Judge Randolph M. Hammock, Case 20STCV19228 2022-09-09 Tentative Ruling

Judge: Randolph M. Hammock, Case: 20STCV19228, Date: 2022-09-09 Tentative Ruling

Mirtech, Inc., a named Defendant that is owned by Defendant Mir, has filed a Cross-Complaint against Ross and his entity, Ross International. Mirtech has a license agreement with Freshtech to collaborate in the food packaging marketplace. Mirtech alleges that Ross, in his role as Freshtech’s CEO, abdicated his duties to Freshtech. Instead, Ross allegedly steered business toward a Freshtech competitor, rPlanet Earth Los Angeles, LLC. This meant a loss in business for Freshtech and a loss of royalties for Mirtech. Mirtech brings causes of action against Ross and Ross International for (1) breach of contract, (2) fraudulent concealment, and (3) intentional interference with contractual relations.

A demurrer for sufficiency tests whether the complaint states a cause of action. (Hahn v. Mirda (2007) 147 Cal. App. 4th 740, 747.) When considering demurrers, courts read the allegations liberally and in context. (Taylor v. City of Los Angeles Dept. of Water and Power (2006) 144 Cal. App. 4th 1216, 1228.) In a demurrer proceeding, the defects must be apparent on the face of the pleading or by proper judicial notice. (CCP § 430.30(a).) A demurrer tests the pleadings alone and not the evidence or other extrinsic matters. (SKF Farms v. Superior Court (1984) 153 Cal. App. 3d 902, 905.) Therefore, it lies only where the defects appear on the face of the pleading or are judicially noticed. (Id.) The only issue involved in a demurrer hearing is whether the complaint, as it stands, unconnected with extraneous matters, states a cause of action. (Hahn, 147 Cal.App.4th at 747.)

However, Mirtech has pled that “there existed a unity of ownership and interests between Ross and Ross Int. such that any individuality and separateness between Ross and Ross Int. has ceased and Ross Int. is the alter ego of Ross.” (Cross-Complaint ¶ 6.) “Alter ego allegations may be pled generally, and the principal factors for piercing the corporate veil—individual dominated the affairs of the corporation, unity of interest and ownership, corporation is a mere shell, diversion of income, inadequate capitalization, failure to issue stock and observe corporate formalities, adherence to fiction of separate corporate existence would work an injustice—may be alleged in conclusory terms. (First Western Bank & Trust Co. v. Bookasta (1968) 267 Cal.App.2d 910, 914-916.)

“A cause of action for breach of contract requires proof of the following elements: (1) existence of the contract; (2) plaintiff's performance or excuse for nonperformance; (3) defendant's breach; and (4) damages to plaintiff as a result of the breach.” (Miles v. Deutsche Bank National Trust Co. (2015) 236 Cal.App.4th 394, 402.)

Mirtech alleges the Ross Cross-Defendants breached the Freshtech Shareholders Agreement as follows: “Ross breached Section 3.3(a)-(b) wherein he represented and warranted that he was in a position to earn a sufficient livelihood outside of Freshtech without violating the restrictive covenants in Article III of the Shareholders’ Agreement by subsequently taking a position as a CEO of RPE and violating the restrictive covenants in the process; [2] Ross breached Section 3.4 by using Freshtech’s “Confidential Information” (as defined therein) for his own benefit and the benefit of RPE and possibly others by disclosing same, directly and indirectly, to various third parties, such as RPE, Daviduk, and others; [and] [3] Ross breached Sections 3.5(a)-(c) by engaging in clear conflicts of interest in executing his employment agreement with RPE to become RPE’s Chief Executive Officer, and otherwise engaging in a business competitive with RPE, soliciting Freshtech customers for RPE, and otherwise interfering with Freshtech’s business, customers, trade, or patronage.” (CC ¶ 25.)

Mirtech is not a party to the Freshtech Shareholders Agreement. However, Mirtech alleges it is a third-party beneficiary, especially when considered in conjunction with the Mirtech License Agreement which incorporated the Freshtech Shareholders Agreement. (Cross-Complaint ¶ 21.) The Cross-Complaint alleges that “[o]ne motivating purpose of Dr. Mir, Ross, and Keller in entering the Freshtech Shareholders’ Agreement was to exploit Mirtech’s Technology under the License Agreement.” (CC ¶ 12.) In addition, “a motivating purpose of the parties entering into both agreements at the same time was because the parties’ shareholder relationship was dependent on Mirtech providing its proprietary intellectual property rights to Freshtech in exchange for royalties so that the parties could effectively collaborate in the competitive food packaging marketplace.” (Id. ¶ 23.) The Shareholders Agreement specifically references Mirtech in the following ways:

…enter into any transaction with a Shareholder or an officer or director of the Company, or any family member or affiliate of a Shareholder or an officer or director of the Company, other than the Commission, License and Royalty Agreement of even date herewith (the "License Agreement"), between the Company and Mirtech, lnc., a New Jersey corporation ("Mirtech").”

“Neither Mir's nor Mirtech's provision of consulting services or licensing of technologies (other than the technology licensed by Mirtech to the Company under the License Agreement) to persons or entities involved in the perishable food industry, including the fresh produce segment of such industry, would constitute a violation by Mir of the restrictions set forth in this Section 3.5.”

The Ross Cross-Defendants argue that Mirtech is not a third-party beneficiary of the Freshtech Shareholders Agreement. Specifically, Cross-Defendants argue it was not a “motivating purpose” of the sections of the Shareholders Agreement allegedly breached to confer any benefit to Mirtech. However, the Ross Cross-Defendants have presented no authority saying the specific portions of the Shareholders Agreement that were allegedly breached must confer a benefit to Mirtech. Rather, it appears this court must look to the Shareholders Agreement as a whole.

“[U]nder California's third party beneficiary doctrine, a third party — that is, an individual or entity that is not a party to a contract — may bring a breach of contract action against a party to a contract only if the third party establishes not only (1) that it is likely to benefit from the contract, but also (2) that a motivating purpose of the contracting parties is to provide a benefit to the third party, and further (3) that permitting the third party to bring its own breach of contract action against a contracting party is consistent with the objectives of the contract and the reasonable expectations of the contracting parties.” (Goonewardene v. ADP, LLC (2019) 6 Cal. 5th 817, 821.)

In Goonewardene, an employee sued her employer and the employer’s payroll service provider based on alleged Labor Code violations and breach of contract. (Id. at 820.) The trial court sustained the payroll company’s demurrer, reasoning that the payroll company could not be liable to the employee. On appeal, the intermediate court reversed, holding that the plaintiff employee was a third-party beneficiary of the agreement between her employer and the payroll company. (Id. at 826.)

On appeal to the California Supreme Court, the court reversed, holding that the plaintiff was not a third-party beneficiary of the agreement. The Court explained that a mere showing a party is likely to benefit from the contract is not enough to be a third-party beneficiary. Rather, it must also be a “motivating purpose” of the contracting parties to benefit the third party. (Id. at 835.) The Court found this lacking because “the relevant motivating purpose of the contract is simply to assist the employer in the performance of its required tasks, not to provide a benefit to its employees with regard to the amount of wages they receive.” (Id.) The court went on that even if a “motivating purpose” had been shown, the plaintiff was still not a third party beneficiary because it would be “inconsistent with the objectives of the contract and the reasonable expectations of the contracting parties.” (Id. at 836.) To this point, the Court explained that “there is no need to permit a third party employee to bring suit to enforce an alleged breach by [the payroll company] of its obligations under the contract, because [the employer] is available and is fully capable of pursuing a breach of contract action against [the payroll company]…Simply put, permitting an employee to sue [the payroll company] for an alleged breach of its contractual obligations to [the employer] is not necessary to effectuate the objectives of the contract.” (Id.) For these reasons, the plaintiff was not a third-party beneficiary under the agreement, and the breach of contract claim was subject to demurrer.

Mirtech’s best argument that it is a third-party beneficiary is the fact that Section 1.3 of the Shareholders Agreement expressly references Mirtech and could confer a benefit on the company. There, the Shareholders Agreement generally precludes Freshtech from entering into a transaction with a shareholder, director, or officer of Freshtech, absent unanimous written consent from all directors. However, Section 1.3 carves out an exception to this general rule by recognizing and permitting the License Agreement between Freshtech and Mirtech. (See Mirtech’s Cross-Complaint, Exh. 1, ¶ 1.3.)

First, it is clear that Mirtech would likely benefit from the Shareholders Agreement, as it preserved Mirtech’s right to contract with Freshtech vis-a-vis the Mirtech License Agreement. However, Mirtech must also demonstrate that it was a “motivating purpose” of the contracting parties to provide a benefit to Mirtech, and that permitting Mirtech to bring its own breach of contract action against the Ross Cross-Defendants is consistent with the objectives of the Freshtech Shareholders Agreement and the reasonable expectations of the contracting parties. (Goonewardene, 6 Cal. 5th at 821.) It has not done so.

First, the primary benefits under the Shareholders Agreement belonged solely Freshtech and its shareholders. Even the portions of the Shareholders Agreement that expressly reference Mirtech do not demonstrate a motivating intent to benefit Mirtech. At most, they show an intent to protect or benefit Freshtech and Shareholder Mir in his individual capacity from liability for dealings with Mirtech. Even considering the Mirtech License Agreement in conjunction with the Freshtech Shareholders Agreement, the court cannot and does not conclude that a motivating purpose of the Freshtech Shareholders Agreement was to provide a benefit to Mirtech.

Further, it does not appear that permitting Mirtech to bring its own breach of contract action against the Ross Cross-Defendants is consistent with the objectives of the Shareholders Agreement and the reasonable expectations of the contracting parties. The royalty payments for which Mirtech seeks compensation from Ross arise from the License Agreement with Freshtech – not the Freshtech Shareholders Agreement. Under these circumstances, Mirtech’s remedies are against Freshtech for breach of the Mirtech License agreement, not against the Ross entities for breach of the Freshtech Shareholder’s Agreement. Moreover, Freshtech and its other two shareholders Mir and Keller have, in fact, already asserted a breach of Section 1.3(d) against Ross in their Second Amended Cross-Complaint. [FN1] (See RJN Exh. B, ¶ 99(b).)

Accordingly, Cross-Defendants’ Demurrer to the First Cause of Action is SUSTAINED. Generally speaking, leave to amend must be allowed where there is a reasonable possibility of successful amendment. (Goodman v. Kennedy (1976) 18 Cal.3d 335, 348.) Cross-Complainant must demonstrate this possibility at the hearing consistent with this ruling.

The Ross Cross-Defendants next demurrer to the Second Cause of Action for fraudulent concealment, first arguing that Ross had no affirmative duty to disclose to Mirtech. “[T]he elements of an action for fraud and deceit based on concealment are: ¿(1) the defendant must have concealed or suppressed a material fact, (2) the defendant must have been under a duty to disclose the fact to the plaintiff, (3) the defendant must have intentionally concealed or suppressed the fact with the intent to defraud the plaintiff, (4) the plaintiff must have been unaware of the fact and would not have acted as he did if he had known of the concealed or suppressed fact, and (5) as a result of the concealment or suppression of the fact, the plaintiff must have sustained damage.” (Marketing West, Inc. v. Sanyo Fisher (USA) Corp. (1992) 6 Cal.App.4th 603, 612-613.)

Cross-Defendants argue that “Ross and Mirtech are not contracting parties, nor is Mirtech a third-party beneficiary of the Freshtech Shareholders’ Agreement, as set forth above. Ross does not have a fiduciary relationship with Mirtech, and Mirtech does not provide any facts or information that would substantiate a confidential relationship between Ross and Mirtech.” (Dem. 9: 25-28.)

Mirtech counters that the Ross Cross-Defendants had a duty to disclose because the parties were in a confidential or fiduciary relationship. (Opp. 9: 18-19.) Mirtech pleads that “Ross had a legal and continuing duty to disclose all material facts to Mirtech based on, at least, (1) Ross’s active concealment of facts, (2) Ross’s confidential and fiduciary relationship with Mirtech, and (3) Ross’s exclusive knowledge of material facts.” (CC ¶ 29.)

“A duty to disclose may arise from a confidential relationship. Where there exists a relationship of trust and confidence, it is the duty of one in whom the confidence is reposed to make a full disclosure of all material facts within his knowledge relating to the transaction in question and any concealment of a material fact is a fraud. [Citation.] A confidential relationship can exist even though, strictly speaking, there is no fiduciary relationship. [Citation.] A confidential relationship may be founded on moral, social, domestic, or merely a personal relationship.” (Huy Fong Foods, Inc. v. Underwood Ranches, LP (2021) 66 Cal. App. 5th 1112, 1122.

In Huy Fong Foods, Inc., the court addressed whether a confidential relationship existed for purposes of fraudulent concealment existed. There, a manufacturer and farmer had a 28-year business relationship, “shared financial information,” and “for many years the parties entered into transactions involving tens of millions of dollars without formal written contracts.” (Id. at 1122.) In addition, the owners of the companies said their relationship was “like a family,” that [they] trusted [eachother],” and that they were good friends. (Id.) After appeal from a jury trial, the Court of Appeal found the evidence of a confidential relationship was “overwhelming” and affirmed the verdict. (Id. at 1122.)

The Ross Cross-Defendants attempt to distinguish Huy Fong Foods by noting that here, unlike in that case, there is no contractual relationship between the parties. However, the factual finding in Huy Fong occurred after a jury trial, as the “[t]he existence of a confidential relationship is a question of fact.” (Persson v. Smart Inventions, Inc. (2005) 125 Cal. App. 4th 1141, 1161.) This court agrees that Mirtech has not cited authority demonstrating that it can piggy-back on Mir’s relationship with Ross to establish a duty to disclose toward Mirtech. For pleadings purposes, however, Mirtech has specifically alleged ongoing dealings that establish a confidential relationship between Mirtech and Ross. [FN 2]

This argument is unconvincing. It appears irrelevant what Ross’s intent was in 2012 when he executed the Shareholders Agreement. That is because the gravamen of the pleading is that Ross concealed from Mirtech his dealings with RPE, and that Mirtech did not learn of this concealment until 2019. (CC ¶ 14.) There is no reason Ross could not subsequently conceal his dealings with RPE, even if he did not intend to do so at the time the Shareholders Agreement or Mirtech License Agreement were formed.

[W]here a purchaser's expectations in a sale are frustrated because the product he bought is not working properly, his remedy is said to be in contract alone, for he has suffered only ‘economic’ losses. This doctrine hinges on a distinction drawn between transactions involving the sale of goods for commercial purposes where economic expectations are protected by commercial and contract law, and those involving the sale of defective products to individual consumers who are injured in a manner which has traditionally been remedied by resort to the law of torts. [Citation.] The economic loss rule requires a purchaser to recover in contract for purely economic loss due to disappointed expectations, unless he can demonstrate harm above and beyond a broken contractual promise. [Citation.] Quite simply, the economic loss rule “prevent[s] the law of contract and the law of tort from dissolving one into the other.” [Citation.]

The Robinson court, however, cautioned that its holding was “narrow in scope and limited to a defendant's affirmative misrepresentations on which a plaintiff relies and which expose a plaintiff to liability for personal damages independent of the plaintiff's economic loss.” (Id. at 993)(Emphasis added.) The Court explicitly did not address application of the rule to a fraudulent omission claim. (Id. at 991[stating the court “need not address the issue of whether [Defendant's] intentional concealment constitutes an independent tort”]).

“The elements which a plaintiff must plead to state the cause of action for intentional interference with contractual relations are (1) a valid contract between plaintiff and a third party; (2) defendant's knowledge of this contract; (3) defendant's intentional acts designed to induce a breach or disruption of the contractual relationship; (4) actual breach or disruption of the contractual relationship; and (5) resulting damage.” (Pac. Gas & Elec. Co. v. Bear Stearns & Co. (1990) 50 Cal. 3d 1118, 1126.) California Courts have routinely held that “only ‘a stranger to [the] contract’ may be liable for interfering with it.” (Mintz v. Blue Cross of California (2009) 172 Cal.App.4th 1594.)

As discussed earlier, Mirtech and Freshtech entered into the Mirtech License Agreement, which Ross signed on behalf of Freshtech. (CC ¶ 38.) Mirtech allege that Ross interfered with the contractual relationship between Mirtech and Freshtech by neglecting his duties as CEO and acting for the benefit of third parties. (Id. at 42.)

The Cross-Complaint alleges that “Ross’s tortious acts occurred while Ross was acting in his capacity as CEO of RPE, CEO of Ross International, or for the benefit of other companies that compete with Freshtech to which he is affiliated or from which he receives benefits, despite the fact that he was supposed to be acting as CEO of and for the benefit of Freshtech.” (CC ¶ 42.)

Mirtech argues that even an ownership interest in a company does not preclude an interference claim. But unlike in Woods v. Fox Broadcasting Sub., Inc. (2005) 129 Cal. App.4th 344, the case on which Mirtech relies, the instant is not a case where Ross has a mere ownership interest in a company. Rather, Ross was acting as CEO of Freshtech (among other capacities), and was the agent who signed the Mirtech License Agreement on Freshtech’s behalf in that capacity. Indeed, it was in this very role with Freshtech that purportedly allowed Ross to interfer with Mirtech’s License Agreement in the first place. As currently pled, there is no way to separate Ross from his role as Freshtech’s CEO, and thus, Ross is not a “stranger” who could interfere with the Mirtech License Agreement.

FN 1 -- This court does not mean to suggest that a single contract cannot have multiple beneficiaries—only that Mirtech is not one of those beneficiaries here.

FN 2 -- Put differently, Cross-Defendants’ argument that there does not exist a sufficient relationship between Ross and Mirtech, as opposed to that between Mir and Freshtech, is fair and certainly not lost on this court. However, as noted above, the existence of a confidential relationship is ultimately a question of fact. In this regard, the court is bound by the allegations in the pleading.
-