Judge David J. Cowan, Case Number: 19STCV30463, Date: 2025-01-10 Tentative Ruling

TENTATIVE RULING ON WINE WAREHOUSE’S MOTION FOR SUMMARY ADJUDICATION OF GOLDEN STATE CIDER’S CROSS-COMPLAINT’S CAUSE OF ACTION FOR FRAUD AND ITS AFFIRMATIVE DEFENSE OF FRAUD TO COMPLAINT

Ben Myerson Candy Co., Inc., dba Wine Warehouse v. Devoto-Wade LLC, dba Golden State Cider, and related cross-complaint, Case No. 19STCV30463

On October 10, 2024, after briefing and hearing oral argument, the Court permitted Plaintiff and Cross-Defendant Wine Warehouse (“WW”) to file a motion for summary adjudication, notwithstanding expiration of the motion cut-off and the pending trial date of February 18, 2025, based on the possible effect on this case of the recent decision of the California Supreme Court in Rattagan v. Uber Tech. (2024) 17 Cal.5^th 1.

On October 25, 2024, WW filed this motion to summarily adjudicate the second cause of action of the cross-complaint of Defendant and Cross-Complainant Golden State Cider (“GSC”) for fraud, and GSC’s parallel twenty-seventh affirmative defense to the second amended complaint based on fraud, on the grounds that they are both barred by the Economic Loss Rule. Relatedly, WW contends that to the extent this cause of action or affirmative defense is based upon a claim of fraudulent inducement, those would be barred by (a) GSC’s admission that there are no grounds to find the Distribution Agreement unenforceable and (b) the statute of limitations.

In summary, WW contends that every fraud claim of GSC is in fact a claim that WW breached the terms of their agreement by principally allegedly agreeing to sell GSC product in every county in California (and concealing a contrary intent), and that by agreeing to perform to other terms it was to have performed under sec. 1 of the agreement, WW was making false representations. In essence, WW asserts it is undisputed that all the purported fraud arises out of contractual obligations.

In support of its argument, WW offers the following key facts it asserts are undisputed:

1. The parties negotiated over whether WW would use “best efforts” or “reasonable efforts” in marketing GSC’s products and they agreed upon the latter.

3. Under sec. 3 of the agreement, GSC could terminate the agreement on ninety days’ notice for a fee or for cause. Cause would be either (a) fraud by WW, (b) breach of the terms of the agreement not cured within thirty days of GSC giving notice or (c) three or more separate breaches in the twelve months preceding termination,[1] regardless of whether the breaches were cured following notice.

4. As GSC’s distributor, WW substantially increased distribution of GSC products from the limited amount GSC was itself distributing previously.

5. Through the length of the agreement, WW used a digital platform (accessible to GSC) to monthly report its suppliers’ sales data, including the month of sales, county of sales and purchasing retailers, as well as if there was use of a sub-distributor.

6. On June 27, 2019, GSC gave notice it was removing fourteen counties from the agreement and indicated what it believed to be the partial termination fee for those counties terminated.

7. On August 1, 2019, GSC advised WW it was terminating the agreement altogether for cause: asserting that WW had misrepresented its ability to serve the entire state because of its use of sub-distributors and that in 2019 there had been no sales in eleven counties and no sales for thirty days in two other counties.

8. The aggregate total population of those counties was between 2% to 3% of the state’s population.

9. In addition, still relevant, GSC asserted that WW had offered discounts and incentives to three retailers without obtaining GSC’s approval and had caused delay in sending product and displays to two retailers.

10. WW filed the complaint herein for payment of its termination fee, to which GSC asserted an affirmative defense of fraud. GSC also filed a cross-complaint, including for fraud.

11. GSC prevailed on its motion for summary adjudication of WW’s cause of action in quantum meruit on the condition that it was not contending that the agreement was unenforceable or subject to in tort a claim of fraudulent inducement.

12. GSC’s claim that WW had an obligation to sell its products in every county arises from the provision in the agreement that WW had the ability to sell GSC’s products “throughout the entire State of California.” GSC has allegedly admitted this fact.

13. GSC’s other claims also arise out of WW’s obligations under the agreement.

14. GSC seeks only contract damages (lost profits or enterprise value), not damages to person or property.

In Rattagan, supra, 17 Cal.5^th at 38-40, the Court held that a party may assert a tort claim for fraudulent concealment based on conduct occurring during a contractual relationship if two conditions are met: (1) the elements of the claim can be established independently of the parties’ contractual rights and obligations and (2) the alleged wrongful conduct exposes the plaintiff to a risk of harm “beyond the reasonable contemplation of the parties when they entered into the agreement.” Stated otherwise, if a party cannot meet these elements, the Economic Loss Rule would bar recovery in tort.

To assess whether the claim is fundamentally contractual, a court must consider (a) the scope of the contract and the rights involved, (b) whether there is an independent duty to refrain from the conduct and (c) even if so, whether those duties are then subsumed within the agreement. (Id., 17 Cal.5^th at 26)

WW asserts that GSC’s fraud claim falls squarely within the confines of the Economic Loss Rule and that the claim is therefore barred. The agreement did not require WW to sell GSC product in each of California’s fifty-eight counties. It was required to use reasonable efforts, not best efforts. A distributor cannot guarantee that a retailer will buy the products. Requiring WW to have sold GSC products in every county is inconsistent with using “reasonable efforts” and requiring a level higher.

On December 19, 2024, GSC filed Opposition to the motion. GSC makes the following points:

1. The motion is untimely. It was filed four days late based on the amended CCP sec. 437c(a)(2) requiring 81 days service prior to the hearing -- for hearings after January 1, 2025 (as here.) The court lacks the power to address this issue by continuing the hearing or shortening the notice period. (Robinson v. Woods (2008) 168 Cal.App.4^th 1258, 1267-68, McMahon v. Sup. Ct. (2003) 106 Cal.App.4^th 112, 118)

2. A triable issue of material facts exists as to fraudulent inducement. For example, on the one hand, GSC asserts that WW promised to sell its product in every county whereas, on the other hand, WW asserts it did not make that promise.

3. The fraud cause of action and affirmative defense are not barred by the Economic Loss Rule.

a. GSC may pursue causes of action for both fraudulent inducement and breach of contract. (Rattagan, supra, 17 Cal.5^th at 41, citing Lazar v. Sup. Ct. (1996) 12 Cal.4^th 631, 645 and Dhital v. Nissan (2022) 84 Cal.App.5^th 828, review granted.)[2] A party may not, however, defeat a fraudulent inducement claim merely because it may also be liable for post-agreement conduct. (Anderson v. Ford Motor Co. (2022) 74 Cal.App.5^th 946, 973)

b. GSC has produced evidence establishing the validity of both causes of action. GSC contends WW promised to distribute in every county in California but did not. Further, WW did not sell to convenience stores, nor keep the product in stock to where it did distribute. GSC contends that it was induced to enter into the agreement based on these false promises.

c. GSC need not allege damages independent of economic loss to bring a fraudulent inducement cause of action.

d. WW’s motion is limited to the impact of Rattagan on GSC’s fraud claim. For this reason, the statute of limitations claim is outside the permitted scope of this motion.

4. GSC’s fraud claim is in any event not barred by the statute of limitation. Lacey could not acknowledge GSC’s access to WW’s data in 2016 when he did not start with GSC until 2017. Moreover, there can be no delayed discovery for accrual purposes where GSC did not know and had no reason to know of wrongdoing by WW. (Fox v. Ethicon Endo-Surgery (2005) 35 Cal.4^th 797, 803)

On December 30, 2024, WW filed a Reply. WW contends the 75-day rule applies where amendment of CCP sec. 437c was not effective until January 1, 2025 - after this motion was already filed – consistent with discussion with GSC as to the hearing date. WW again asserts that the allegations of the cross-complaint pertaining to fraud concern alleged contractual obligations and that therefore the Economic Loss Rule applies. There is no claim that GSC suffered damages other than based on the agreement. Lazar, supra, on which GSC relies, is not to the contrary: The contention there concerned promises made before an agreement was reached. However, GSC cannot now contend its claim pertains to conduct to induce the agreement where it previously withdrew that claim. (Hence, Dhital is not applicable here.) In turn, Lazar did not address the Economic Loss Rule in any event where personal injury damages were claimed.

Initially, the motion was not served four days too late. The 81-day rule under the new statute is not applicable here where it went into effect as of January 1, 2025. This motion was filed beforehand – and hence the new statute does not apply retroactively to when WW filed the motion – even if it concerns a hearing date after January 1, 2025. A party cannot be expected to comply with a law not in effect. Retroactivity applies typically only where the change in the law reflects pre-existing expectations.

The Cout grants WW’s request for judicial notice of the census data, and overrules GSC’s objection thereto, where the point was merely to note estimated population information about which there is no reasonable question. Ultimately, however, as discussed below, the Court does not depend on this information in reaching its decision.

The Court has ruled on the evidentiary objections each side filed to the other party’s evidence in the forms provided, filed herewith.

Rattagan, supra, permits a fraudulent concealment claim (as opposed to a fraudulent inducement claim as GSC is seeking to assert here) based on conduct occurring during the contractual relationship (as opposed to here where the conduct GSC now complains of occurred before the agreement was entered into) if the plaintiff can establish the two elements set forth above. The Supreme Court notes (at 17 Cal.5th 41, fn. 12) that it then had under review Dhital, supra, and another case, concerning claims for fraudulent inducement.[3] Hence, Rattagan, supra, does not squarely address the claim here of fraudulent inducement even if it does address application of the Economic Loss Rule to a claim of fraudulent concealment. The Supreme Court states: “We do not address these issues here.” (Id.)

On the merits, the parties are talking at cross-purposes: GSC does not argue in opposition to the motion that the fraud claim (independent of fraudulent inducement) does not fall under the Economic Loss Rule, i.e., that the two conditions are satisfied – which is the principal basis of the motion. As a result, GSC has not provided any basis for the Court to conclude that either of these independent bases are applicable to render the Economic Rule inapplicable, taking account of the three above-referenced factors courts are to consider. To the contrary, the evidence submitted indicates that the obligations under the agreement created the claims asserted (i.e., as to where and how WW was to distribute GSC’s products), it is unclear what other duty WW had that GSC is claiming required it refrain from unstated conduct and whatever duties WW did have would be governed by the agreement.

GSC’s argument is a different one - that the Economic Loss Rule does not apply to a fraudulent inducement cause of action - but WW was not contending it did.[4]

The critical issue on this motion is a slightly different one that the Opposition does not address directly; namely, what is the consequence as far as the Economic Loss Rule where a party affirms the contract and sues for fraud rather than fraudulent inducement. While GSC is correct that the Economic Loss Rule is not applicable if a party is suing for fraudulent inducement (Dhital, supra, 84 Cal.App.5^th at 843, Robinson Helicopter v. Dana Corp. (2004) 34 Cal.4^th 979) (and is not electing to affirm the agreement and to sue instead for fraud), Rattagan does not state that the Economic Loss Rule does not apply where, as here, a party has affirmed the contract and is suing for fraud.[5] In fact, in Rattagan, the Court held the Economic Loss Rule applied to the alleged conduct concerning the subject of the agreement. The Opposition fails to acknowledge that GSC previously asserted that it was not asserting a fraudulent inducement cause of action (if it even was.)[6] By GSC contending that the agreement was not voidable - to defeat WW’s quantum meruit claim – GSC relinquished any claim for fraudulent inducement.[7] Indeed, GSC’s counsel admits as much in the quoted language.[8]

In opposition to the motion, however, GSC now contends that notwithstanding its affirming the contract, and express representation it was not seeking to assert fraudulent inducement, it is inconsistently claiming it can still sue for fraudulent inducement to avoid applicability of the Economic Loss Rule to the fraud claim. A claim for fraudulent inducement – to find the agreement unenforceable - is no longer compatible with affirming the contract. (Geraghty v. Shalizi (2023) 8 Cal.App.5^th 593, 597 (“a party who is fraudulently induced to execute a contract can either rescind the agreement and restore the consideration, or can affirm the contract and recover damages for fraud”), Chapman v. Skype (2013) 220 Cal.App.4^th 217, 234 (to same effect)) Instead, the fraud claim for damages survives. The Opposition fails to address this issue at all.

Judicial estoppel applies here to bar GSC from asserting a claim it previously relinquished - on which representation the Court relied in granting GSC’s motion for summary adjudication of WW’s claim in quantum meruit (where the Court knew the agreement would still stand.) Consequently, in the absence of any argument that the Economic Loss Rule does not apply to a fraud claim, or that GSC is seeking damages other than economic ones, WW is entitled to summary adjudication.[9]

Where the Economic Loss Rule applies to the claim of fraud here as to WW’s performance of the terms of the agreement (including the alleged wrongful use of sub-distributors or failure to ensure retailers had sufficient product) - as a matter of law – the Court does not need to reach the alleged factual issue (if at all) about whether WW misrepresented it would distribute GSC’s product literally in every county in California. This issue does not change the outcome that GSC cannot bring this claim as a tort where it elected to affirm the agreement.

Moreover, it is in any event not clear that even were the Economic Loss Rule not applicable under these circumstances that jurors would reasonably believe WW was not using “reasonable” as opposed to “best” efforts to service the whole State of California where it was covering those counties having more than 90% percent of its population. Those smaller population counties where WW was not selling product, for example, in Humboldt (given the reference to not selling in Eureka) does not necessarily mean WW was not doing what it represented it would do. Further, it is worth noting that the agreement does not state WW would distribute in every single county -- even if GSC believed a WW salesperson inferred it would beforehand.[10] The terms of the written agreement in any event supersede prior oral negotiations. (Civil Code sec. 1625)

In allowing this motion to be heard at this time, the Court did not limit its scope to solely fraudulent inducement as opposed to fraud.[11] What the Court limited the motion to was fraud / fraudulent inducement as opposed to other causes of action of the cross-complaint such as the third cause of action for defamation. That said, it is true that the Court did not specifically discuss the statute of limitations issue - which WW could have asserted earlier regardless of Rattagan. WW is taking advantage of leave to pursue the Economic Loss Rule issue to now address this statute of limitations issue. The Court will not consider the statute of limitations argument under these circumstances. Consequently, the Court does not reach whether there is a triable issue in this regard. Where the statute of limitations argument was additional to the one addressed above, this issue does not change the Court’s ruling.

Finally, the Court does not find any material issue for these purposes as to the facts in WW’s Separate Statement. Likewise, the Court does not find that any of GSC’s additional facts in its counter-Separate Statement create any material disputed issue. The principal issue is whether the contentions fall under the Economic Loss Rule. Whether, for example, WW promised to distribute in each of the fifty-eight counties versus all over California does not matter for these purposes. The damages here are not personal nor property based and there is no duty independent of that under the agreement which GSC elected to affirm.

[1] GSC contends under the agreement that the three breaches did not have to be in the twelve months preceding termination. As discussed below, this disagreement is not material on this motion.

[2] When GSC filed its opposition, review was still pending.

[3] On December 18, 2024, however, the Supreme Court dismissed the petition for review in Dhital and remanded to the Court of Appeal.

[4] Similarly, GSC’s argument that a party can sue for breach of contract and for fraudulent inducement, per Dhital, supra, does not address what happens when a party elects to affirm the agreement and instead sue for damages. For the same reason, Anderson, supra, is not instructive. (Anderson also does not address the Economic Loss Rule.)

[5] GSC’s distinction between conduct occurring before the agreement was entered into and conduct occurring thereafter is not material here: By electing to stand on the agreement, a party is necessarily also thereby stating that the conduct that occurred before the agreement was entered into is now only of significance as far as fraud rather than fraudulent inducement – the remedy for which would be setting aside the agreement rather than damages. The Court is not holding that this conduct is no longer actionable but that it is only in the context of the claim for fraud (subject to the Economic Loss Rule.)

[6] The second cause of action for fraud in the cross-complaint does not specifically allege GSC was fraudulently induced to enter into the agreement or seek its set-aside. Similalrly, the twenty-seventh affirmative defense in GSC’s answer to the second amended complaint merely asserts fraud.

[7] P. 13 of the order, filed May 31, 2023, granting GSC’s motion for summary adjudication as to WW’s quantum meruit claim, makes clear that this is because the agreement was enforceable.

[8] If GSC could still sue for fraudulent inducement then WW should have been entitled to assert a quantum meruit claim.

[9] Robinson Helicopter, supra, 34 Cal.4^th at 992, that GSC cites, does not support the proposition that a fraud claim can survive the Economic Loss Rule because a party also requests punitive damages. Were that true, this rule would be irrelevant. Punitive damages are permissible only where the underlying tortious conduct permits. Here, the Court is indicating there can be no tort and only a contract claim. (Rattagan, supra, 17 Cal.5^th at 20)

[10] WW emphasizes in its Reply that GSC did not point to any WW employee who in fact stated that it would distribute GSC product in every county – the GSC deponent, Hunter Wade, instead merely arguing that this was his understanding of what WW represented by stating it would sell throughout the state.

[11] Indeed, significantly, the second cause of action for fraud does not allege that WW fraudulently induced GSC to enter into the agreement. The allegations concern WW’s acts during the contractual relationship. There are no allegations specific to conduct occurring before the parties entered into the agreement.