Opinion
No. C 02-1670 JSW.
August 2, 2004
ORDER DENYING DEFENDANT'S MOTION TO DISMISS COUNTS VIII, IX AND X OF PLAINTIFF'S FOURTH AMENDED COMPLAINT
Now before the Court is defendant Ariba, Inc.'s ("Ariba") motion to dismiss counts VIII, IX, and X of the Fourth Amended Complaint ("4th AC") filed by plaintiff Neoris De Mexico, S.A., de C.V., formerly known as Cemtec, S.A., de C.V. ("Cemtec"). This Court has jurisdiction over Cemtec's state law claims because the parties are diverse and the amount in controversy exceeds $75,000. See 28 U.S.C. § 1332.
Ariba seeks to dismiss counts VIII, IX, and X of Cemtec's 4th AC on the ground that Cemtec failed to plead a set of facts to support their claims under Rule 12(b)(6), and failed to plead its facts with sufficient particularity pursuant to Rule 9(b). After careful consideration of the parties' arguments and the relevant authority, the Court DENIES Ariba's motion to dismiss counts VIII, IX, and X of Cemtec's 4th AC.
FACTUAL AND PROCEDURAL BACKGROUND
Plaintiff Cemtec is the internal technology arm of Cemex, a global cement company located in Monterey, Mexico. (4th AC ¶ 14.) Defendant Ariba is a provider of internet based business-to-business ("B2B") electronic commerce network solutions. ( Id. ¶ 9.)
In 1999 and 2000, the parties engaged in negotiations regarding the possibility of Cemtec licensing and reselling Ariba's software. ( Id. ¶ 15.) Cemtec, in consultation with Ariba, developed a "comprehensive business model for establishing different electronic marketplaces consisting of Latin American buyers and sellers based upon the Ariba B2B Commerce Platform." ( Id.) Cemtec planned to establish an e-commerce "vertical" market to link Latin American buyers and sellers of construction products, and a "horizontal" e-commerce market where small and medium-sized businesses could access an aggregated supplier base. ( Id. ¶ 16.) Ariba allegedly represented that its applications would be able to facilitate Cemtec's business plan in the areas of hosting, branding, tracking and reporting. ( Id. ¶¶ 18-22.)
On May 12, 2000, Cemtec and Ariba entered into a Master Agreement in which Ariba granted Cemtec two software licenses for twenty-five years. ( Id. ¶ 27.) At that time, Cemtec and Ariba envisioned that the software would enable Cemtec to create its vertical and horizontal markets. ( Id.) Cemtec now alleges however that Ariba overcharged Cemtec and that Ariba's services and software failed to proved perform as promised during negotiations. ( Id. ¶¶ 31-87.)
On April 8, 2002, Cemtec filed a complaint against Ariba alleging nine causes of action. Pursuant to Rules 12(b)(6) and 9(b), Ariba moved to dismiss five of these claims. On July 9, 2002, the Court filed an order granting in part and denying in part Ariba's motion to dismiss for failure to state a claim. First, the Court granted Ariba's motion to dismiss Cemtec's claim for breach of express warranty, without leave to amend, insofar as it purports to assert warranties not contained within the Master Agreement. Second, the Court denied Ariba's motion to dismiss claims of promissory estoppel and the breach of the covenant of good faith and fair dealing. Finally, the Court dismissed Cemtec's claims for fraud and negligent misrepresentation because Cemtec did not plead the facts of these claims with sufficient particularity pursuant to Rule 9(b). The Court found that Cemtec's pleading was deficient under Rule 9(b) because the complaint failed to allege facts demonstrating "when" and "where" the alleged misrepresentations occurred, and to "whom" the misrepresentations could be attributed. Accordingly, the Court granted Cemtec leave to amend its complaint.
On July 23, 2002, Cemtec filed its First Amended Complaint ("FAC"). Ariba filed a motion to dismiss the claims of fraudulent misrepresentation, fraudulent concealment and negligent misrepresentation. In an order dated October 28, 2002, the Court again dismissed the claims with leave to amend under Rule 9(b) on the ground that Cemtec still had not sufficiently pleaded facts demonstrating "when" and by "whom" the alleged misrepresentations were made. However, the Court found Cemtec had adequately alleged "where" the misrepresentations occurred by alleging that the meetings took place at Ariba's corporate offices in Mountain View, California.
Cemtec then filed its Second Amended Complaint ("SAC") on November 12, 2002. Subsequently, on December 10, 2002, Ariba filed an Answer and Counterclaim to Cemtec's SAC. On January 10, 2003, Cemtec filed an Answer to Ariba's Counterclaim. On January 30, 2003, Cemtec filed a First Amended Answer to Ariba's Counterclaim. The parties proceeded to conduct discovery.
On January 14, 2003, the Executive Committee reassigned all further proceedings in this case to the undersigned.
On September 5, 2003, the Court granted the parties' stipulation allowing Cemtec to file a Third Amended Complaint ("TAC"). In response, Ariba filed a motion to dismiss the claims of fraudulent misrepresentation (claim VIII), fraudulent non-disclosure (claim IX), and negligent misrepresentation (claim X) of the TAC on November 10, 2003.
On April 22, 2004, the Court granted the parties' stipulation that Cemtec would be allowed to file a Fourth Amended Complaint ("4th AC") and that in the interest of preserving the parties resources Ariba's motion to dismiss the TAC would be deemed a motion to dismiss the 4th AC. On May 21, 2004, Cemtec filed their 4th AC.
Ariba now seeks to dismiss Cemtec's claims VIII, IX and X for fraud in the inducement, fraudulent non-disclosure and negligent misrepresentation pursuant to Rules 12(b)(6) and 9(b) on the ground that Cemtec failed to allege the requisite elements of their claims, and failed to plead their claims with sufficient particularity.
ANALYSIS
A. Legal StandardA motion to dismiss under Rule 12(b)(6) tests the legal sufficiency of a claim. Navarro v. Block, 250 F.3d 729, 731 (9th Cir. 2001). A motion to dismiss should not be granted "unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Conley v. Gibson, 355 U.S. 41, 45-46 (1957); Johnson v. Knowles, 113 F.3d 1114, 1117 (9th Cir. 1997). The complaint is construed in the light most favorable to the plaintiff, and all properly pleaded factual allegations are taken as true. Jenkins v. McKeithen, 395 U.S. 411, 421 (1969); Everest Jennings, Inc. v. Am. Motorists Ins. Co., 23 F.3d 226, 228 (9th Cir. 1994). "Dismissal is proper only where is no cognizable legal theory or an absence of sufficient facts alleged to support a cognizable legal theory." Navarro, 250 F.3d at 731.
B. Sufficiency of Pleading Under Rule 12(b)(6)
In its October 28, 2002 Order, the Court found that Cemtec pleaded the requisite elements to establish a claim of fraud under Rule 12(b)(6). Following a careful review of the FAC and the 4th AC, the Court finds that the complaints are nearly identical. The only recognizable difference between the two complaints is that the 4th AC contains additional allegations that delineate the dates when the alleged misrepresentations occurred, and attribute each misrepresentation to specific Ariba employees. Ariba now raises new legal issues and arguments that were not made in the prior 12(b)(6) motions. Ariba contends that three of Cemtec's theories to support claims VIII, IX and X fail as a matter of law because the parties' Master Agreement contains an integration clause that precludes the introduction of pre-contract negotiations and representations inconsistent with the contract's terms. Ariba first assails Cemtec's theory that Ariba fraudulently promoted ORMX and ORMS as distinct products. Ariba also contests the theories advanced by Cemtec that Ariba misrepresented the hosting capability of ORMX and the price structure of the licensed software.
1. Fraudulent Promotion of ORMX and ORMS as Distinct Products
In its 4th AC, Cemtec alleged that Ariba fraudulently promoted ORMX as a new and functionally distinct software program from ORMS, when in fact the programs were merely duplicative names for an identical software code. (4th AC ¶ 57.) Ariba now contends that this theory fails as a matter of law because ORMS and ORMX are two separate licenses to two different intellectual property rights. (Br. at 8.) Therefore, Ariba argues, because Cemtec contracted for two licenses, it received two distinct products. Id.
As the Court previously found in its October 28, 2002 Order, Cemtec's FAC sufficiently pleaded facts, for purposes of a 12(b)(6) motion, to demonstrate that Ariba fraudulently promoted ORMX as a new and functionally distinct software program from ORMS. The Court found that, taken in a light most favorable to Cemtec, the alleged May 8, 2000 internal Ariba memorandum ("Memo"), and the last minute alteration to the definition of "Programs" in Attachment 3 to Master Agreement provided a factual basis to support Cemtec's theory.
In its 4th AC, Cemtec raises the same allegations that survived Ariba's previous motion to dismiss. First, Cemtec alleges that on September 28, 1999, Ariba issued a press release that "publicly announced" the introduction of ORMX, a "new product and program," that would allow "medium-sized enterprises" "a seamless way to integrate with their suppliers." (4ht AC ¶ 60.) Based on this press release and the representations of Ariba employees, Cemtec contracted to license both ORMX and ORMS for $5 million — $2.5 million each. (4th AC ¶ 25.) Second, Cemtec alleges that the Ariba Memo "acknowledged that Ariba had promoted ORMX and ORMS as `two distinctly different products,' when, in fact, they were `the same product' and, going forward, should be so `positioned' by Ariba's marketing personnel." (4th AC ¶ 76.) Third, Cemtec alleges that Ariba unilaterally changed the definition of "Programs" in the ORMX attachment by replacing the reference to "ORMX" with "ORMS," and subsequently used the unannounced change to claim Cemtec should have known the two products were not separate products, but rather "a marketing ploy." (4th AC ¶ 78.)
At oral argument, Ariba's council conceded this typo occurred, but maintained that the Master Agreement still contradicts Cemtec's allegations.
The foregoing allegations, taken together and in the context of fraudulent and negligent misrepresentation, raise a reasonable inference that Cemtec bargained under the premise that it would pay an extra $2.5 million for the "new" ORMX technology with added functionality, rather than a previously available program spliced into two intellectual property rights. These allegations also raise the reasonable inference that if Cemtec had know that Ariba created two licenses from a previously available product, it would not have agreed to pay an additional $2.5 million. Accordingly, Cemtec's theory that Ariba fraudulently promoted ORMX and ORMS as distinct products again survives Ariba's 12(b)(6) motion.
2. Misrepresentation of ORMX Hosting Capabilities
Ariba contends that Cemtec failed to plead facts to demonstrate its theory that Ariba employees misrepresented the hosting capabilities of ORMX. However, read in a light most favorable to Cemtec, the alleged disclosures of Ariba President Thomas Pallack suggest that one instance of ORMX software would enable Cemtec to host a 5,000 customer online marketplace. (4th AC ¶ 67.) The 4th AC also alleges that Ariba employees represented that ORMX would allow Cemtec to create a "shared" online marketplace, without "client installation," where concurrent clients could access Cemtec's ORMX application through a web-browser. (4th AC ¶¶ 62 and 69.) The representations regarding the hosting capabilities of ORMX appeased Cemtec and allegedly induced Cemtec to enter into the Master Agreement. (4th AC ¶¶ 119-122.)
At oral argument Ariba attacked Cemtec's theories that Ariba misrepresented the hosting capabilities of ORMX and the price structure of the licensed software on the ground that any extrinsic evidence of misrepresentation is precluded by the integration clause in the Master Agreement. In California, it is a "well-settled rule that parol evidence is admissible to prove fraud in the inducement `even though the contract recites that all conditions and representations are embodied therein.'" Ron Greenspan Volkswagen, Inc. v. Ford Motorland Development Corporation, 32 Cal. App. 4th 985, 995 (1995). Extrinsic evidence of fraud in the inducement is only precluded if it contradicts the integrated agreement. Brinderson-Newberg Joint Venture, 971 F.2d at 281 (applying California law). Here, the parties' Master Agreement is silent as to the hosting capabilities of ORMX. Accordingly, Cemtec may introduce parol evidence that Ariba fraudulently induced Cemtec to contract.
Subsequently, when Cemtec attempted to implement the ORMX software, Ariba's technical consultant, Fabian Galarza, stated that one instance of ORMX software would never enable Cemtec to host an ASP for thousands of customers and that each customer would need its own instance of ORMX. (4th AC ¶ 79.) If true, these alleged disclosures suggest Ariba knowingly misrepresented the hosting capabilities of ORMX because it is highly improbable that Ariba negotiators would not know the functional limitations of ORMX.
For the foregoing reasons, the allegations in Cemtec's 4th AC raise a reasonable inference that Ariba employees knowingly misrepresented the hosting capabilities of ORMX in order to induce Cemtec to contract. The allegations also raise reasonable inferences that Ariba fraudulently failed to disclose facts to induce Cemtec to contract.
3. Misrepresentation of the Licensed Software Price Structure
Ariba contends that extrinsic evidence regarding the price structure of the licensed software would add to or vary the terms of the parties' Master Agreement and is therefore inadmissible. Ariba asserts that because the Master Agreement clearly defines the subscription fee to be charged to each customer, Cemtec therefore cannot plead facts that to raise a reasonable inference that Ariba misrepresented the per-customer cost. (Br. at 12-13.) Ariba misconstrues Cemtec's argument. Cemtec does not allege Ariba misrepresented the subscription fee. Rather, Cemtec alleges that because Ariba represented that only one instance of ORMX could support the entire online marketplace, when in fact each new customer required an instance of ORMX, Ariba misrepresented the implementation cost to Cemtec's customers. (4th AC ¶ 79.) As a consequence, the unanticipated cost of a copy of ORMX for each new customer, in addition to the subscription costs, prevented Cemtec from procuring subscribers and undermined the entire contract. Therefore, Cemtec properly pleaded facts to demonstrate Ariba misrepresented the per-customer cost to implement Cemtec's online marketplace.
For the foregoing reasons, this Court finds that Cemtec's 4th AC properly pleaded the elements to support claims VIII, IX and X pursuant to Rule 12(b)(6).
C. Heightened Pleading Requirement of Rule 9(b)
Rule 9(b) provides that, "[i]n all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity." To comport with Rule 9(b), the complaint must allege the time, place, and content of the alleged fraudulent representation or omission; the identity of the person engaged in the fraud; and the "circumstances indicating falseness" or "the manner in which [the] representations [or omissions at issue] were false and misleading." In re GlenFed, Inc. Sec. Litig., 42 F.3d 1541, 1548 (9th Cir. 1994). Accordingly, a plaintiff must provide an explanation as to how an alleged statement or omission was false or misleading when made. Id. The failure to plead fraud with the requisite particularity is grounds for dismissal. See Wool v. Tandem Computers, Inc., 818 F.2d 1433, 1439 (9th Cir. 1987).
D. Sufficiency of Pleading with Particularity for Fraud and Non-disclosure under Rule 9(b)
In its October 28, 2002 Order, the Court found that Cemtec's FAC adequately alleged facts to demonstrate "what" was the content of Ariba's alleged misrepresentations, "why" the misrepresentations mislead Cemtec, and "where" the misrepresentations occurred. However, the Court also found that Cemtec's FAC failed to satisfy the requirements of Rule 9(b) because Cemtec did not adequately plead the dates "when" the misrepresentations occurred, or to "whom" the misrepresentations could be attributed. The Court accordingly dismissed the claims with leave to amend.
In the 4th AC, Cemtec added allegations that attribute each alleged misrepresentation concerning the hosting capabilities and implementation costs of ORMX to specific Ariba employees. (4th AC ¶¶ 61-74.) The 4th AC also clearly delineates the dates on which the alleged misrepresentations occurred. ( Id.) Therefore, because Cemtec's 4th AC now ties specific names and specific dates to the alleged misrepresentations by Ariba employees, Cemtec properly pleaded its allegations with requisite particularity to satisfy Rule 9(b)'s heightened pleading requirement for fraud and non-disclosure.
Ariba argues that Cemtec did not plead, with sufficient particularity under Rule 9(b), its allegation that Ariba misrepresented that the licensed software contained a tracking function. Ariba further contends that Cemtec cannot satisfy the requirements of Rule 9(b) by asserting that the express language of the Master Agreement provides for a tracking function because the Agreement, on its face, does not contain such a provision. The Court concurs with Ariba's argument.
Cemtec's 4th AC complaint asserts that "the Cemtec contract team told Ariba that it needed software with the capability of tracking and reporting customers' transactions. [Furthermore,] Pallack, Bruno and other [Ariba employees] falsely assured Cemtec that the Ariba software had such functionality." (4th AC ¶ 82) While the complaint asserts that Ariba's false assurances occurred in Mountain View, Cemtec did not adequately plead, with sufficient particularity, "when" the alleged misrepresentations occurred, or the content of the misrepresentations. Cemtec also fails to disclose the identity of the "other" Ariba employees besides Pallack and Bruno who assured Cemtec that the licensed software contained a tracking function.
Cemtec contends that "Exhibit E to the Master Agreement," and "three of the four separate attachments to the Master Agreement" contemplate that the licensed software contained a tracking function. (4th AC ¶ 83.) However, just because the Master Agreement contemplates that Ariba will "share . . . a percentage" of Cemtec's "[t]otal [r]evenues," does not mean that the contract contemplates that the software could track customer transactions. Exhibit E appears to provide Cemtec "sole discretion whether or not to charge [its] customers a transaction fee." Cemtec's apparent unfettered discretion to charge its customers a transaction fee does not give rise to a reasonable inference that the contract, on its face, provides that the licensed software could track customers. The Master Agreement only contemplates that if Cemtec exercised its discretion to charge its customers a transaction fee, Ariba would be entitled to a percentage share. It is also unclear from Cemtec's bald allegation which of the "three of four attachments" to the Master Agreement contemplate a tracking function, and how they do so.
Accordingly, the Court grants Cemtec leave to amend its complaint with respect to Ariba's alleged representations about the software's tracking functionality only. Cemtec may only proceed under this theory if it sufficiently amends the complaint to add further particularity to its allegations.
While the Court previously granted Cemtec multiple opportunities to amend its complaint, the allegations about the software's tracking capability appear for the first time in the TAC and 4th AC. Cemtec is therefore entitled to plead additional facts to support this theory with the requisite particularity under Rule 9(b).
CONCLUSION
For the foregoing reasons, Ariba's motion to dismiss counts VIII, IX, and X under Rules 12(b)(6) and 9(b) is DENIED. The Court GRANTS Cemtec leave to amend with respect to the representations about the software's tracking function only. Cemtec will have 30 days to amend its complaint.
In light of this Order the hearing on the parties' cross-motions for summary judgment is continued from October 15, 2004 to December 3, 2004. In response to the Miscellaneous Administrative Requests recently filed by both parties, the page limitations for the cross-motions shall be as follows:
• as to Defendant's motion for summary judgment, the opening and opposition briefs shall not exceed 50 pages; the reply brief shall not exceed 25 pages;
• as to Plaintiff's cross-motion for summary judgment, the opening and opposition briefs shall not exceed 40 pages, the reply brief shall not exceed 20 pages.
This Order resolves docket entries 66, 137 and 140.
IT IS SO ORDERED.