Opinion
22-35028
09-07-2022
ESPRESSO SUPPLY, INC., a Washington corporation, Plaintiff-counter-claim- defendant-Appellant, v. SMARTCO INTERNATIONAL (HK) LIMITED, a limited liability company organized under the laws of Hong Kong; SMARTCO INTERNATIONAL (ASIA) LIMITED; ETERNAL EAST (HK) LIMITED, a limited liability company organized under the laws of Hong Kong, Defendants-counter- claimants-Appellees.
NOT FOR PUBLICATION
Argued and Submitted August 10, 2022 Seattle, Washington
Appeal from the United States District Court for the Western District of Washington Ricardo S. Martinez, Chief District Judge, Presiding
Before: BERZON, CHRISTEN, and FORREST, Circuit Judges.
MEMORANDUM [*]
In this case involving a coffee products international distribution agreement, the district court granted the defendant's Federal Rules of Civil Procedure Rule 12(b)(6) motion to dismiss for failure to state a claim on the ground that the contract had expired. We reverse and hold that the plaintiff 's complaint makes out a facially plausible claim that the contract was not expired and was breached.
1. The district court's refusal to consider Espresso Supply's parol evidence runs afoul of Washington's context rule. In Berg v. Hudesman, 115 Wash.2d 657 (1990), the Washington Supreme Court jettisoned the "plain meaning rule," which had strictly limited courts' discernment of "plain and unambiguous" contractual terms to the "four corners of the instrument." Id. at 666 (citations omitted). After explaining that courts' interpretation of contracts must effectuate the intent of the parties and observing that the meaning of language "can almost never be plain except in context," id. at 668 (quoting Restatement (Second) of Contracts § 212 cmt. B (Am. L. Inst. 1981)), Berg "reject[ed] the theory that ambiguity in the meaning of contract language must exist before evidence of the surrounding circumstances" is examined. Id. at 669. To "aid in ascertaining the parties' intent," Berg directed courts to consider parol evidence going to: (1) the subject matter and objective of the contract, (2) all the circumstances surrounding the making of the contract, (3) the subsequent acts and conduct of the parties, (4) the reasonableness of respective interpretations urged by the parties, (5) any statements made by the parties in preliminary negotiations, (6) usages of trade, and (7) the parties' course of dealing. Id. at 666-68.
Hearst Communications, Inc. v. Seattle Times Co., 154 Wash.2d 493 (2005), refined the contours of the context rule. In that case, the Hearst Corporation sought to introduce parol evidence demonstrating that, despite express contractual language to the contrary, it understood a joint operating agreement's loss calculation provision as excluding "force majeure" costs. Id. at 499-501, 504-05, 507, 510. The Washington Supreme Court explained that the context rule does not authorize "unrestricted use" of parol evidence. Id. at 503 (citation omitted). Instead, parol evidence is admissible "to determine the meaning of specific words and terms used" in an instrument, not to "show an intention independent of the instrument" or to "vary, contradict[,] or modify" the terms of the instrument. Id. (quoting Hollis v. Garwall, Inc., 137 Wash.2d 683, 695-96 (1999)). Hearst emphasized that, in particular, parol evidence should not be used in a manner that allows the "unexpressed subjective intent" of a party to alter the meaning of express contractual language. Id. Hearst reiterated, consistent with these admonitions, that parol evidence must be evaluated to aid the court in "understanding the parties' intent with respect to the meaning" of contractual language. Id. at 502; see also Spectrum Glass Co., Inc. v. Pub. Util. Dist. No. 1 of Snohomish Cnty., 129 Wash.App. 303, 311 (2005).
2. Espresso Supply's complaint states that both parties understood and agreed that the contract's renewal provision-which provides that "[t]he initial duration of this Agreement shall be five (5) years, renewable each year"-created an evergreen five-year term. Espresso Supply's complaint referred to an email from Brian Gross, Smartco's former Vice President and primary representative during the negotiations, who signed each page of the contract on Smartco's behalf. The email, sent about three weeks before the Agreement was signed, includes, under the heading "what we agreed to and want to include in a contract," the statement "we will have a 5 year Licensing Contract that is renewed yearly." The email further notes that, although the parties were still ironing out the details of other terms in the Agreement-such as limitations on Smartco's ability to market its competing brand of coffee products-the parties set a "goal" of resolving those "few last challenges" within the following week. The Gross email provides support for Espresso Supply's position, as it indicates that the parties treated the words "renewed" and "renewable" as equivalent terms, undercutting the district court's assertion that "'renewable' . . . unquestionably mean[t] 'capable of being renewed,'" not "renewed."
Smartco suggested at oral argument that the parties may have renegotiated the details of the renewal provision after Gross sent the email. But the email states that the renewal term had been agreed upon (although other issues were still open), and the complaint contains no allegation or attachment that supports the supposition that the question was nonetheless reopened. It is therefore a plausible inference that the email reflects the parties' understanding of the language included in the Agreement.
Espresso Supply's parol evidence is admissible under the context rule. It qualifies as evidence going to the "objective of the contract," "the circumstances surrounding the making of the contract," "the reasonableness of the parties' respective interpretations," and "statements made by the parties in preliminary negotiations." See Hearst, 154 Wash.2d at 502-03; Berg, 115 Wash.2d at 66768; Wash. State Republican Party v. Wash. State Grange, 676 F.3d 784, 796-97 (9th Cir. 2012); Kelley v. Tonda, 198 Wash.App. 303, 312 (2017).
Further, the Agreement's renewal provision, even using the dictionary definition adopted by the district court-that "renewable unquestionably means 'capable of being renewed'"-does not disclose how renewal would occur. There are three possibilities: (1) the agreement was capable of being renewed upon mutual agreement; (2) the agreement was capable of being renewed upon unilateral action by one party; or (3) the agreement was capable of being renewed upon silence-that is, failure to notice an intent to initiate expiration. So this is not a case, like Hearst, where a party is seeking to rely upon unexpressed subjective intent to alter the language of the contract. Instead, this is a case where a party is seeking to introduce important contextual information that will aid the court in discerning the "reasonable meaning of the words used" in an express contractual term. Hearst, 154 Wash.2d at 503. The evidence alleged in the complaint plausibly supports the conclusion that the parties treated the words "renewed" and "renewable" interchangeably and meant to provide for an automatically renewing five-year contract, absent notice of an intent to terminate the agreement by one party.
In sum, taking Espresso Supply's parol evidence into account, as we must, we conclude that the complaint includes factual assertions regarding the breach of contract claim that, taken as true, "state a claim to relief that is plausible on its face," meaning there is "more than a sheer possibility that [the] defendant has acted unlawfully." Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 557, 570 (2007)); see also Nayab v. Cap. One Bank (USA), N.A., 942 F.3d 480, 495-96 (9th Cir. 2019). We therefore reverse the district court's dismissal of Espresso Supply's breach of contract claim.
We note that the record contains additional parol evidence, attached to Espresso Supply's motion for a preliminary injunction, indicating that Gross stated, in a phone call that occurred just after Smartco's alleged breach of contract, that the Agreement had "a five-year term which renews every year for subsequent five-year terms" such that Smartco had "the opportunity, annually, to provide notice" of an intention to allow the Agreement to expire, which, if exercised, would "allow Espresso Supply the opportunity to exit the business over time." As the phone call was not discussed in the complaint, and the Declaration detailing the phone call was not attached to the complaint, the substance of the phone call is not cognizable on the motion to dismiss. Knievel v. ESPN, 393 F.3d 1068, 1076 (9th Cir. 2005); Khoja v. Orexigen Therapeutics, Inc., 899 F.3d 988, 998-99, 1002-03 (9th Cir. 2018).
3. Espresso Supply asserted, in addition to breach of contract, claims for (1) intentional interference with a business expectancy; (2) violation of the Consumer Protection Act; and (3) unfair competition. It sought damages as well as declaratory and injunctive relief. The district court dismissed all of Espresso Supply's claims on the ground that they depended on the existence of a contract between the parties, and the contract had expired. As we conclude the complaint plausibly establishes that there was a contract between the parties that had not expired, we reverse and remand each of Espresso Supply's claims for further proceedings.
4. The district court's decision to grant Smartco's Rule 12(b)(6) motion to dismiss was a precursor to its later-in-time decisions to deny Espresso Supply's motions for reconsideration and for leave to amend the complaint. We vacate those later-in-time decisions as moot.
5. The district court's denial of Espresso Supply's motion for a preliminary injunction rested on the same ground as the dismissal of the complaint-that is, a refusal to consider Espresso Supply's parol evidence, which included, at the preliminary injunction stage, the Gross phone call. We therefore reverse the denial of the motion for a preliminary injunction and remand the motion to the district court for reconsideration in light of the legal principles enunciated in this disposition. See, e.g., Epona v. Cnty. of Ventura, 876 F.3d 1214, 1227 (9th Cir. 2017).
REVERSED IN PART, VACATED AS MOOT IN PART, AND REMANDED.
[*] This disposition is not appropriate for publication and is not precedent except as provided by Ninth Circuit Rule 36-3.