See Complaint at ¶¶ 25-28, 33, 72. Plaintiff further alleges that Nelcela Defendants misrepresented the ownership of Plaintiff's software to the Registrar of Copyrights and caused copyrights to be issued to Nelcela Defendants for Plaintiff's software. See Complaint at ¶ 40.
Post provides integrated electronic transaction solutions primarily to the hospitality industry. Dkt. #84 Post Crossclaim at ¶ 3. In 1999, Post sought to bring its credit card processing services in house. Id. at ¶ 19. From June of 1999 to August of 2000, Mary Gerdts, President and CEO of Post, negotiated with Messrs Dollarhide and Campagna regarding Nelcela providing Post with a fully functional and operational credit card processing system.Id. at ¶¶ 20-24. On August 2, 2000 ("August 2000 Contract") Post and Nelcela reached a two-phase agreement. Id. at ¶ 30. In Phase I, Nelcela would provide Post its Nelcela System source code. In Phase II, Post would "go live," operating its own customized version of the Nelcela System, which Post would own.Id. at ¶¶ 30,41-45. Post Alleges, on December 28, 2000, Post "went live" and discovered Nelcela Defendants falsely represented the Nelcela System's functionality and capabilities. Id. at ¶¶ 21,24,26,28,33,43,45-47. Upon concluding Nelcela did not intend to deliver the system in accordance with the parties agreements, Post asserts it obtained a replacement system from Plaintiff MTSI.
II. Legal Standard
The motion to dismiss for failure to state a claim is viewed with disfavor and is rarely granted." Gilligan v. Jamco Development Corp., 108 F.3d 246, 249 (9th Cir. 1997). Accordingly, the court will not dismiss a complaint unless it appears beyond a doubt that the claimant can prove no set of facts to support the claim that would entitle the claimant to relief. Morley v. Walker, 175 F.3d 756, 759 (9th Cir. 1999). However, "the court [is not] required to accept as true allegations that are merely conclusory, unwarranted deductions of fact, or unreasonable inferences." Sprewell v. Golden State Warriors, 266 F.3d 979, 988 (9th Cir. 2001).
In determining whether a complaint states a claim, all allegations of material fact are taken as true and construed in the light most favorable to the nonmoving party. Wyler Summit P'ship v. Turner Broad. Sys. Inc., 135 F.3d 658, 661 (9th Cir. 1998). As such, an inquiry into the adequacy of the evidence is improper when deciding whether to dismiss for failure to state a claim. Enesco Corp. v. Price/Costco, Inc., 146 F.3d 1083, 1085 (9th Cir. 1998).
III. Defendant Nelcela's Motion to Dismiss Post's Crossclaim, (Dkt. #113).
A. Validity of the Mutual Confidentiality Agreement
Nelcela first argues a "Mutual Confidentiality Agreement" executed on May 26, 1999, constitutes the sole written and executed contract between Nelcela and Post. Further, Nelcela asserts the "Mutual Confidentiality Agreement" prohibits Post from filing this lawsuit, the agreement provides:
The parties understand and agree that, except such agreements as currently exist between [Post] and [Nelcela], no contract or agreement providing for any relationship shall be deemed to exist between [Post] and [Nelcela] and/or owners or stockholders of either party unless and until a definitive agreement has been executed and delivered, and each party hereby waives, in advance, any claims (including, without limitation, breach of contract) in connection with the proposed business relationship by and between [Post] and [Nelcela] unless and until the parties have entered into a definitive agreement with respect to such relationship which has been executed and signed by the parties . . .
Dkt. #84 Post Crossclaim Ex. 11, p. 3.
Nelcela argues because the "Mutual Confidentiality Agreement" was the only written and executed contract, the parties "waive[d] in advance, any claims (including, without limitation, breach of contract)." Id. While Post concedes a "definitive agreement" was never executed, Post argues the parties engaged in "extensive" discussions establishing a contractual arrangement between the parties, sufficient to establish that the Mutual Confidentiality Agreement does not bar Post's claims.
Post also argues, that if the Mutual Confidentiality Agreement bars its claims against Nelcela, then necessarily Nelcela's claims against Post are also barred. However, as Post has not filed a motion to dismiss Nelcela's Crossclaims, that issue is not before the Court.
Because the terms of the Mutual Confidentiality Agreement waive any legal claims between the parties until they reached a definitive written contract, Posts claims against Nelcela can stand if Post's Crossclaim states a claim upon which relief can be granted that: (1) the Mutual Confidentiality Agreement is void or voidable; or (2) the parties modified the requirement of a definitive agreement.
Post contends it has alleged fraud in the inducement, making the Mutual Confidentiality Agreement voidable. Fraud in the inducement occurs when a misrepresentation leads another to enter into a transaction with a false impression of the risks, duties, or obligations involved. Black's Law dictionary 686. (8th ed. 1999). Even under liberal "notice" pleading standards, it is unclear to the Court how Nelcela was put on notice that Post sought to declare the Mutual Confidentiality Agreement voidable for fraud in the inducement. FED. R. CIV. PRO. Rule 8(a)(2). However, Post's fraudulent inducement claim must be plead with particularity. FED. R. CIV. PRO. Rule 9. Notably, Post has not alleged a Crossclaim or affirmative defense related to fraud in the inducement of the Mutual Confidentiality Agreement. Post's Crossclaim of fraud relates to Nelcela allegedly inducing Post to pay Nelcela $562,000 and to "go live," not that Nelcela fraudulently induced Post to enter into the Mutual Confidentiality Agreement. Dkt. #84 Post Crossclaim at ¶ 75. In fact, the only mention of the Mutual Confidentiality Agreement is located in paragraph 40 of Post's Crossclaim. Nowhere does the Crossclaim assert the Mutual Confidentiality Agreement is voidable; nowhere does Post contend entering the Mutual Confidentiality Agreement damaged Post. Moreover, a careful review of the Crossclaim demonstrates that virtually all Post's allegations of misrepresentations upon which Post relied are after the date the Mutual Confidentiality Agreement was executed. See Id. at ¶¶ 22,24,26,28,33,43,45-47. The only allegations which may predate the Mutual Confidentiality Agreement are located in paragraphs 20 and 21, which provide: in spring 1999, Mr. Campagna provided Post a general description of the Nelcela System that "he claimed Nelcela owned." Id. at ¶ 2 These two paragraphs fail to allege the time and place of the alleged fraudulent statements. FED. R. CIV. PRO. Rule 9(b) (2005); Gill v. Three Dimension Sys., Inc., 87 F. Supp. 2d 1278 (M.D. Fla. 2000). Thus, the Court concludes Post's Crossclaim for "fraud in the inducement" fails pursuant to Rule 9(b) and 12(b)(6), and the time for amendment of Post's Crossclaim has passed.
Turning to Post's argument the conduct of the parties is sufficient to infer acquiescence to modification of the Mutual Confidentiality Agreement and that the parties entered into a subsequent contract. "Conduct can manifest acceptance of an offer or acquiescence in a modification." Ancell v. Union Station Assoc., Inc., 803 P.2d 450, 453 (Ariz.Ct.App. 1990) (internal citations omitted). In Ancell, Ancell, a mortgage broker entered into a written contract with a hopeful mortgagee providing the mortgagee would pay Ancell $64,210 if he obtained a firm commitment from an acceptable lender. Id. at 458. The contract also provided the agreement was null and void if Ancell failed to secure a lender by January 15, 1998. Id. At issue was whether the parties subsequent dealings modified the January 15, 1998 termination date. Finding a genuine issue of material fact existed regarding whether the mortgagee manifested acceptance of modification of the contract, the Arizona Court of Appeals reasoned Ancell continued to Seek a lender after the termination date. Id. at 454.
Similarly here, taking as true the allegations in Post's Crossclaim and viewing them in the light most favorable to Post, Post has alleged facts sufficient to support a claim that Nelcela Defendants manifested acceptance of modification of the requirement for a definitive written agreement, signed and executed by the parties. Specifically, Post's Crossclaim outlines correspondence between the parties regarding the two-phase implementation of Nelcela System and a customized Nelcela System, for which Post would pay Nelcela $750,000. Dkt. #84 Post Crossclaim at ¶¶ 23,27,28. On August 2, 2000, Ms. Gerdts corresponded with Mr. Campagna, detailing the "proposed terms of the parties agreement," to which Mr. Campagna agreed. Id. at ¶¶ 30,31. Post's Crossclaim goes on to allege both parties acted in conformity with the agreement, Post making partial payments for the Nelcela System and Nelcela Defendants working towards customizing the Nelcela System. Id. at ¶¶ 37,39. Based on the foregoing, taking as true the allegations in Post's Crossclaim, the Mutual Confidentiality Agreement does not bar Post from bringing suit against Nelcela because Post alleges the parties entered into an August 2000 Contract and allegations of the parties' conduct is sufficient to infer the parties acquiesced to modification of the requirement for a definitive written agreement.
B. Declaratory Judgment
Nelcela's argues Post's Crossclaim for a Declaratory Judgment that the customized Nelcela System is owned by Post is barred because there was no definitive written contract as required by the Mutual Confidentiality Agreement. However, taking as true the allegations in the Crossclaim and viewing them in the light most favorable to Post, Post has alleged facts sufficient to support a claim that Nelcela Defendants manifested acceptance of modification of the requirement for a definitive written agreement, signed and executed by the parties.
C. Breach of Contract.
In the alternative, Nelcela argues if the Court concludes the subsequent agreement constituted a contract, Post fails to state claim for breach of contract because Post concedes it did not act in accordance with the terms of the subsequent contract. Specifically, according to the terms of the August 2000 Contract, Post agreed to pay Nelcela $750,000 for two phases of source code, Nelcela System in Phase I and customized Nelcela System in Phase II. Dkt. #84 Post Crossclaim at ¶¶ 30,31. However, Post's Crossclaim provides, Post did not pay the $750,000 as agreed, and instead, only paid Nelcela $562,000. Id. at ¶¶ 31,51.
The authority relied on by Nelcela in support of this argument is inapposite, and instead, stands for the general rule a buyer has an election to return nonconforming goods and rescind the sale or keep nonconforming goods and sue for damages. Authorized Supply Co. of Ariz. v. Swift Co., 271 F.2d 242, 244 (Ariz. 1960) (concluding where buyer elects to rescind a sale, the buyer is precluded from suing the seller for damages as a result of an alleged breach of express implied warranties.) The Court is neither aware nor does Nelcela cite authority providing that where a buyer fails to pay the full contract price, the purchaser is precluded from seeking damages for breach of contract. Moreover, Nelcela has conceded failure to pay the full contract price does not preclude a buyer from seeking damages for breach of contract because it has failed to refute Post's arguments in its reply. Whetzel v. Mineta, 364 F. Supp 2d. 1077, 1083 (D. Alaska 2005).
D. Negligent Misrepresentation
Nelcela next argues Post's Crossclaim only alleges future conduct, and therefore, fails to state a claims for negligent misrepresentation. In order to prevail on a claim of negligent misrepresentation, the plaintiff has the burden of proving that: (1) defendant, in the course of its business, gave incorrect information for the guidance of others in their business transactions; (2) defendant intended that plaintiff rely on that information or could reasonably foresee that plaintiff would rely on that information; (3) defendant failed to exercise reasonable care in obtaining or communicating that information; (4) plaintiff relied on that incorrect information; (5) plaintiff's reliance was justified; and (6) plaintiff's reliance was a cause of damage to plaintiff. RESTATEMENT (SECOND) OF TORTS § 552 (1977).
Furthermore, "[t]he promise of future conduct is, as a matter of law, not such a representation as will support recovery under a theory of negligent misrepresentation." McAlister v. Citibank, 829 P.2d 1253, 1251 (Ariz.Ct.App. 1992) (citations omitted). Nelcela argues Post's Crossclaim only refers to Nelcela's representations regarding what it hoped to achieve in the future. Nelcela maintains it refused to put a "date-certain" in writing and only agreed to work towards a future agreement.
However, Post's Crossclaim maintains the Nelcela Defendants made numerous misrepresentations regarding its ownership of and the functionality of Nelcela Systems. Dkt. #84 Post Crossclaim at ¶¶ 21,24,26,28,33,43,45-47,88. According to Post's Crossclaim, these misrepresentations were present facts, upon which Post relied when entering the August 2000 Contract. Taking as true the allegations in the Crossclaim, Nelcela Defendants misrepresented they owned the Nelcela System and that it was fully functional. Id. These are actionable alleged misrepresentations of present facts and sufficient to state a claim upon which relief can be granted.
E. Breach of Express and Implied Warranties
Nelcela argues Post's Crossclaim fails to state a claim for breach of express warranties because the Crossclaim contains no affirmation of fact relating to the product, which became the basis of the bargain. However, Post's Crossclaim for breach of express warranties incorporates by reference all previous allegations. Dkt. #84 Post Crossclaim at ¶ 100. As noted above, Post's Crossclaim alleges Nelcela Defendants made numerous present factual misrepresentations regarding the Nelcela System upon which Post relied when entering into the August 2000 Contract, such as its ownership of and the functionality of Nelcela Systems. Id. at ¶¶ 21,24,26,28,33,43,45-47,88.
In relation to Post's Crossclaim for breach of implied warranties, Nelcela argues the implied warranties were excluded by the parties course of dealing because the parties entered in to a service contract for the Nelcela System. However, taking as true the allegations in the Complaint, Post sought to purchase a fully functional credit card processing system it could operate in house, without the need of outside service. Based on the foregoing, Post's Crossclaim for breach of express and implied warranties states a claim upon which relief can be granted.
F. Conversion
"Conversion is an intentional exercise of dominion or control over a chattel which so seriously interferes with the right of another to control it that the actor may justly be required to pay the other the full value of the chattel." See Focal Point, Inc. v. U-Haul Co. of Ariz., 746 P.2d 488, 489 (Ariz.Ct.App. 1986). To maintain an action for conversion, a plaintiff must either have actual possession of the personal property or the right to demand immediate possession of the personal property at the time of the alleged conversion. Sears Consumer Fin. Corp. v. Thunderbird Prods., 802 P.2d 1032, 1034 (Ariz.Ct.App. 2004).
Nelcela argues taking as true the allegations in Post's Crossclaim, it did not own the source code, because it only paid Nelcela $562,000, as opposed to the price the parties contracted for, $750,000. Dkt. #84 Post Crossclaim at ¶¶ 31,51. Post argues its Crossclaim outlines two separate contracts, one which was complete.
However, taking as true the allegations in the Crossclaim, it supports only a claim the source code was one contract for a total purchase price of $750,000. The Crossclaim alleges, a two-phase agreement; in Phase I Nelcela would provide Post the Nelcela system; in Phase II Nelcela would provide Post the customized Nelcela system for a total payment of $750,000. Id. at ¶ 30. This payment was to be paid in increments of 25%, a deposit, delivery of Phase I, completion of 100% conversion, completion of Phase II. Id. The Crossclaim alleges Post paid a $200,000 down payment on September 20, 2000, which was characterized as a "partial payment". Id. at ¶¶ 37,38. From October to December 2000, Post paid Nelcela $362,000 "for development of custom Phase I code prior to conversion." Id. at ¶ 31.
These are the only allegations related to payments in the Crossclaim. Nowhere does the Crossclaim allege that $362,000 constituted full payment for the customized source code. In fact the terms of the contract belay that notion, as the August 2000 Contract provided for 4 separate payments. Taking as true the allegations in the Crossclaim, ownership of the customized software occurred when Post paid the $750,000 contract price, which Post did not pay. Accordingly, the allegations in the claim fail to state Post had a right to demand the source code at the time of the alleged conversion, because Post had not completed payment for the source code. Accordingly, Post's Crossclaim for conversion will be dismissed. Furthermore, there appearing to be no set of facts which would alter the August 2000 Contract payment schedule, it appears any attempt to amend this Crossclaim would be futile. Moreover, the time for amendment has passed. Therefore, the Court will dismiss Post's conversion Crossclaim with prejudice.
G. Unjust Enrichment
To maintain a claim for unjust enrichment under Arizona law, Post must establish the following five elements: (1) an enrichment; (2) an impoverishment; (3) a connection between the enrichment and the impoverishment; (4) absence of justification for the enrichment and the impoverishment; and (5) an absence of a remedy provided by law. Cmty. Guardian Bank v. Hamlin, 898 P.2d 1005, 1009 (Ariz.Ct.App. 1995). Nelcela argues both the Fourth and Fifth Element are lacking because Post's Crossclaim fails to allege "absence of justification for the enrichment" and because Post has an adequate remedy at law.
The Crossclaim alleges Post paid Nelcela $562,000 and in return received nonfunctional software, resulting in significant damages. Dkt. #84 Post Crossclaim at ¶¶ 51,52,55-56. The Crossclaim states Nelcela neither delivered the system nor intended to deliver the system. Id. at ¶ 51. While the Crossclaim also details Nelcela Defendants worked towards implementing Nelcela System, representations that the Nelcela System did not function, could not function, was not owned by Nelcela, and the System was not tested are sufficient to allege absence of justification. Moreover, the fact that Nelcela Defendants worked toward implementing and customizing Nelcela System may support an argument the entire $562,000 enrichment was not without justification However, taking as true the allegations in the Crossclaim, Nelcela's efforts to implement Nelcela System were insufficient to justify $562,000 enrichment.
Secondly, while Post cannot recover on both its breach of contract claim and its unjust enrichment claim, it is not precluded from pleading alternative theories. See United States v. Kensington Hosp., 760 F. Supp. 1120, 1135 (E.D. Pa. 1991) (finding dismissal of unjust enrichment claim premature where federal rules allow pleading alternative theories of recovery). Therefore, Post's Crossclaim for unjust enrichment states a claim upon which relief can be granted.
H. Fraud
To prove common law fraud, nine elements must be established: (1) a representation; (2) its falsity; (3) its materiality; (4) the speaker's knowledge of its falsity or ignorance of its truth; (5) the speaker's intent that the information should be acted upon by the hearer and in a manner reasonably contemplated; (6) the hearer's ignorance of the information's falsity; (7) the hearer's reliance on its truth; (8) the hearer's right to rely thereon; and (9) the hearer's consequent and proximate injury.Burkons v. Ticor Title Ins. Co. of Cal., 798 P.2d 1308, 1317 (Ariz.Ct.App. 1989).
Here, Nelcela argues Post's Crossclaim fails to allege the Seventh and Eighth Element, reliance and a right to rely. In regards to the right to rely, Nelcela argues, Post cannot maintain it had a right to rely on any of Nelcela's representations when Post licensed the same software from MTSI in the midst of Nelcela's work to modify integration of Nelcela System. Taking as true allegations in the Crossclaim, Post alleges it relied on numerous misrepresentations as to present facts regarding the capabilities of Nelcela System and Nelcela's ability to implement and customize the Nelcela System, such as Nelcela owned the copyrighted source code, that the system was functional, that it was capable of processing charge backs, etc. Moreover, as these representations were central to the efficacy of any credit card processing software, for which Post was contracting to purchase, Post had a right to rely on these alleged misrepresentations. It is unclear to the Court, how engaging in a substitute transaction to mitigate its damages negates Post's right to rely on the aforementioned alleged misrepresentations. Dkt. #84 Post Crossclaim at ¶¶ 21,24,26,28,33,43,45-47,88. Therefore, Post's Crossclaim states a claim for fraud upon which relief can be granted.
I. Arizona Consumer Fraud Act
A claim of fraud under the Arizona Consumer Fraud Act is governed by ARIZ. REV. STAT. § 44-1522, which states in pertinent part:
The act, use, or employment by any person of any deception, deceptive act or practice, fraud, false pretense, false promise, misrepresentation, or concealment, suppression or omission of any material fact with intent that others rely upon such concealment, suppression or omission, in connection with the sale or advertisement of any merchandise whether or not any person has in fact been misled, deceived, or damaged thereby, is declared to be an unlawful practice.
First, Nelcela argues Post's consumer fraud claims against Messrs Campagna and Dollarhide must be dismissed because they are not merchants. While the purpose of the Consumer Fraud Act is to eliminate unlawful practices in merchant-consumer transactions, neither the plain meaning of "any person," nor any authority presented construing the act limits its application to merchants. ARIZ. REV. STAT. § 44-1522. Secondly, as noted previously, Post alleges it relied on numerous misrepresentations as to present facts regarding the capabilities of Nelcela System and Nelcela's ability to implement and customize the Nelcela System. Dkt. #84 Post Crossclaim at ¶¶ 21,22, 24,26,28,33,43,45-47,88. Accordingly, Post's Crossclaim for violation of the Arizona Consumer Fraud Act states a claim upon which relief can be granted.
J. Negligence
To prove negligence, one must establish: (1) duty, (2) breach of that duty, (3) causation, and (4) damages. Ocotillo West v. Superior Court, 488, 844 P.2d 653, 655 (Ariz.Ct.App. 1992). Nelcela argues Post has failed to allege it owed Post a duty. While the duty of care as an essential element of actionable negligence, arises by operation of law, it may and frequently does arise out of a contractual relationship, the theory being that accompanying every contract is a common law duty to perform with ordinary care the thing agreed to be done, and that a negligent performance constitutes a tort as well as a breach of contract. RESTATEMENT (SECOND) TORTS § 385. The Crossclaim alleges Nelcela Defendants possessed specialized skill and knowledge and were under a duty to exercise the degree of care ordinarily expected in the business. Dkt. #84 Post Crossclaim at ¶¶ 118-120. Accordingly, Post's Crossclaim for negligence states a claim upon which relief can be granted.
K. Dismissal of Messrs Campagna and Dollarhide
Finally, Nelcela argues Messrs Campagna and Dollarhide must be dismissed because the Crossclaim neither alleges they were parties to any contract nor provides allegations sufficient to pierce the corporate veil. "Corporate directors are not personally liable for torts committed by the corporation or by one of its officers merely by virtue of the office they hold. To be held liable, the directors or officers must participate or have knowledge amounting to acquiescence or be guilty of negligence in the management or supervision of the corporate affairs causing or contributing to the injury." Bischofshausen, Vasbinder, and Luckie v. D.W. Jaquays Min. and Equip. Contractors Co., 700 P.2d 902, 908-909 (Ariz.Ct.App. 1985).
The actionable misrepresentations above were made by Messrs Campagna and Dollarhide. Dkt. #84 Post Crossclaim at ¶¶ 21,22, 24,26,28,33,43,45-47,88. Moreover, Post's Crossclaim alleges Messrs Campagna and Dollarhide knew Post was relying on representations regarding the functionality of Nelcela System.Id. at ¶ 6 Post alleges while Mr. Dollarhide informed Ms. Gerdts he had tested the modified Nelcela System prior to going live, he later stated he had never tested the modified systemId. at ¶ 48. Further, the Crossclaim alleges Messrs Campagna and Dollarhide knew these statements were false when made. Id. at ¶ 74. Taking these allegations as true, they sufficiently state a claim that Messrs Campagna and Dollarhide participated in or were guilty of negligence in the management of Nelcela.
IV. The Clothier's Motion to Dismiss Third Party Claims Against Gene Clothier and Toni Clothier, (Dkt. #128).
The Clothier's motion argues (1) Nelcela's claims are not "supported by any testimony or evidence;" (2) fail to allege specific facts to support a conspiracy claim; and (3) are "shrouded fraud claims" subject to Rule 9(b) particularity requirements.
First, the Clothier's contention Nelcela's claims are not "supported by any testimony or evidence" is wholly without merit. The Clothiers do not argue the allegations in Nelcela's Third Party Complaint are conclusory, and instead, argues the allegations cannot be "supported by any testimony or evidence." The Clothiers go on to argue, Mary Gerdts' and Gene Clothier's deposition has already been taken, but "the depositions were not even mentioned in [Nelcela's] Response."
In determining whether a complaint states a claim, all allegations of material fact are taken as true and construed in the light most favorable to the nonmoving party. Wyler Summit P'ship v. Turner Broad. Sys. Inc., 135 F.3d 658, 661 (9th Cir. 1998). As such, an inquiry into the adequacy of the evidence is improper when deciding whether to dismiss for failure to state a claim. Enesco Corp. v. Price/Costco, Inc., 146 F.3d 1083, 1085 (9th Cir. 1998). Had the Clothiers surmised depositions were necessary, then a motion for summary judgment was appropriate.
Secondly, the Clothiers allegations regarding the "conspiracy claims" failing to allege specific facts supporting the existence of a conspiracy is without merit. The RESTATEMENT (SECOND) OF TORTS provides: for harm resulting to a third person from the tortious conduct of another, one is subject to liability if he:
(a) does a tortious act in concert with the other or pursuant to a common design with him, or
(b) knows that the other's conduct constitutes a breach of duty and gives substantial assistance or encouragement to the other so to conduct himself, or
(c) gives substantial assistance to the other in accomplishing a tortious result and his own conduct, separately considered, constitutes a breach of duty to the third person.
Nelcela's Amended Third-Party Complaint alleges: Ms. Gerdts sought out and worked in concert with Mr. Clothier for the purpose of avoiding paying Nelcela and made numerous misstatements regarding Nelcela, in particular, that Nelcela did not own software that it legally owned. Am. Compl. IV, at ¶¶ 12-19. Nelcela alleges Gene Clothier knew these misstatements were false and made them for the benefit of MTSI. Id. These misstatements resulted in infringement of Nelcela's copyrights and conversion of Nelcela's software. Id. at ¶¶ 23,32,41. Taking as true these allegations, the Complaint alleges Mr. Clothier worked in concert with Ms. Gerdts and MTSI making misrepresentations to third parties for the purpose of avoiding payment to Nelcela and benefitting MTSI, which resulted in infringement of Nelcela's copyrights and conversion of Nelcela's software. Accordingly, the Nelcela's Amended Third-Party Complaint states a claim of aiding and abetting tortious conduct.
Finally, the Clothiers arguments Nelcela's claims are "shrouded fraud claims" subject to Rule 9(b) particularity requirements are equally without merit. Nelcela's third-party complaint alleges: (1) Aiding and Abetting Tortious Conduct re: Copyright Infringement; (2) Aiding and Abetting Tortious Conduct re: Conversion; (3) Defamation; and (4) Injurious Falsehood. Rule 9 (b) provides "all averments of fraud or mistake" must be stated with Particularity. FED. R. CIV. PRO. 9(b) (2005). Nelcela has not alleged a cause of action in fraud or mistake. Plaintiff fails to cite any authority whatsoever for the proposition Nelcela's claims are subject to Rule 9(b) particularity requirements. Furthermore, "to state a claim for slander per quod or injurious falsehood a party need only meet Rule 8's liberal pleading requirements." Leavitt v. Cole, 291 F. Supp.2d 1338, 1345 (M.D. Fla. 2003). Plaintiff has failed to cite the elements for the cause of action, the allegations that are deficient, or any applicable law. The motion is without merit and will be denied.
V. Movant Charles Anderson's Motion to Dismiss State Fraud Claim, (Dkt. #211); Movant Charles Anderson's Motion to Strike Response, (Dkt. #246); and Plaintiff's Motion for Reconsideration of Order Denying Stipulation to Extend Time to File Response to Charles Anderson's Motion to Dismiss, (Dkt. #256).
A. Movant Charles Anderson's Motion to Strike Response, (Dkt. #246); and Plaintiff's Motion for Reconsideration of Order Denying Stipulation to Extend Time to File Response to Charles Anderson's Motion to Dismiss, (Dkt. #256).
On September 13, 2005, the Court denied the parties stipulation for a two-day extension for Plaintiff to respond to Movant Anderson's Motion to Dismiss because Plaintiff failed to allege good cause for the extension. In its motion for reconsideration, Plaintiff has set forth its good cause. Although the Court has advised the parties that absent compelling good cause extensions of time will not be granted, the Court finds denying reconsideration would essentially result in Plaintiff's default on the instant motion. Such default is not justified given the two-day extension did not result in delay of deadlines and the fact that Movant Anderson stipulated to the extension. Accordingly, the Court will grant the motion for reconsideration and deny the motion to strike.
B. Personal Jurisdiction
To establish personal jurisdiction over Mr. Anderson, Plaintiff has the burden of showing that: (1) the forum state's long-arm statute confers jurisdiction over the nonresident defendant; and (2) the exercise of jurisdiction comports with principles of due process. Omeluk v. Langsten Slip Batbyggeri A/S, 52 F.3d 267, 269 (9th Cir. 1995). Arizona's long-arm statute confers jurisdiction to the maximum extent allowed by the Due Process Clause of the United States Constitution. ARIZ. R. CIV. PRO. 4.2(a) (2004); Doe v. American Nat'l Red Cross, 112 F.3d 1048, 1050 (9th Cir. 1997). Therefore, the only issue is whether the exercise of jurisdiction over Defendant accords with due process.See Omeluk, 52 F.3d at 269.
To survive a motion to dismiss for lack of personal jurisdiction, the plaintiff need only make a prima facie showing of jurisdiction. Ziegler v. Indian River County, 64 F.3d 470, 473 (9th Cir. 1995). In determining whether the plaintiff has met his burden, the Court must take the allegations in the plaintiff's complaint as true and resolve disputed jurisdictional facts in the plaintiff's favor. Am. Tel. Tel. Co. v. Compagnie Bruxelles Lamber, 94 F.3d 586, 588-89 (9th Cir. 1996).
Due process requires that the nonresident defendant have "certain minimum contacts with [the forum] such that the maintenance of the suit does not offend 'traditional notions of fair play and substantial justice.'" International Shoe Co. v. Washington, 326 U.S. 310, 316 (1945) (internal citation omitted). There, are two types of personal jurisdiction, general and specific. Plaintiff concedes "the MTSI claim against Anderson is not necessarily related to Anderson's contacts with this state," and accordingly, Plaintiff must establish Mr. Anderson is subject to general jurisdiction in Arizona. Burger King Corp. v. Rudzewicz, 471 U.S. 462, 472 (1985) (holding a finding of specific jurisdiction requires that the alleged injuries "arise out of or relate to" the activities between resident and non-resident).
A defendant is subject to general jurisdiction only where the defendant's contacts with a forum are "substantial" or "continuous and systematic." Bancroft Masters, Inc. v. Augusta Nat'l, Inc., 223 F.3d 1082, 1086 (9th Cir. 2000). The only allegations regarding Mr. Anderson's contacts with Arizona are that: Mr. Anderson entered a contract with an Arizona resident and that Mr. Anderson attended a deposition in Arizona. Neither is sufficient to establish jurisdiction over Mr. Anderson. "[M]erely contracting with a resident of the forum state is insufficient to subject the nonresident to the forum's jurisdiction." Holt Oil Gas Corp. v. Harvey, 801 F.2d 773, 778 (5th Cir. 1986); see also Moylan v. AMF Overseas Corp., 354 F.2d 825, 829 (9th Cir. 1965) (holding that a forum visit for purposes of a deposition does not establish the type of "purposeful availment" necessary to confer jurisdiction over the deponent).
While Plaintiff cites to the "effects test" in support of its argument Mr. Anderson purposefully availed himself of the benefits and privileges of conducting business in Arizona, there are no allegations whatsoever on the face of the complaint establishing Mr. Anderson "expressly aimed at or targeted" Arizona or that Mr. Anderson knew his conduct would cause harm in Arizona. See McGlinchy v. Shell Chem. Co., 845 F.2d 802, 817 (9th Cir. 1988) (finding effects test inapplicable and stating that, "unlike Calder and Haisten, in this case personal jurisdiction is sought on a contract claim, not on a tort claim.").
Again, although Plaintiff argues it makes no sense to litigate this matter in Nevada and it is more convenient to join Mr. Anderson in this litigation, the Due Process Clause "protects an individual's liberty interests in not being subject to the binding judgment of a forum with which he has established no meaningful contacts, ties, or relations." Burger King Corp., 471 U.S. at 471-72. "[A state] does not acquire [personal] jurisdiction by being the 'center of gravity' of the controversy, or the most convenient location for litigation . . . the issue is personal jurisdiction, not choice of law" Hanson v. Deckla, 357 U.S. 235, 254 (1958). Because the Court finds it lacks personal jurisdiction over Mr. Anderson, it declines to reach Mr. Anderson's alternative arguments for dismissal.
VI. Defendant Post's Motion for Sanctions Against Nelcela Regarding: Spoliation of Evidence, which Plaintiff and the Clothier's have joined (Dkt. #243); and Defendant Post's Motion to Strike Defendant Nelcela's Supplemental Response to Post's Motion for Sanctions Re: Spoliation of Evidence or for Leave to Reply to Same (Dkt. #274); and Defendant Post's Motion for Leave to Submit Post-Hearing Memorandum Regarding Issues Raised at Spoilation Hearing (Dkt. #296).
A. Background
Post filed a lawsuit in Maricopa County Superior Court on May 25, 2001, against Nelcela, which was removed and consolidated in this action. Post's allegations were substantially similar to those alleged in the Amended Crossclaim, which was the subject of Nelcela's motion to dismiss outlined above, and involved claims related to breach of the August 2000 Contract to provide Post a customized Nelcela System to enable Post to process credit card transactions in house. Post's state law complaint alleged that on information and belief Nelcela did not own Nelcela System.
On June 29, 2001, Post filed a Rule 34 request for inspection of Nelcela's server, SQL database, audit/security system, and VPS in the state court litigation. On July 9, 2001, Nelcela sought a protective order to prevent the inspection, which the state court denied on August 23, 2001. Post contends its request for inspection was never rescinded. Nelcela disputes this and alleges the Rule 34 inspection was related to the discrete issue of determining whether Post violated the Temporary Restraining Order, by accessing data and stealing Nelcela's source code. Nelcela further argues the state court judge denied Nelcela's motion for a protective order because the state court was dissatisfied with the parties stipulation to vacate the hearing on the protective order and both parties stipulated to withdrawal of motions for sanctions related to alleged violations of the temporary restraining order. Post contends it continued to seek inspection, sending Nelcela a request to maintain the integrity of the system as it existed in December 2000 on June 18, 2002. Post also argues it raised the issue of inspection on September 3, 2002.
While the issue of whether Nelcela system was at issue in 2001 is disputed, the underlying facts related to allegations Nelcela Defendants destroyed evidence are not in dispute. Specifically, this dispute involves Messrs Dollarhide and Campagna beating seven computer hard drives with a hammer and overwriting older versions of source code.
B. Legal Standard
A trial court has inherent authority to sanction a party for destroying relevant evidence. Glover v. BIC Corp., 6 F.3d 1318, 1329 (9th Cir. 1993). Courts applying this sanction have done so, when the moving party established (1) duty to preserve; (2) relevancy; and (3) prejudice. Id. First, a court can instruct the jury that it may draw an inference adverse to the party or witness responsible for destroying the evidence. Id. Second, a court can exclude witness testimony proffered by the party responsible for destroying the evidence and based on the destroyed evidence. Id. Finally, a court may "in extreme circumstances" dismiss the claim of the party responsible for destroying the evidence. See Halaco Engineering Co. v. Costle, 843 F.2d 376, 380 (9th Cir. 1988). Furthermore, "a finding of 'bad faith' is not a prerequisite to this corrective procedure." Glover, 6 F.3d at 1329 ( citing Unigard Sec. Ins. v. Lakewood Engineering Mfg., 982 F.2d 363, 368-70 n. 2 (9th Cir. 1992)).
1. Duty to Preserve
The record before the Court is one with two opposing versions of the conduct in state court and the importance of Nelcela's system during 2001. Notably, neither party has provided information for which the Court can ascertain the validity of arguments related to the basis for the inspection request, denial of a protective order, and effect of the parties stipulation to withdraw motions for sanctions. Furthermore, both parties have stated that Post was represented by different counsel in 2001, during the time period at issue. Due to the lapse of time, change in counsel, change in court, and lack of information, the precise facts related to the inception of this litigation, centrality of Nelcela's system, and whether the system was the subject of an ongoing request for inspection have not been fully developed.
However, Nelcela's arguments "ownership" was not at issue when this litigation was commenced in state court are not well taken. Although Post's claims were for breach of contract and various torts, Post challenged Nelcela's ownership of the source code in its complaint. Furthermore, where litigation has commenced, the system is the lynchpin of the litigation, the system is the subject of the temporary restraining order, the Court finds at a minimum Nelcela should have ensured it had produced all materials required before allowing destruction of the hard drives and firewall at issue. Nelcela has made numerous contentions related to the scope of the Rule 34 inspection demand, the facts surrounding the denial of the protective order, and contentions the parties resolved the matter. The court finds these issues must be developed and will be relevant to the bad faith (or good faith) of Mr. Dollarhide when destroying the hard drives and firewall. Accordingly, it appears Nelcela had a duty to preserve the integrity of its system as it existed in December 2000.
2. Relevance
Post argues destruction of the hardware is relevant to this litigation, because Post is now unable to have a forensic expert inspect these computers to find when and how the Nelcela System source code was developed, extract prior versions of the source code, and disprove Nelcela's claim Post went through Nelcela's firewall and stole the source code. Nelcela contends it has provided Post the source code as it existed in December 2000. Nelcela discarded only outdated equipment and preserved software. Furthermore, Nelcela argues "writing over" older versions of software is commonly followed in the industry. As indicated above, while Post put Nelcela's ownership of the source code at issue, it is unclear to the Court whether Post's inspection request was narrowed to the issue of whether there had been a violation of the temporary restraining order.
3. Prejudice
Post argues inspection of the destroyed hard drives is "vital" to its defense and, specifically, Post's forensic expert cannot inspect the hardware to rebut Nelcela's allegations Post breached the firewall and stole Nelcela's source code. Nelcela argues the hardware was irrelevant because all relevant information was preserved. After reviewing the papers and arguments, the Court finds Post's allegations of the extreme importance of inspecting this hardware is significantly belayed by Post's conduct. The last request from Post (which appears to be an oral request of some kind) was made three years ago. Post did not discover the destruction because its expert attempted to inspect Nelcela's system, and instead, discovered Mr. Dollarhide had destroyed the hard drives in an August 2005 deposition. While Post's expert report was ultimately due in September 2006, the deadline was initially April 15, 2005. Dkt. #52. On March 31, 2005, the Court extended Post's expert report deadline to May 27, 2005. Dkt. #104. Again on June 22, 2005 the Court extended Post's expert report deadline to September 2, 2005. Dkt. #178. Moreover, the Court repeatedly admonished the parties that continuances would not be granted absent compelling good cause. Given the reluctance of the Court to extend deadlines, it is curious Post had not sought inspection of Nelcela's system prior to August 2005, given looming expert disclosure deadlines. Where as here, the Court is presented with opposing allegations, the Court is obliged to make assessments of the credibility of the arguments. The Court finds Post's contentions of prejudice are significantly belayed by its conduct.
C. Bad Faith
In order to warrant the requested sanction of dismissal, the Court must conclude Mr. Dollarhide's conduct was willful and in bad faith. Century ML-Cable Corp. v. Carrillo, 43 F. SUPP.2d 176 (D.P.R. 1998) (held that defendant's willful destruction of his laptop and business records justified entry of default judgment against him and order to pay attorneys' fees and costs); Wm. T. Thompson Co. v. Gen. Nutrition Corp., Inc., 593 F. SUPP. 1443 (C.D.Cal. 1984) (entry of default judgment and costs against defendant for destroying documents and erasing computer tapes and discs preventing plaintiff from presenting critical evidence to a jury); Computer Assocs. Int'l, Inc. v. Am. Fundware, Inc., 133 F.R.D. 166 (D.Colo. 1990) (default judgment only appropriate remedy against defendant who destroyed all copies of its source code despite duty to preserve as evidence materials within its control).
The Court is troubled by the timeline of events surrounding the destruction of the hard drives. For example, the state court litigation commenced on May 25, 2001, and Post demanded inspection of Nelcela's system a short time thereafter on June 29, 2001. And apparently in late 2001 Mr. Dollarhide took a hammer to the hard drives. Nonetheless, the record is simply unclear, due to the fact these issues were presented in state court, the fact Post was represented by different counsel during the relevant time this litigation was commenced, the opposing arguments regarding the scope of the Rule 34 inspection, the basis for the state court's denial of Nelcela's motion for a protective order, and finally the nearly four years that has lapsed since the destruction of the evidence at issue. Nonetheless, here where Post seeks dismissal of Nelcela's claims, Post bears the burden of persuasion. The Court finds there has been an insufficient showing of bad faith conduct and prejudice to warrant the extreme sanction of dismissal. Moreover, the issues of relevancy remain unclear.
Accordingly, the Court will deny the motion. However, Post is granted leave to reurge the issue in limine before the jury trial, should the Court not resolve the issue of ownership on the papers. Post is advised the Court will only address the issue after presentation of evidence in the trial, so the Court will be in a better position to evaluate all the evidence. At that time, and if appropriate, the Court will consider whether a sanction is warranted.
IT IS HEREBY ORDERED Defendant Nelcela's Motion to Dismiss Post's Crossclaim is DENIED IN PART and GRANTED IN PART. (Dkt. #113). The Motion is granted only as to Post's Crossclaim for Conversion, Count 3, which is hereby dismissed with prejudice.
IT IS FURTHER ORDERED Upon Nelcela's Motion to dismiss and MTSI's consent thereto, Defendant Nelcela's Motion to Dismiss Case is GRANTED. (Dkt. #159). Count 10, Count 11, Count 14, Count 15, and Count 16 are hereby dismissed from Plaintiff's First Amended Complaint.
IT IS FURTHER ORDERED Nelcela is granted leave to file a motion for attorney's fees with respect to its' motion at Dkt. #159, outlining the legal and factual basis for a fee award.
IT IS FURTHER ORDERED the Clothier's Motion to Dismiss Third Party Claims Against Gene Clothier and Toni Clothier is DENIED. (Dkt. #128).
IT IS FURTHER ORDERED Movant Charles Anderson's Motion to Dismiss State Fraud Claim is GRANTED. (Dkt. #211). Movant Anderson is hereby dismissed from this action for lack of personal jurisdiction.
IT IS FURTHER ORDERED Movant Charles Anderson's Motion to Strike Response is DENIED. (Dkt. #246).
IT IS FURTHER ORDERED Plaintiff's Motion for Reconsideration of Order Denying Stipulation to Extend Time to File Response to Charles Anderson's Motion to Dismiss is GRANTED. (Dkt. #256).
IT IS FURTHER ORDERED Defendant Post's Motion to Strike Defendant Nelcela's Supplemental Response to Post's Motion for Sanctions Re: Spoliation of Evidence or for Leave to Reply to Same is DENIED IN PART and GRANTED IN PART. The Court will grant Post leave to file a supplemental response. (Dkt. #274).
IT IS FURTHER ORDERED Defendant Post's Motion for Leave to Submit Post-Hearing Memorandum Regarding Issues Raised at the Spoilation Hearing is DENIED. (Dkt. #296).